Security Syndication Attorney Shares How To Raise Private Money For Real Estate

Kim Lisa Lisa Taylor, Esq., is the founder of Syndication Attorneys PLLC, a boutique corporate securities law firm that helps clients nationwide with their federal real estate securities offerings.

Kim Lisa and the other members of the Syndication Attorneys team focus on helping small business owners/developers structure and convey their investment opportunities in a way that will attract private investors, both domestic and foreign. They teach their clients how to use securities laws effectively and provide them the tools and resources they need to achieve their business goals legally.

In addition to her work with the firm’s clients, Kim Lisa is a nationally recognized expert in the securities industry and a highly sought-after speaker, instructor and author. Kim Lisa has been responsible as a securities attorney for over 3,300 securities. She is also the author of the best selling book “How to Legally Raise Private Money: The Definitive Guide to Raising Money for Real Estate and Small Business.”

What you’ll learn in this episode:

*Kim Lisa says that that the key to raising private money is building strong relationships with people who might be willing to either loan you money or invest in a company alongside you. Unlike with a bank, raising money from private investors is less dependent on one’s credit history than the details of the deal and their ability to trust you. “The better they know you, the more times they’ve seen you consistently show up somewhere where they are, the more likely they are to invest with you.”

*One approach with potential investors is asking them what they’re making money on right now. If they’re loaning their money to someone else and getting 12%, they’re probably going to want that. But if their only other investments are in the market or their money is in a bank account, they’ll be happy with 6-7%. Depending on their experience, you would pay anywhere from 6-12%.

*Still, Kim Lisa says, the best place to get your money is from the banks, because they’ll want less than what your investors will want. She advises starting with banks and filling the gap with investor funds. By getting the lower interest rate on the bulk of the purchase price, that will raise the amount you can pay investors on the smaller amount you need to raise from them.

*She says you really shouldn’t talk to people about money until you get to know them. The way to do this is, find out what they do and what they invest in and what they look for in their investments. Then you casually say, I periodically have openings for investors. If you open witih that, it may raise suspicions. Your first meeting should just be about exchanging information. Then you can follow up with opportunities.

*Before you talk specifics about small apartments and offering a 12% return or whatever, you should have a pre-qualification conversation to determine what their financial situation is, what they’re looking for and if what you have to offer might be a good fit. Kim Lisa calls this a “suitability conversation.” Another important question to ask is, “Are you accredited?” Be cautious about allowing investments from people who can’t afford to lose the money.

*Kim Lisa explains an example of investment progression. A lot of people start out at local real estate investment associations with smaller deals – maybe single-family projects or fourplexes. They’re probably borrowing from investors or hard money lenders. Those lenders have to be compliant with the law. Then you might graduate on to talking to family and friends and others about loaning your self-directed IRA money.

*At the point where your business depends on repeatedly borrowing money from individual investors that are not hard money lenders – or when you’re starting to put people into passive investment opportunities where you will form an LLC – that’s when you start thinking about securities laws. In between those scenarios are joint ventures, where all of the members are actively involved in generating their own profits.

*When you have created a company you’re going to run and people are passively investing with you and relying on you to generate profit for them, that’s when you are selling securities – and the sale of securities is regulated.

*Kim Lisa discusses what it means to sell securities. You either have to register your offering, which means getting pre-approval from a regulator before you start selling the interest to private investors. The shorter and cheaper alternative is to qualify for an exemption from registration. There are many exemptions. In addition to the SEC, every state has its own securities agency and securities laws. If you’re in Florida and doing all your business there, you can qualify for the Florida intrastate exemption. There are certain federal exemptions that pre-empt these individual state laws. In general, securities laws protect the investors in their jurisdiction.

*The most common Federal exemption is Regulation D, Rule 506. Rule 506B allows you to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited investors. This rule says you have to have a pre-existing substantive relationship before you can offer securities under regulation. The other option under 506 is Rule 506C, which allows you to freely advertise your offering but you can only accept investments from verified accredited investors. It allows you to sell to anybody as long as they can verify that they’re accredited – and you can advertise to anybody as well. So Rule 506B is the one most people start with.

*You can go on Legal Zoom and download your own will or an LLC for you and your spouse. There’s nothing illegal because you’re writing legal documents for yourself and don’t have the potential to harm anyone else. But when you get into the business of writing legal docs that describe the rights and duties of other people, that is illegal practice – and not the industry standard. When you do your own syndication documents there are horrific tax ramifications for setting them up wrong. THE BOTTOM LINE IS, GET YOURSELF A GOOD ATTORNEY! And if you step up securities, get a securities attorney!

*The questions Kim Lisa asks a client who wants to set up a 506B include: What are you buying? Where is it? Where do you live? Where are your investors coming from? What kind of qualifications do you think your investors might have? Do you think all of them are accredited or might some be non-accredited? What kind of experience do you have? (If you don’t have a lot of experience, you won’t be able to attract average investors through advertising). She says, “When we know the answers to those questions, then we’re asking questions that help steer you into the appropriate exemption for the way you’re going to be able to raise the money.”

*If you don’t have experience with one kind of asset class, team with someone who does – because you can leverage your deals in many ways. You can leverage your bank financing, but you can also leverage of other people’s experience. If you team with the right people, it elevates you in the eye of the investor.

*Kim Lisa reminds listeners that when you’re talking to investors, you’re not only looking for passive investors, but people who can help guarantee a loan – and/or that might know where some deals are and be able to find that. You’re looking for people who know others with money that you might want to bring into your management team. You want people on your team with skill sets you don’t have.

*Kim Lisa discusses the concept of crowdfunding. She says, “It’s really just a means to advertise on the internet, but it’s still a means of advertising a legal securities offering, so subject to the same rules. The questions that need to be addressed are: Are we going to register the offering? Are we going to qualify for an exemption? Which exemption are we going to use? We’ve got to pick an exemption that allows us to advertise.

*In addition to the 506C exemption, there is one called regulation crowdfunding that allows you to raise up to a million dollars in a 12-month period. You have to do it through a crowdfunding portal that is registered with the SEC or with FINRA. There is also something called Regulation A Plus. It’s a public offering, a streamlined process that allows you to raise up to $50 million in a 12-month period. Once it’s pre-approved by regulators, you can sell that to anybody.

*Kim Lisa adds, “Once we write the offering documents, we notify the regulators that you’re selling securities in their jurisdiction. There’s no further reporting that has to occur, as long as you finish your raise within one year. With regulation crowdfunding, you have have some ongoing reporting requirements. There may be some auditing requirements with the regulation A-plus. Depending on what variation you’ve chosen, you may actually have to do some annual audits.”

*There is a document on www.syndicationattorneys.com you can download to set up a hard money lending fund. When you raise money for a securities offering, you can raise it for a specific property; that’s called a “specified offering.” You can do a specified offering to buy three properties at one time. There other kind of offering is a “blind pool,” where you don’t have anything under contract, but you’ve got a business plan that says these are the kinds of properties we look for. When you’re doing hard money lending, you’re looking at the blind pool model because you’re not investing in a specific property at that time.

*An investment summary describes what kind of criteria borrowers have to meet, and the criteria that those properties have to meet before you make those loans. Once you do that, you can make those loans to anyone. You become responsible for overseeing the loan, the vetting of the property, vetting off the borrowers and servicing of the loan.

*Kim Lisa says there are a ton of free resources on her company’s website, including a library of 30 “bite size” articles on all different aspects of syndication. Every month, she and her partners do free monthly tele seminars about a specific topic related to syndication, including some with guest speakers. Everything starts with the educational process. They have a low-cost entry program where people can hire them for $1000 for three hours of one on one legal advice. They also get invited to their Facebook Live group, where they do additional live training on developing an investor marketing plan and executing on that plan. They have a sister website called Investor Marketing Materials.com that allows people to access these investment summaries and business plans.

*Parting advice from Kim Lisa: “Raising money from private investors is all about a mindset you have to get past. It’s uncomfortable asking people about money because you’re not asking them for a favor. They just don’t know people like you that they can invest with. Then all of a sudden here you are. You could be an answer to their prayers because they’re not happy having all their money tied up in the stock market or in a bank account. You’re offering the opportunity they need. Think of it as a relationship game – a long game that allows you to build yourself up as a solid business pillar of the community and someone they can trust.”

Resources:
www.syndicationattorneys.com
www.investormarketingmaterials.com
http://www.LanceSchool.com

Grab a FREE Copy of Lance’s Best Selling Book “How to Make Big Money in Small Apartments” Here.