50 Cent, Arizona Prisons, and Real Estate Opportunities

The Securities Exchange Commission (SEC) does not mess around. The SEC doesn’t care about what rules I didn’t know about or why I think my real estate syndication isn’t really selling a security, or that I googled the difference between 506 (b) and 506 (c) and still got it wrong. If the rules get violated, someone will pay and someone won’t be doing any more syndication deals.

Last week I had the opportunity to attend a conference with SEC attorney, Jillian Sidoti, CCIM, Esq. The focus of the conference was on ethically raising capital for commercial real estate and following the guidelines and laws that are enforced by the SEC.

Throughout the conference, Jillian shared some anecdotes about clients who were subpoenaed by the SEC because they started taking action before seeking counsel from an attorney. These are stories that every investor wants to avoid being a part of. Whether you started with a pipe dream inspired by Fixer Upper or you have a pristine business plan with 100 deals under your belt, you will certainly not be doing deals from prison if you enter new territory and violate SEC rules. Even if your mistake results in just a fine or a slap on the wrist, you can lose all credibility with your investors if the SEC comes calling.

Jillian touched on something that reminded me of a guiding principle we have in our business, which is, TEAM IS EVERYTHING. As an investor, if you can build a great team it is likely that you will have a great investing career. Having a team with a diverse skill set is crucial for eliminating blind spots and encouraging accountability and growth. I don’t want to be the smartest person on my team, my goal is to focus on what I do best, stay in my lane, and surround myself with (hopefully smarter) people who can do the same.

Collaborating with investors and raising capital is a critical part of the real estate syndication world. Bringing a group of investors together to tackle a larger project is a commonly used and lucrative strategy. Executing a larger project usually takes a team of investors, classified as general partners and limited partners. Limited partners don’t have an active part in the syndication but bring capital necessary to close the deal. The limited partner gets dividends but for the limited partner the experience is passive and there won’t be any 2 A.M. phone calls from tenants.

General partners are usually comprised of several roles and depending on the deal can include a sponsor/managing member, a credit partner, a property manager, renovation team, and a well versed SEC attorney.

The managing member manages the operation of the deal and manages the property manager and construction team to make sure rents are raised and units are updated so that projected returns stay on target. The credit partner qualifies for the loan and may have other roles depending on the deal. The property manager is the person who gets the 2 A.M. phone call about the exploding toilet. Just last week I talked to an investor who got a text and a picture message on a Saturday morning from a tenant. The text said,

“My girlfriend was parking in the driveway and pressed the gas instead of the brake.”

Because of our team, as managing members, we never get texts like this from our tenants on a Saturday morning. We wouldn’t spend our Saturday morning coaching the tenant to call their insurance or securing the property or scheduling a maintenance man or doing the work ourselves.

At the end of the month, along with our once-monthly accounting email and direct deposit of rent, our property management company would attach the invoices from the sub-contractors who fixed the garage, an extra bill to the tenants, and perhaps an insurance claim. Our property managers are a valuable part of our team.

Some people love good attorney jokes but I just love attorneys. Without attorneys, I would need to spend 3 plus years in law school making sure I knew everything about everything and I would rather spend my time putting together real estate deals. Not knowing that you were breaking the law or violating a code of conduct does not excuse you from the rules. Claiming or soliciting funds inappropriately or drawing up documents incorrectly can be costly or illegal mistakes.

While it might seem like some investors are putting together big deals without a lot of help, knowing and following the rules is critical if you ever want to syndicate more than one deal. I know a person who knows a person who just spent a year in an Arizona prison for securities fraud. The person is still claiming his innocence and ignorance that he was breaking any law, however, he just spent 365 days in a jumpsuit, eating unseasoned rice and beans for two meals a day. I don’t know a lot about prison but I’ve heard that Arizona prisons are the toughest. These are prisons where inmates wear pink underwear, have no air conditioning, and are only served two meals a day–both meals being rice and beans. Thank you but no thank you, the attorney fees are worth every dime.

Having a quality team is critical to our success as real estate investors. So true in our field is the saying, “your network determines your net worth”. Even people who are unfamiliar with real estate investing have heard the horror stories of investments gone wrong. What people don’t realize is that these horror stories usually come from I-Can-Do-Everything-By-Myself hobby investors. In order to be successful, we need to have the humility to know when a qualified individual can carry out a task better than us.

My rule of thumb question for outsourcing/adding a team member for an aspect of a project:

“If we were a Fortune 500 company, would this task or job title require a four year degree or a trade license?”

If the answer is “yes,” I am adding a team member. This rule of thumb applies to most aspects of our business, including social media marketing, kitchen renovations, selling a house, accounting, website design, and most importantly attorney work. I often see advertisements for legal document templates, where someone can go in and personalize a template on anything from a lease to a private placement memorandum.

This blows my mind. In the case of syndication, the property likely costs millions, investors have likely invested hundreds of thousands and closing costs are in the tens of thousands. This is not the time for DIY. Any legal document that prevents unforeseen conflict or protects against liability should not only be drawn up by someone whose name ends in E-S-Q-., but by the best E-S-Q-. You can find.

I will leave you with a lovely quote from Grammy-award winning rapper, 50 Cent, who said,

“I didn’t go to Harvard, but the people that work for me did.”

Yes, 50, that is what we want. We want the smartest, most diverse, experienced, wise and humble team that we can find. We don’t want a team because it brings us nostalgia of playing team sports in middle school or because we are handing out charity, but because it is necessary, it protects our investors, and it protects us. Great investors have a great team, so go, team, go.

To learn more about Jillian Sidoti, CCIM, Esq., go to her website at www.crowdfundinglawyers.net/

To learn more about our event with our team from Memphis, go to slaughterinvestgroup.com/memphis-event