493: JV Partnerships, Syndication and SEC Updates

SHOW NOTES FOR EPISODE 493: JV PARTNERSHIPS, SYNDICATION AND SEC UPDATES

Joint Venture Partnerships and Syndications are two common ways to structure bigger real estate deals.  But which do you utilize under various situations?  In today’s podcast, author, real estate investor and syndication attorney Kim Lisa Taylor shares how and when the two different structures come into play, as well as sharing the latest SEC updates for 2021.

What You Will Learn

• What differentiates a Joint Venture Partnership from a Syndication?
• When would you choose a Joint Venture over a Syndication?
• How lending money constitutes a security
• Structuring joint ventures within syndications
• New rules for Accredited Investors
• How to best structure a deal to appeal to lenders

About Our Guest

Kim Lisa Taylor

Kim was an Old Dawg guest on episode #049: The ABCs of Multifamily Syndication and episode #241 “How to Become a Successful Syndicator”

Kim Lisa Taylor, author, real estate investor, and nationally recognized speaker, and is the founder of Syndication Attorneys PLLC, a Florida law firm that helps entrepreneurs create successful investment companies.  She 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.  An attorney since 2002, Kim has made corporate securities law her primary focus since 2008. She has written more than 300 Securities Offerings and numerous Joint Venture Agreements.

Kim is also the author of How to Legally Raise Private Money: The Definitive Guide to Syndication and Raising Money for Real Estate and Small Business.

More About Kim

• The firm has been doing well
• They survived Covid and are moving forward
• Momentum is picking up in the marketplace
• New deals and new clients
• She’s seeind a lot lot of returning clients

Investor Marketing Materials Resource

• They’ve started an investor marketing materials platform called InvestorMarketingMaterials.com
  • They have hired professional editors, writer, and graphic designers to help you create professional marketing materials that you can use to impress and attract your investors and keep them coming back

JV Partnerships

• Typically, people will bring in or seek out JV partners on smaller deals where they may only need $200,000-300,000
• They also want to bring in bring in people who will be more actively involved
• These are the types of deals where syndication doesn’t make sense
• For example, for a large syndication, where you will need a large group of investors, you don’t want a lot of people telling you what to do
  • When you have passive investors, that’s when you fall under securities laws
  • But if you have a small group of investors who are all actively involved, you will do best to create a Joint Venture
    • Typically, that will structured as a member managed LLC, where all the members are considered to be managing members
      • They all have rights and duties to contract and bind the company, to open and close bank accounts and to make active decisions about what’s happening with their money
        • Percentage interest could be based on how much someone invests, sweat equity and/or a combination of both
      • You have to be very careful because you’re walking a fine line and when do you cross over into the world of securities laws, and then you have to set up a syndicate
        • The fine line may be that, even though you’re doing the bulk of the sweat equity, you still have to make sure you’re involving the other partners actively, making decisions beyond just a “voting right”
          • You might want to assign titles to people:
            • Accounting
            • Property management oversight
            • Due diligence
            • Allocate tasks amongst the team so you don’t, inadvertently, call it a Joint Venture, and then treat it like a security
              • It’s not what you call it as much as how you actually operate the company that determines if you sold a Joint Venture interest or a security
                • Where that will get you in trouble is if the deal goes bad and all of a sudden the investors are losing money and they’re not getting what was promised to them and they complain to attorneys or regulators.  Then the regulators start scrutinizing the deal and they see that they called it a Joint Venture but one person was making all the decisions and did all the work.  The other “partners” were really passive investors and he didn’t follow securities laws and he’s in trouble for that because it’s not a Joint Venture

 Difference Between a Joint Venture and a Security

• Can’t be a Joint Venture because both aren’t active
• It needs to follow securities law
• What is a security?
  • When do you trigger securities laws?
    • You trigger securities laws when you’re selling securities
      • How do you know if you’re selling securities?
      • The definition for real estate investors: When it involves 1) money, 2) is in a common enterprise, with an 3) expectation of profits based solely on the 4) efforts of the “promoter” (that’s called the 4-prong Howey Test)- if you have an investment that meets that criteria, it is an “Investment Contract,” and that falls into the definition of securities – if you’re selling investment contracts, you’re selling securities!
        • This applies when you have a Limited Partner that invests money but does none of the work and a General Partner, who does all the work
          • The same is true for an LLC.  There are two ways you can form an LLC
            1. Member Managed – where all the members are managers
            2. Manger Managed – where only one or two people, or another LLC, do all the work and the other people are passively investing that’s considered selling Investment Contracts and constitutes a security
• It everyone investing in a project is actively involved in generating their own profits, they are not considered as passive investors, therefore, they didn’t meet the 4-prong Howey Test – it’s not based on the effort of a “promoter” – everyone is generating profits
  • That’s the difference between a Joint Venture and A Security

Lending Money vs. Investing in a Deal

• If someone is loaning money to someone in a deal, technically, the promissory note is still considered securities
• And when you get into a business that depends repeatedly on borrowing money from private investors, you then are selling securities
  • When she has clients doing that, her firm creates a note offering for them
  • It looks a lot like a a regular syndicate, where you have a disclosure document
  • But instead of having an LLC operating agreement or Limited Partnership agreement there will be a promissory note that is the contractual agreement between the person who is promoting the deal and the investor
• If you are doing one or two isolated transactions per year, you shouldn’t be too concerned
• And, if you are borrowing money from people who are in the business of being Hard Money lenders or banks, you should be too concerned that you are selling them securities
• But when you are going to other people – neighbors, family and friends, people who are not in the business of lending money – that’s when you fall into the that category where these notes are considered securities and you’ll have to follow securities laws
• Also, another example, if you are dealing with a single family deal, you can form an LLC, the investor puts up the money and you do the work
  • If the investor is not actively involved in generating profits, it is still considered a security
  • But if investor is an Accredited Investor, probably no one will ever complain about it
  • If you bring in people who are not Accredited Investors, that’s when regulators start to pay attention
  • Of course, nothing is going to happen unless the deal fails and you don’t perform

Bank Loans and Deal Sponsorship

• If it is a member managed LLC, the bank will likely want to underwrite every single member
• Every single member will have to be capable of being underwritten
• If they are not capable of being underwritten, then that structure wouldn’t work for you
• The normal situation with the bank is that they want to know that the person that’s guaranteeing the loan is ultimately responsible for the final decisions on that property if the deal starts to tank
  • The bank is going to look at the person guaranteeing the loan as having a majority ownership, as the manager in a manager managed LLC, so they know that person is ultimately responsible, making the final decisions if the deal goes wrong

What Deals Are Prime for JV Syndication

• If you’re raising less than $300,000, you’re probably going to want to structure the deal as a Joint Venture Partnership, so you don’t have to comply with securities laws because the legal costs can be disproportionate to the raise
• However, if you have more than 3 or 4 main members that you know very well, let’s say you have 10 or 15 investors, you don’t want that many people actively involved and telling you what to do.  Plus, trying to get unanimous or majority decisions from that many people, to make major decisions about the property, could become cumbersome.
• If you’re going to have more than 3 or 4 investors, don’t do joint ventures
• If you have more investors, go the syndication route
  • Complying with securities laws is not difficult
  • To reduce costs, require only Accredited Investors only, so you don’t have to do a Private Placement Memorandum
  • Keep your deals smaller
  • Make it a manager managed LLC or Limited Partnership so that you’re in control, can make the decisions and the investors are passively investing with you

Joint Venture Structure Within a Syndication

• Kim’s firm frequently use a joint venture structure within the structure of a syndication
• When they are structuring a securities offering with a manager managed LLC, the manager managed LLC will be the investor level entity – that’s the company that will probably take title to the property and then sell off a portion of its ownership interest to investors and the management team will keep a portion of its ownership interests for itself
• The manager of that management member LLC is usually comprised of 2 to 4 people, which would also have a separate LLC for the manager
  • That LLC can either be a member managed LLC, where everyone is actively involved, or it can be a manager managed LLC
    • The reason they might want to do one vs. the other is that situation where only 2 of those 4 members will actually sign on the loan
      • The lender will want the 2 signers to be the managers of that management level entity and then all 4 can be members of the management level entity
      • They always have to think of how the deal has to be structured to get the loan approved and get the deal to the closing table – to create the least amount of friction to get that deal done
  • You can use the term GP (general partner) interchangeably with “manager of a management level LLC”
    • The GP is the manager entity of an LP (limited partnership) and the Manager is the management level of a manager managed LLC
• You need to look at, within the manager managed LLC, how many people can feasibly run that company
• The name of the investment level LLC will be on deed

A Third Way JVs Get Involved in Syndicates

• When you’re getting in to really big deals
• Raising $4-5 million per deal, independent of what the lender is providing
• You might want to consider doing a Joint Venture Agreement with a private equity company, family office or institutional investor that’s going to be coming in at half or more of that raise
• You’ll set up a syndicate structure, like we referenced before, but, instead, it is a side-by-side investor or member of a bigger member managed LLC, with the private equity company, family office or institutional investor being the other joint venture member
• They can get a bit more complex
  • When they start doing deals like that, they can have five or more LLCs in a deal
    • One to own the property,
    • One as the JV entity that owns the title holding entity
      • Within that, the equity company will have its own structure
    • The syndicate has it’s own structure with its managers and members
• This is a another way joint ventures are used quite frequently in real estate deals

Recent SEC Updates

Three recent SEC updates – two have been enacted, one has not

• The Accredited Investor Definition

  • Became effective in December 2020
  • Two new categories of Accredited Investors were added:
    1. A couple doesn’t have to be married anymore in order to qualify as Accredited
       • Co-habiting couple can pool resources together to qualify as an Accredited Investor
    2. Any company with $5 million dollars or more in assets can qualify as an Accredited Investor
    3. They are also considering including certain occupations or people with advanced degrees as possible qualifications of Accredited status other than just income

• Harmonization of Exemptions

  • The SEC looked at all the different exemptions that are available and looked at where there were disparities between the various rules/exemptions to try to make the exemptions more consistent
  • They’ve done some clarifications
    • If you close one offering before starting a new offering, as long as there is a 30-day gap between when you stop raising money for one and start raising money for the other, the two won’t be considered part of the same offering
      • This is important because if you wanted to do a 506 (b) offering (that can’t be advertised), following a 506 (c) offering (an advertised offering), you won’t risk violating the advertising rules

• Other Updates

  • Raised limits for regulation A+ offerings
    • From $50 million per year to $75 million per year for Tier 2 offerings
  • Raised Regulation Crowdfunding limits
    • From $1.07 million to $5 million

• Proposed Finders Rule

  • Not yet approved but proposed
  • This is a new “Finder’s Rule” for people who don’t have securities licenses who would actually receive commissions for referring Accredited Investors to other people’s deals
  • Two proposed categories:
    • For people who refer on a one-time basis
    • For people who refer more frequently
  • This was proposed prior to the new administration so it is still pending approval

Articles Available on Her Website

• Joint Ventures or Securities – What’s the Difference
• 3 other articles on the SEC updates

How to Reach Kim

• Free 30-Minute Consultation with Kim
• Website: SyndicationAttorneys.com

IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, iHeartRADIO and Spotify and Subscribe, Rate & Review our podcast.  This will greatly help in sharing this podcast with others seeking to learn real estate investing as a means to achieve a successful retirement.

Check out our other podcasts at olddawgsreinetwork.com.

Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.

Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com