091: Real Estate Syndication for Dummies

SHOW NOTES FOR EPISODE 091  –  REAL ESTATE SYNDICATION FOR DUMMIES

Samuel K. Freshman literally wrote the book on modern real estate syndication.  He has been practicing law, syndicating and investing in real estate for over 60 years.  In this episode, Mr.  Freshman shares his wisdom and successful insight on a host of topics ranging from syndicating basics to finding investors to buying smart.  He presents the complexities of syndication in a way that is logical and easy to understand.

What You Will Learn

• A simple definition of syndication
• When you need to consider syndicating
• How to get started in syndicating without experience or money
• How to find investors
• What is one of the first questions potential investors will ask?
• Investing strategies to survive recessions (Samuel has been through six recessions!)
• Understanding the role of leveraging based on current interest rates
• Find out why Sam never worked a day in his life

About Our Guest

Samuel K. Freshman

Samuel K. Freshman, is Board Chairman of Standard Management Company which performs real estate acquisitions, bridge finance, and property management. Active in real estate investment for 60 years as an attorney and investor. He has been an expert witness in real estate, legal matters, finance, lecturer at the Stanford Law and Business Schools, chairman of a bank, title company, and a theatre exhibitor. Chairman Emeritus Stanford Professionals in Real Estate (SPIRE). Author of books and over 20 published articles, Mr. Freshman is working on a series on saving entitled “The Smartest Way to Save,” “The Smartest Way to Save More,” and “The Smartest Way to Save Big” about becoming rich on a modest income. Sam received a Stanford BA (Pre-Legal, (1954) and a JD (1956). (E-mail: sfreshman@standardmanagement.com

His Syndication credentials:

Samuel K. Freshman, formerly a principal in Freshman, Marantz, Orlanski, Cooper & Klein Law Corporation, of Beverly Hills, California, has lectured and written extensively on Real Estate Financing and Syndication. A graduate of Stanford University and Stanford Law School, he is a general partner in numerous real estate syndications. As a member of the California Real Estate Commissioner’s and California Corporations Commissioner’s Advisory Committees, he assisted in drafting state syndications legislation. Mr. Freshman has served as Chairman of the Legal Committee of the California Real Estate Association, Syndication Division; Secretary of the National Real Estate Securities Institute; and Chairman of the Real Property Committee, Beverly Hills Bar Association as well as Vice-Chairman of the American Bar Association Real Property Section Sub-Committees on Trade Associations and Real Estate options, and a member of the Construction Industry Panel of the American Arbitration Association.

More About Samuel

• Grew up in Michigan
• Pursued law/real estate on his father’s advice
• College night at local high school
• Stanford recruiter pursued him
• Moved to California, attended Stanford
• Father bought factory in California
• Father encouraged him to pursue real estate

Syndication Defined

• Where there is one party who finds an investment (film, business, property, etc.) and is responsible for running the enterprise. Another person puts up the money to fund the enterprise but does not participate in the management of the enterprise.  That creates what’s called a “security.”  One person is investing and depending on the work of another.  At that point, the securities laws come into play and the legal ramifications.  There are rules about the relationship between the two and when and where you have to register or qualify and when the rules do not apply.
• Popular in financing motion pictures at the time but not much with real estate

When Would a Person Want to Syndicate?

• When you have an investment where you can get enough of a return to keep your investor happy and leave enough on the table for yourself
• Syndication meets the role of financing – to leverage an investment – to more money at a lower rate than the investment is going to pay you back, which increases your return
• For example, if you have $100,000, you could invest in a property on your own and perhaps generate 8-10%. Or, you could go out and get 9-10 other investors, to invest with you, and you keep an override on the investment.  Instead of making 10%, because of the affect of leverage, you could make 20-30% or more by bringing in others and getting a share of what they are making.

How do You Start?

• Look for a local person who’s in the business that you can partner with that has background and familiarity with the business
• Offer to be a gopher, to do the grunt work, to get familiar with the business. Go to work for a syndicator
• He has over 100 graduates that he has trained who have become very successful
• Start meeting with potential investors
• The lawyer comes later in the process

The Key to Syndication

• Finding the right products
• The raising money part becomes easier
• It’s harder to find the good investment than it is to find the investors

Factors You Need to Consider First

• What are the leverage opportunities when you’re figuring out how to finance the deal? For example, when interest rates are high, then you are going to have to raise a bigger part of in equity.  If interest rates are low, then you can borrow as much as 75-80% of the cost of the apartment building.
• Today, it’s more like 65% and then you get into negative leverage, where the leverage is actually pulling down the return.
• You want to set up financing where your leverage increases your return to the equity.
• When interest rates are high, your investor return will be less. If rates are low, then the more you borrow the higher return for your investors.

Getting Investors

• Look at your social circle. Are there people you know who are wealthy who have the funds to invest?
• Personal contacts are best. Ask them if they would be interested and what kind of investments and kinds of returns they are used to getting
• But if you are starting out from scratch, are new in town or most friends and family don’t have the funds, then you find a partner who has the resources
• Presenting a good property to your partner can be of the most value

One of the First Questions Potential Investors Will Ask

• How much are you putting into the project?
• You must be willing to have skin in the game
• You need at least 10-20% of the equity or your partner will need to have it or no one will listen to you
• Make your expertise be finding the good projects

How do You Know What Kind of Return to Give Your Investors?

• Look at where you invest and what others are paying
• He sees 2% in Beverly Hills – 5% in Reno
• Don’t try to talk people into investing
• Find people who love real estate
• He usually pays 6%. Others pay 10%
• You determine your market, which determines your rate
• Everything is subject to change

Speculator vs.  Investor

• Speculators look at 3-5 year hold, fix-up the and then sale the property
• Samuel’s firm buys for the long term
• Retired people that invest with him want a steady source of return
• He can’t predict the total profit except in the long term
• He may say “We’ll start out at 5% but hope to have it up to 7% in a few years.”

Long Term Investing

• As a long term investor, sometimes the property will be worth less later on than when they initially purchased the property because recessions come (he’s been through 6 recessions)
• The key is not to over-borrow because leverage is great on the way up but disastrous on the way down
• He’s had friends who were worth $100 million but when the recession hit they lost everything because they borrowed too much
• You need to be able to have a 20-30% drop in rents and still meet your mortgage – that’s one of the acid tests they apply when evaluating properties
• Another acid test: They only buy in neighborhoods where the schools are rated 6 or better (out of 10). If school rating is 2-3, they throw the property in the trash

Know Your Criteria

• You must develop your own criteria based on your market and what you’re looking for
• Your resources are primarily your time if you are the syndicator
• Set up procedures and formulas that will satisfy your investors and satisfy your needs but that you can apply quickly to your acquisition so you don’t waste a lot of time
• Some people spend days, weeks and months looking for properties but never buy anything because they don’t have a pre-established criteria

How Long Does he Hold Investments

• His answer: Forever!
• He invests for long term but does 10 year projections
• His holding period is generally 30 to 40 years and they pay off the loan
• He’s buying for his grandchildren

His Two Biggest Mistakes

1. He didn’t buy enough
2. He sold too soon

• He started buying 1920s high rise office buildings in downtown Los Angeles
• 11 stories would be vacant
• Bought a building for $1-2 million
• In 3-5 years, sold for $2-3 million and thought he did very well (50 years ago)
• Today the same buildings are worth $100 million

Biggest Success

• Lakeside Apartments in Burbank, California
• Comprised of 750 units and a shopping center
• Bought for $10 million with $100,000 down early in his career!
• The way he structured the financing was brilliant
• Sold apartment 5-7 years later for $29 million and still has the shopping center which is now worth $30 million.
• His usual deal is a 6% cash return on average and double their equity in 10 years. A 13% IR.

Advice to Investors Starting Out Later in Life

• First, identify your role: Are you the person who…
  • Finds the property?
  • Manages the property?
  • Finds the investors?
• If you do everything, you’ll have to stick to smaller properties
• If you want to do bigger deals, you’ll have to develop a specialty or expertise
• Where are you most comfortable?
• Do something you like
• Work in teams
• Where do you want to eventually be?
• Get a job with an investing/syndicating company
• Find a mentor or partner who can give you the benefit of their experience

Why Sam Has Never Worked a Day in His Life

• Because he loves what he does, it doesn’t feel like work
• As a kid he played Monopoly every day and he’s still playing

What Does he See for the Future of His Business?

• The only constant is change!
• Started with high rise office buildings
• Went to distressed shopping centers
• Went into apartments in L.A.
• Going national – focusing on Nevada
• Went into Reno 3-4 years ago and they have doubled the equity in their properties already (Got in before the Tesla announcement)
• “It’s much better to be lucky than smart!”
• The business is set up to go to his grandchildren

Rap-It-Up

• Favorite real estate book: Principles of Real Estate Syndication by Samuel K. Freshman
• Favorite business book: anything about time management
• Favorite quote: “Always do right! This with gratify some and astonish the others!” by Golda Meir
• A few more quotes: His father always said, “You only have one resource they can’t take away from you and that’s your reputation.”
• In you lost everything and only had $1,000 to your name, what would you do with that to rebuild your business: “Find a partner with millions of dollars and show him a deal he couldn’t turn down.”

How Can You Reach Sam

• Website: standardmanagementcompany.com
• Phone Sam’s secretary, Margaret: 310-410-2300 X5306 – can schedule a phone interview, get on investor list

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