Kim Lisa Taylor is a author, real estate investor, and nationally recognized speaker. She often writes articles on how to legally use OPM (other people’s money), and has been featured in many publications, most recently Personal Real Estate Investor Magazine. She is the author of the soon-to-be released book Syndicate Anything; How to Legally Find Private Investors to Fund Your Dreams While Helping Them Achieve Their Own.


Kim is frequently a guest speaker on several radio talk shows and has been the keynote speaker at multiple real estate investor events across America. She spends time teaching real estate investors topics such as the “Legal Aspects of Private Lending” and “Partnering and Pooling Money”, through live workshops, home-study courses, and books. Kim is a California and Florida licensed attorney and partner in the Corporate Securities Law Firm of Trowbridge & Taylor LLP.

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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.

JASON HARTMAN: Hey, welcome to the Creating Wealth Show. This is your host Jason Hartman. This is episode number three hundred and thirty-eight; thank you so much for joining us today. And we’re going to talk about a few things today. Our guest is an attorney who’s licensed in two states, who is going to talk about syndication, and funds, and how you can either set up your own syndication, or your own fund, or you can—what you should know, before investing in someone else’s syndication or fund. And you know how I feel about this stuff. Commandment #3, remember: thou shalt maintain control. So we will talk about that, and she just did a great job on this interview. It’s very complete. And remember, folks: when you’re talking to a securities attorney, most of them charge really high hourly rates. I do not know the rate of this expert, however, I would venture to guess she charges several hundred dollars an hour. And she’s very knowledgeable. So, you get that all for free on the show! Isn’t that fantastic? She’s got a very good website, and you can check out a lot of information there. And if you need her services, she’ll give out her website, so you can contact her as well.

But before we do that, I’ve got Steve here with me, and I wanted to talk about a recent news item. This one’s actually from Newser. And it is about something that may not surprise any of us. As the financial crisis occurred a couple of years ago, and we’re still reeling from it, regardless of what Obama says. Or the lamestream media. We’ve still got quite a few issues left. Seems like really no one has suffered any real consequences from that, except Main Street America. Not the bigwigs, not the elites, not the people that ran the companies that basically pretty much rammed the world into the ground financially. Bankrupted the countries, bankrupted huge institutions that are over 150 years old. Well, here is yet another example of zero consequences for their actions. And it’s good old—you may have guessed it—Lehman Brothers. And this article talks about why Lehman Brothers wasn’t prosecuted, and I have Steve here to talk to me about it. How you doing, Steve?

STEVE: I’m doing great. I’m hoping that maybe the new leader of the free world, Vladimir Putin, can do something about this.

JASON HARTMAN: It’s interesting that you say that, because I think he has a lot more respect than our own president Obama. Putin is looking really like the leader of the world.

STEVE: It’s pretty sad. He’s just grabbing the bull by the horns, jumping up on the stage, and telling everybody how it’s gonna be.

JASON HARTMAN: I’m not crazy about Putin, but in a lot of ways, it’s hard to deny that—you can understand why people have more respect for him than Obama lately, that’s for sure.

STEVE: Yeah, he’s showing leadership. You don’t have to agree with what he’s doing, but he is leading here. Obama just seems to be kind of going wherever his behind-the-curtain advisers whisper. But Putin’s still two steps ahead of him.

JASON HARTMAN: Yeah, well, Obama’s a community organizer, what do you expect?

STEVE: Yeah, he’s not accustomed to dealing with chemical warfare and air attacks and things like that. But hey, he can bus a bunch of people to the polls. Did I say that?

JASON HARTMAN: Yeah, and you know, let me—yes. They do bus people to the polls. But if this—if we attack Syria, I am just gonna be so upset. I mean, this is just unbelievable, the way we just get in everybody else’s business. And you know, it’s interesting how the world looks at chemical warfare. Only 1% of the deaths in Syria have been caused by this alleged chemical warfare attack, right? And you know, let’s just assume it’s true. But what about the other 99%? I mean, haven’t over 100,000 people been killed already in this conflict? Where was the outrage then? It’s just funny how our brains work. I guess being killed by a chemical is so much worse than having your brains blown out with a gun.

STEVE: Yeah, because the person suffocated, Jason, it makes it a lot worse than getting ripped to shreds by bullets or a grenade. Don’t you know this?

JASON HARTMAN: Yeah, or a landmine, or whatever. It’s unbelievable. Don’t get me started. Okay, let’s just look at the crooked, elite scum that get off the hook in America. Because I don’t know, sometimes I think America has left the building.

STEVE: Right. We have a few things to talk about here, and just—kind of elaborating on what you said, you’ve got the securities attorney coming on later, and they are the most highly paid type of attorney, in my mind, because the law is so nebulous and so filled with potholes and favoritism and nepotism, that these securities attorneys will always—they can never give you a for-sure answer. They don’t know what bureaucrat is working at the SEC that day. And it’s really a shame, and it’s on display here with the Lehman Brothers, that situation. Basically, what we have happening is, the chief of the SEC, named Mary Schapiro, had a 8-member task force out of the New York office of the SEC tell her that they decided, we’re not gonna file any charges. The SEC only files civil charges. But they weren’t going to file any civil charges, and she hit the roof. She was saying, well, why on earth are there no civil charges? This is clearly one of the biggest financial debacles that happened in 2008. And this chief in New York named George Canellos, basically said, you know, we’re not going to do it. She ordered him to keep investigating—said, there’s gotta be something here. We can’t just not go after Lehman. And still, nothing! Crickets on this thing from this guy Canellos, who I’m sure we’ll have plenty to say about later on the show.

JASON HARTMAN: Well, congratulations to Dick Fuld—he was running Lehman at the time, and he was known as the Gorilla of Wall Street, because he was so incredibly competitive. And it looks like he’s off the hook, because Canellos’ team ruled out suing the firm, because it was bankrupt. Well, isn’t that always the case? The executives bankrupt the company and get away with all the money themselves in terms of their bonuses and—I mean, they talk about these clawback provisions. They never claw it back. I have yet to hear one story of a clawback. We’ll see if that ever happens. But yeah, so they decided they’d focus on individual investors instead. Well, why does the article say individual investors? I mean, what about the executives? Personally? Their personal liability? It’s unbelievable the way entities are used in the really big scale elite too-big-to-fail game.

STEVE: Yeah, it’s pretty ridiculous, because in a bankruptcy, those trustees are ruthless. We saw—I can’t remember what the guy’s name was, but he was the bankruptcy trustee for the Madoff case there in New York. And he was going after everybody! The owners of the New York Mets, the baseball team, they were big investors, into Madoff. And he was going after them, suing them. I can’t remember how many different lawsuits he filed to “go after” these people that were investors. It seems that’s the habit of the SEC. But the executives that actually—

JASON HARTMAN: Let me just explain that for a moment, okay? So, what that means—I’m not sure people really understand what you’re talking about there. What that means is that, in a Ponzi scheme, like Bernie Madoff, or the US Social Security system—either one—when the thing blows up, what they try and do is, they try to go after investors who’ve taken money out of it, and who’ve had profits. And basically, unwind the Ponzi scheme, which you can never completely do, because whoever invented the Ponzi scheme has taken a lot of money out of it, and of course, they gave returns to the early investors so that they could develop momentum, and other investors would come in and support them. I mean, that’s the nature of a Ponzi scheme. And so, they go and sue the early investors that took a lot of money out of the scheme, to go and equalize the accounting and give some money back to the later investors who came in and got completely burned. And you know, it’s always pennies on the dollar, if anything. But that’s what they’re saying here, it looks like.

STEVE: That’s right, that’s what their idea was going to be. Meanwhile, these executives probably had pretty fat bank accounts.

JASON HARTMAN: Yeah. And I mean, Lehman—we’re not saying Lehman was a Ponzi scheme per se. It’s far more nuanced and complex than that. I mean, Lehman did all kinds of crazy stuff. But I think it’s the same idea in the regulators’ eyes.

STEVE: It is, and we can simplify it a little bit for the listeners. Because what they were concerned about was something called Repo 105, and this is a practice where a Wall Street firm or investment bank, private equity group, whatever—would use these terrible securities. In this case, the bad pools of mortgages. CDOs, collateralized debt obligations. They would use these as collateral for loans. So, they’d say hey, look, I own all these securities, give me a loan. So I can go trade, and do all kinds of crazy derivatives, who knows what, right? So they used that as the collateral, but then they would list that transaction as a sale on their books, so it would show that I sold this bogus collateral, these bogus securities, and so it made their books look pretty misleading, and a bankruptcy court examiner basically said, this is really material misleading. And at a minimum of Dick Fuld, said, it was grossly negligent.

JASON HARTMAN: Which, you know it’s not negligent. You know Fuld knew exactly what he was doing. I mean, he’s an experienced guy.

STEVE: Yeah. These guys have MBAs, and Ph.D.s for their accountants that are running the books.

JASON HARTMAN: They have incredibly smart people around them. And they’re incredibly smart themselves, and they have vast amounts of experience! I mean, he’s not some spring chicken oh I just didn’t know what I was doing. This guy’s been on Wall Street for a long time. He knows the game. So, to put that in like a real estate analogy, maybe. It would be like you buying, as an investor, a portfolio of houses. So, let’s say you have a portfolio of 50 houses. And say those 50 houses are worth $10 million. Well, it would be like getting a faulty appraisal on that portfolio saying that the portfolio was really worth $30 million, when it was only worth $10 million in real life. And then going and borrowing against the portfolio, but telling your banker that you didn’t borrow the money—that you sold the asset. So it looks better on your balance sheet, it doesn’t look like you have any debt, right? And the portfolio was overvalued in the first place! The value was smoke and mirrors. So, it’s just unbelievable the games these people can play at the highest levels of the financial system. It’s like they get a pass. They just get to do all sorts of crazy stuff that us little guys don’t get to do.

STEVE: And it goes back into the complexity of the securities laws, and all this. Nobody really knows what they mean. It’s, what’s the mood of the bureaucrat or the prosecutor for that day. Or, who do you know. It’s not a cut and dry thing.

JASON HARTMAN: That’s the other thing. These companies that are being investigated by the SEC from time to time—a lot of these people that work for the SEC—frankly, their whole goal is to get offered a job by one of these companies. So, it’s such a conflict of interest. I mean, you go and investigate a company, and you’re hanging out at their beautiful corporate headquarters, and maybe, you know, maybe some of the executives while you’re there doing your audit, they take you out for lunch, and they kind of hint that they might like to hire you—what were your plans for your life? How long ago did you start with the SEC? Hmm, you’d be really good on our audit team. Maybe we can give you a big fat bonus for signing with us. And somehow the investigation goes away.

STEVE: So aggressively prosecuting Dick Fuld doesn’t bode well for your future job prospects. Unless you want to be a SEC government attorney. But if you work for Wall Street you could make $2 million a year at the in-house counsel.

JASON HARTMAN: You know? I mean, say what you want about him, and I don’t know the full story, but good old Elliot Spitzer. He went after these companies, like really hard. He’s not getting offered jobs by these companies, okay?

STEVE: How is Elliot Spitzer still even around? Shouldn’t he have had to just ride off into the sunset?

JASON HARTMAN: No, you know, hey, Anthony Weiner and Elliot Spitzer all came back, right?

STEVE: Hey, New York! New York! What are you thinking? You keep letting these guys back into the limelight. I’m going to get a bunch of New York hate mail.

JASON HARTMAN: You know what the problem is? I mean the reason that New Yorkers—that they have these crazy political races? It’s because they’re drinking sodas that are more than 16 ounces. That must be the problem.

STEVE: Yeah, the sugar is rotting the brain, or something.

JASON HARTMAN: Something like that. So, what happens next year is, the FBI decides that this move is technically legal, and they drop their criminal investigation, and then things go back to the SEC only on the civil side, right? Then what?

STEVE: Well, basically, there’s a bunch of finger-pointing happening. Some people saying that hey, Fuld knew this was going on. He totally was the brainchild of this—not the brainchild. The author of this. And he of course denies it. And this Canellos guy just magically says, no, Fuld was telling the truth. And the other executives were just ruled out for other reasons. So Canellos, the SEC investigator in New York, who the head of the SEC in Washington put in charge of this—just decided, nah, he’s telling the truth. I’m a human lie detector. Dick Fuld knew nothing about this.

JASON HARTMAN: It gets even better. Then the next thing that happens is, Canellos has this team of investigators, right? And they decide that the Repo 105 issue was not material, okay? And we talked about that. It’s not material information to investors, and hence, it wasn’t criminal to withhold information about it. It reminds me of the funds that register in Delaware so they can write off their fiduciary obligation by contract, and say, hey, you know, we’re taking all of your money. But we don’t have any fiduciary obligation to you, as the investor. We can have conflicts of interest, we can act in our own interest, we have no obligation to you as the investor. There you go! Another example of that. Unbelievable.

STEVE: By the way, that was great that you found that out. I’d always wondered why. But hey, that’s what you get on the Creating Wealth Show. Shameless plug.

JASON HARTMAN: Listen, I’m going to pat myself on the back for that one, because I just—when I found out that this one fund that is trying to pitch our investors all the time registered in Delaware—you know, keep in mind, it doesn’t have to be—and you’re going to hear more about that on this show, and it’s interesting how this very knowledgeable attorney kind of—she doesn’t want to really address that whole Delaware issue. You’re going to hear that here coming up. And she says, it sounds like an ethical problem. Well I agree! It’s an ethical problem!

STEVE: Of course it does!

JASON HARTMAN: But that’s what people do! What we have nowadays, Steve, is we have a bunch of criminals, basically, running around in the business world. And you know, we’ve always had these criminals. There have always been people that do bad things and take advantage, of course. But we have these criminals that don’t look like criminals. They go to nice schools, they have upscale educations, they wear nice suits. And rather than using guns to commit their crimes, they use lawyers, they use accountants—they pervert the spirit of the law to basically take advantage of people. And so, what you’re going to hear is that these funds, when they structure them, they’ll have an investment manager will be a separate entity from the fund that holds the property or the business in which you’re investing.

And so, maybe the business or the apartment building or the shopping center or the hotel or whatever the asset is, the underlying asset that they’re asking investors to put their money into, that’s registered where it’s located. Maybe it’s registered in Arizona. Maybe it’s registered in Texas or California, or whatever. Right? But then the investment management company, which is a whole nother company they set up—so now you have to figure out who’s liable, or can you sue them both, or whatever, right? When they bilk you out of you money, or cheat you out of a higher return—maybe they don’t outright steal. Usually they don’t. They just skim the profits off the top so the investors don’t get as much. Well, that’s registered in Delaware, and so, they can contract away any fiduciary responsibility. Wow. Delaware is a very desirable state, now that I’ve found that out.

STEVE: Yeah, I think there are more companies in Delaware than there are people.

JASON HARTMAN: I think there are, actually! That’s actually true, I believe. I’ve heard that before. Yeah, Delaware has a lot of post office boxes. Those are where companies are “located.”

STEVE: That’s correct.

JASON HARTMAN: Yeah, the registered agent business in Delaware is really big. Okay. So, they throw out Repo 105, that concept, right? And then what do you have next? You have SEC’s second highest ranking enforcement official.

STEVE: Yes. They got a bee in their bonnet about this too, and they recommended drafting potential charges against Lehman Brothers, so at least that way the attorneys and the SEC could review it and say hey, this’ll stick, or we need to change this argument up, or change that up. But this Canellos guy, again—no, I’m not gonna do it. I’m just not gonna draft the charges.

JASON HARTMAN: Okay, so what he did—what Canellos did instead, he drafted and proposed an SEC report that said why the SEC wasn’t filing charges, and then Schapiro shot the idea down, arguing that the draft was too sympathetic to Lehman. Now, I wonder if there’s some crony capitalism going on here! You just have to wonder! And you know what? Crony capitalism is so much more nuanced than an actual bribe, you know? In a Third World country, things are done by outright bribes. It’s just kind of part of the business world, from what I hear. But here, it’s more like that example I gave you of, maybe you should come work for my next venture.

STEVE: Bribery is a lot more complicated.

JASON HARTMAN: Well, what’s your salary at the SEC? Oh, let me see. At the SEC you make 150 grand a year, and you have government healthcare—you’re probably exempted from Obamacare like all the other higher government people—but you know, we’ll give you like, a $2 million bonus for signing at my next venture. And you know, we’ll hire you there, we’ll give you $400,000 a year. That’s quite a bit better than your government job, huh?

STEVE: Yeah, exactly. Exactly. A lot better. So I think the $2 million bonus, you could pay for your doctor’s visits, even under Obamacare.

JASON HARTMAN: There you go. So what happened next?

STEVE: So basically, to round it off—Schapiro, the director of the SEC, ultimately just gave Canellos what he wanted. Said, I’m gonna give you what you want here, because everybody else in the SEC is telling me that it’s not appropriate for myself, a political appointee, to overrule Canellos, a bureaucrat. So, long live democracy.

JASON HARTMAN: Yeah, really. Long live crony capitalism. That’s exactly what happened here. You know what’s kind of funny? Once in a while I’ll think of a childhood actress that I liked, for example. And there’s those shows, where are they now? And sometimes I’ll just look them up on Facebook, right? A lot of those profiles of celebrities on Facebook I’m sure are fake. And you know, or you just look them up on the internet to see, where are they now? So, the question to ask here is, after Lehman Brothers, what happened to Dick Fuld? Well, we all probably remember the story of him getting punched out in the gym. Someone just came up and whacked him in the face, and knocked him out, apparently. Well, listen to this. You’re going to love this, okay? So, on November 10th of 2008, that date shortly after—it’s not after, it’s as the financial crisis was unfolding, right? Fuld transferred his Florida mansion to his wife, Kathleen, for $100.

STEVE: That’s a good price per square foot.

JASON HARTMAN: No, that’s the whole house.

STEVE: That’s what I mean.

JASON HARTMAN: [LAUGHTER]. That’s an incredible price per square foot. So, hey Kathleen! My wife! Do you have a Benjamin in your wallet? Pass me over that Benjamin in your purse, that hundred bucks, and I’ll transfer the mansion to you, in order to protect the house from potential legal actions against me. Okay? This is Dick Fuld talking, of course. And they had purchased the house four years earlier, Steve, for get this—$13.75 million. And Kathleen got it for a hundred bucks. Boy, she really—his wife really knows how to take advantage of a desperate seller, doesn’t she?

STEVE: Yeah, yeah. She knows how to find the don’t-wanter, so the speak.

JASON HARTMAN: Yeah, the don’t-wanter seller. If you can pull that one off in the open market, that hundred dollar deal—you know, they say, there’s a few really good ways to get rich. Either marry it, or inherit it. Well, there you go.

STEVE: There you go.

JASON HARTMAN: This is from Wikipedia by the way, okay?. So, in late March of 2009, Dick Fuld had an email sent out, stating that he joined Matrix Advisors, a New York-based hedge fund. They probably offered him a couple million dollars just to sign. Not that he needed the money.

STEVE: A couple million.

JASON HARTMAN: Yeah. Probably more than that. Who know. And then in May of 2010, Fuld was registered by the Financial Industry Regulatory Authority, otherwise known as FINRA, as employed by Legend Securities, a securities brokerage and investment banking firm in New York. And then Fuld left the firm in early 2012. So, I don’t know why the guy can’t just enjoy his retirement. I mean, with all the money he’s got. But I wonder if he took another job after that.

STEVE: I don’t know. In the normal legal environment, when there’s a lawsuit—when there’s a complaint that arises—you can’t get away with that nonsense of transferring deeds and that stuff, after it’s known that there is a legal dispute. It’s called a fraudulent transfer.

JASON HARTMAN: Well, this guy—this doesn’t apply to the elite class.

STEVE: Well I was just going to say that in order for that to be a problem, you’d have to have a lawsuit filed in the first place. Which thanks to his buddy Canellos, is not happening. I really would like to follow this in the future. See where this Canellos guy ends up.

JASON HARTMAN: Yeah. He’s gonna end up working with Dick Fuld in the future, I bet. Somewhere, in some company.

STEVE: Oh yeah. Talk about turning a blind eye! Lehman what? Lehman went bankrupt? Unbelievable.

JASON HARTMAN: It’s just sickening. It really is. Okay. Well Steve, let’s talk about something more cheerful here before we get to our guest. Tell us about Little Rock, Arkansas—good old Slick Willy Clinton’s hometown. And since we opened that market just recently, you’ve had some clients buying there, right?

STEVE: We’re having a great time in Arkansas [with accent].


STEVE: I don’t know, was that good?

JASON HARTMAN: That was a pretty good Slick Willy, Bill Clinton. And I gotta tell you, looking back, I’m beginning to really like Clinton.

STEVE: Yeah, wow. Talk about your free market capitalist, huh?

JASON HARTMAN: This is called contrast.

STEVE: That’s exactly what this is.

JASON HARTMAN: Compared to Obama, Clinton looks like a star. He looks like Reagan to me now.

STEVE: He was amazing. Please come back. Well, we might get his wife. But that’s for another day. So, we have a great property in Little Rock, Arkansas, and I’m looking at the pro forma, which is of course a projection of how our team thinks the property is going to perform. And great little property that is 1200 square feet. It’s an $89,000 property.

JASON HARTMAN: So you’re way below $100 a square foot. But not nearly as good as the deal Kathleen Fuld got from Dick Fuld.

STEVE: Yeah, I’m sorry. If you’re looking for that deal, what can I tell you. Rates have gone up, it’s not gonna happen. I wonder what her mortgage payment is.

JASON HARTMAN: Let me see. It’s $100, so she probably just bought it free and clear.

STEVE: What is Kathleen Fuld’s cash on cash return?

JASON HARTMAN: Well, I think they’re living in it, so, it’s technically still a liability, as Robert Kiyosaki would say. But….

STEVE: Move out! Rent that thang.

JASON HARTMAN: Pretty good deal overall.

STEVE: Yeah, Kathleen, what are you doing. So the total cash invested for this property—this includes your closing costs, your origination fees, and all that—is about $26,000. And the property’s rented for $975 a month. So it’s well about a 1% rent-to-value ratio, which we like. And your cash on cash return on this property is 12%.

JASON HARTMAN: Nice! That’s really nice. And your overall return on investment is projected at 36%. So, the famous Jason Hartman quote—if it only goes half as well, you’re still making 18% on your money.

STEVE: Exactly right. Good, solid property. It’s a little bit newer; I believe it was constructed in the early 80s. I’d have to verify that. But with a $975 rent, it’s going to be a pretty solid area. Those properties that rent for around a thousand are usually in the better areas.

JASON HARTMAN: Fantastic. Okay, good! Do you have one more?

STEVE: I do, because we’re going to be down in Austin. We need to think of somewhere good to eat!

JASON HARTMAN: Oh, there’s lots of great places to eat in Austin. I love that city. That’s a great town.

STEVE: Yeah, I get in at like 6:30, so I’ll call you and we’ll go get some food.

JASON HARTMAN: Yeah, I think I land at 4 that day, on Friday. So, yeah. We’ll go have some good Texas food in the downtown area.

STEVE: Looking forward to it. So we’ve got one in Hutto, Texas. And this is in the Austin metro area.

JASON HARTMAN: That’s a suburb. We’ve done a lot of business there over the years, by the way.

STEVE: Oh, it’s great. It’s great. And these things rent out like crazy. The Austin economy is booming. It is absolutely booming; Apple has moved a large operation there, and so many different tech companies going to Austin. And then you’ve got the educational and the governmental presence all there, servicing that huge state. So many of those kinds of jobs in the Austin area. And this property is a little bit bigger. Built in 2003, and it’s 2200 square feet.

JASON HARTMAN: What’s the price?

STEVE: The price—after you do your rehab, because this thing’s gonna take about $7500 in rehab—the price will be $48,000 cash in. Your total price will be just over 140. Depending if that rehab stays exactly at 7500. So, what I really love about this one, Jason, is the cost per square foot is $61, in Austin. The cost of construction has to be in the high 80s per square foot, and that doesn’t even include the land, which is more expensive, because the environmentalists like Austin. Therefore they have jacked the real estate price—they have a tendency to do that with all their environmentalism.

JASON HARTMAN: Right, right. Yeah.

STEVE: So your cash on cash, a little bit lower, but it’s a newer house that you’d sit on for that growth, and get some cash flow in the mean time. It’s 5%. That’s a projection. And your total return is 25%. And this thing’ll rent like wildfire.

JASON HARTMAN: Yeah, that’s an easy market to rent in. And I gotta tell you, those Texas rents—the higher property taxes in Texas are definitely pretty well offset by the higher rents that you get. Because tenants—this is what people that just don’t understand economics just don’t understand. And it is the concept of pass-through. Whenever there’s an election going on, you hear the left always talking about corporate welfare, and how the corporations are getting away with murder, and you know, I don’t disagree with them, actually. I think they are, because we live in this sort of socio-fascist crony capitalist—but it’s only crony capitalism for the elite, the big capitalists. The too-big-to-fail type of capitalists, type environment. And they talk about corporate welfare, and how the corporation should pay more, right? But what they don’t realize is that as soon as you make the corporations pay more, all they do is raise their prices. They just pass it right through.

Same with properties. If you as an owner have to pay a higher tax rate on your property taxes, it just passes through to the tenant. But usually the tenant doesn’t know enough to figure that out. Because if they live in Texas, they think hey, I’m getting away with murder! I don’t pay any income tax, because there’s no state income tax in Texas, which is beautiful. And I don’t pay any property tax, because I’m a renter. But if you take that same house in a sort of a comparable city like, you compare maybe Austin to Atlanta. I mean, of course every city has so many difference, you can’t really compare them. But say it was a similar house in a similar neighborhood, everything else being equal. You’d see that the rents are higher in the Austin house, because the property tax is passed through to the tenants. So it’s a pass-through entity; things always pass through. And one more thing I want to ask you about though, Steve. By the way, two great properties. Thanks for telling us about those. One more thing I want to ask you about, though, is Las Vegas. Years ago I did some business in Las Vegas, and we really just haven’t been that interested in that market. A lot of our listeners have asked us about it, and share some of your thoughts on it?

STEVE: I was actually there over the weekend, with my wife. So it wasn’t a business trip. We went down and saw Jerry Seinfeld, and he’s still got it.

JASON HARTMAN: He’s so funny!

STEVE: Oh yeah. He’s adapted, and moved with the times, and I haven’t laughed that hard in a long time. But—

JASON HARTMAN: You don’t strike me as much of a Vegas guy. I doubt that you gambled. And I know that you don’t drink.

STEVE: We go down there for a couple of the shows, and the food, and just the lazy time. Well, the reason being—I’ll just tell on the show—we’re gonna have our third kid here in late December.

JASON HARTMAN: Yay! You told everybody!

STEVE: I told everybody, yeah. And so, we just though, okay, we gotta get out of here while we still can for a few days. Because it’s gonna get complicated.

JASON HARTMAN: Well good stuff.

STEVE: Yeah, so. And it’s close. It’s a quick drive. So we went down, had a great time. But I always watch that market, because I’ve done a few flips there over the years, because it’s close to me, and I have a lot of contacts there. And I actually talked to a couple of contacts last week, and they told me exactly what I expected to hear: that the prices have gone up; it’s cooled slightly, but they’ve gone up crazy, about 35% in the last year alone. This is according to an article from in the news. And what this has done, because the financing has still been so difficult to obtain—is these are almost all investors, and it’s made the rental market a little soft. There’s a lot of properties for rent. It’s gonna take more time to rent these out, and you’re gonna get a lower price, and so what’s happened is that people are having to pay a lot more for a lot less rent. And we just can’t get close to that 1% rent-to-value ratio. You’re gonna have to pay $140, $150,000 in many cases to get $1000 in rent, and even then it’s gonna take you 60 days in some cases to get that amount of rent. So, hey. Vegas has got bright lights! A lot of fun things to do. But you’d be better off investing your money in Little Rock, or in Atlanta. And then you can go have fun in Vegas. Just don’t invest there right now.

JASON HARTMAN: That’s sort of one of my somewhat famous quotes; invest in places that make sense, so that you can afford to live in places that don’t make sense. And that kind of applies to this concept. You know, maybe it’s—invest in places that make sense, so you can afford to vacation in places that don’t make sense. So that’s kind of applicable to this whole concept. I mean, it just—the market, it’s just not that great. If you like Vegas, I mean, I’m not much of a Vegas person. But I always seem to end up there, because I’ve always got a business convention or something there. But vacation there! If you need to get that out of your system. It doesn’t mean you should buy a property.

STEVE: Yeah, that’s what you do there. The irony is that it’s a gambler’s market. It’s so volatile, and I’ve talked about that on the show before, but—I remember, I went down to Vegas, it was in 2009. And I was looking at some high-rise condo units. And there are a couple of towers—some of you probably know what they are. The Turnberry Towers up there.

JASON HARTMAN: I looked at those, yeah.

STEVE: Yeah, a little bit east of the strip kind of, but up on the north side of it. And these towers—they have these, what is it? Concave or convex? Convex, where the windows kind of curve outwards. So that’s where all of the—you’d have these convex windows that would show kind of the lobby of each floor, and you could see three or four doors going into the separate units. So I was in actually the top of one of these Turnberry Towers, looking down at one of the other towers, and I could see the front doors of all of these units for I believe about 40 floors going down. And I could see that little 8½ by 11 notice of trustee sale on about half of them. You could see that paper on the door. I mean, these units—they sold for a million dollars easy. At the top of the market back in ’06 and ’07, and you could buy them for $200, $300,000 back in 2009! But you were crazy if you did that, so to speak. So hey, if you did that, you put it all on black, you’re in Vegas, baby! You made money. But just as many people got burnt and got hurt, because it’s just such a roller coaster of a market.

JASON HARTMAN: Yeah. Anything that’s exciting and sexy is probably not the place to invest. That’s the rule. Get yourself a nice little boring place like Little Rock, Arkansas. Sorry, Little Rock friends. No offense intended. But, you’re not making the news every day like Las Vegas, okay? And that’s why we like you so much as a place to invest. So, and all the other similar type cities. So, good stuff. Well hey, Steve, we gotta get to our guest, because we have a fairly lengthy discussion with her, and she’s darn interesting. So let’s talk about syndications and crowdfunding and some of this stuff is pretty fascinating. So let’s go to her, and be sure to join us for our Austin Property Tour coming up. We’re about, oh, a little less than three weeks away from that. And it’s going to be a great time. So register at, and Steve, thanks for joining me today!

STEVE: My pleasure. Thanks for having me.

JASON HARTMAN: We’ll be back and talk about securities and crowdfunding here in just a second.


JASON HARTMAN: Be sure to call in to the Creating Wealth Show and get your real estate investing and economics questions answered by me personally! We’d love to have you call in, share your experiences, ask your questions, and a lot of other people listening have those very same questions. So be a participant in the show! At 480-788-7823. That’s 480-788-7823. Or, anywhere in the world via Skype: JasonHartmanROI, that’s JasonHartmanROI, for return on investment. Be sure to call into the show. And we are going to enter all of the callers in a drawing for some nice prizes as well, so be sure to call into the show, and I look forward to talking with you soon.


JASON HARTMAN: It’s my pleasure to welcome Kim Lisa Taylor to the show! She is a California and Florida licensed attorney, and partner in the real estate securities law firm Trowbridge & Taylor LLP, and she has done over 100 private placement offerings. And I think you’re going to learn some very interesting stuff today about syndications, securities, the JOBS Act, that is going to have a very significant change, I think, on this market, and some of the stuff investors should look out for as well. So, Kim, welcome! How are you?

KIM LISA TAYLOR: I am wonderful, thanks Jason.

JASON HARTMAN: Well good! It’s great to have you on the show. And you’re coming to us today from somewhere in Florida, I believe, right?

KIM LISA TAYLOR: That’s right. St. Augustine, Florida.

JASON HARTMAN: Fantastic. Well, welcome! So first of all, maybe a good place to start is, helping listeners get an understanding of, what is a security?

KIM LISA TAYLOR: Well, there’s two ways that this comes into play, particularly for real estate investors. Both the state and federal laws define what constitutes a security. And if you look in any of those definitions, you would see probably the first thing listed is always a note, and they’re talking about promissory notes. The second thing is further down in the list: usually you’ll see something called an investment contract, and that is the one, if you’re not dealing in notes, in promissory notes, and borrowing money in order to fund real estate transactions, then the other thing you might be doing is finding passive investors and bringing them into an investment company, like a limited liability company or something like that. And so, there’s kind of a little four-prong test we use to determine whether or not something constitutes an investment contract. And it’s these four things—it’s an investment of money in a common enterprise with an expectation of profits based solely on the efforts of the promoter, and the promoter would be the investor, or the person who has the real estate opportunity and is looking for the money. So you know, if you’re bringing in passive investors, you’re probably dealing in investment contracts. Those are securities. So, if you create a security, then you have to follow securities laws before you can start asking investors for money.

JASON HARTMAN: So, does a security mean that it’s fractionalized? That you’re only doing part of the deal—would that be a way to know? Is that like a sniff test for a security? Is it part of the deal or all of the deal type thing?

KIM LISA TAYLOR: Not so much. You know, that’s certainly a good indicator that it could be a security, but the real test is whether or not the investors are passive or if they’re actively involved in management. Because you could have a situation where you’ve got three or four members of a limited liability company, but everybody’s gonna be involved. Everyone has a role, everyone has a job. More than just a voting interest. And maybe part of those people put up the money, and part of those people are actually doing the physical labor of you know, finding the deals and making the rehabs or whatever happen. So, in that situation, if everyone is staying actively involved in managing their own money, then you haven’t created a security, and that’s—another typical name for that would be a joint venture, or a general partnership. But when you get into other types of structures, such as a manager-managed limited liability company, where the manager’s calling all the shots and making all the decisions, or a limited partnership where you have one general partner that’s in charge of everything, and the limited partners just have a passive role in putting in the money. Then either of those situations are pretty classic definitions of securities. And it really wouldn’t matter whether you had one person or if you had 25. It’s still a security.

JASON HARTMAN: Right, okay. So, there needs to be a manager to make it a security, right? Then, because if there’s not a manager, then the investment can’t be passive for the investor.

KIM LISA TAYLOR: Sure, that’s a good way to say it.

JASON HARTMAN: Okay. So if there’s someone managing the deal, even if you’re the only investor in the deal, it could be considered a security, right?

KIM LISA TAYLOR: That’s right.

JASON HARTMAN: Okay, alright. So, now, the manager—do they need to have an equity stake, or not? Probably not, right?

KIM LISA TAYLOR: They don’t have to. Sometimes they do, sometimes they retain a percentage of ownership of the company, or they would also perhaps earn some fees. So, there’s different ways that they can earn money. But they don’t necessarily have to invest their own cash.

JASON HARTMAN: Right. But they could take equity just for their labor, or for setting up the deal, right?

KIM LISA TAYLOR: Sure they could.

JASON HARTMAN: Okay. But they’re not required to; that doesn’t make it a security either way or weigh on it.


JASON HARTMAN: Okay. So, what happened in the world of—on past shows, we’ve talked about the world of TIC—tenant in common deals. Which were all the rage a few years ago. I mean, I remember people hitting me up trying to get access to my investors, always to present their TIC, or tenant in common opportunity. And my understanding is, a lot of people—a lot of companies and people—got in trouble in those, because they were trying to market them as though they were a real estate deal, and I don’t know the final ruling, if there ever was one actually, whether it was a security—and then it would have to either be registered, or comply with other requirements—or if it was a real estate deal, just a fractionalized real estate deal. That’s what they were trying to say.

KIM LISA TAYLOR: Yeah, you’re right—that was kind of the way things were operated. A lot of real estate brokers saw opportunities where they couldn’t sell a big property, say, to one investor. They went and recombined several investors, and if they all buy fractional interests in the deed to the actual real estate, then we’re not selling securities; we’re really just selling real estate. The problem is, a lot of those deals were sold as real estate deals coupled with a management contract offered by the broker, and so, it was that coupling with this management contract, I think, that really kind of crossed the line into the world of securities, because again, who was promoting the deal? It was the broker. And who were the investors relying on to generate that profit? Again it was the broker. Because they said hey, I’m just investing. I’m buying something, but I don’t really have to do anything with it—the broker’s going to handle everything.

So that’s how they kind of fell into the realm of securities laws, and yes, there was a white letter ruling by the SEC that said that this kind of a scenario really isn’t just the sale of real estate; these people are relying on you to make a profit broker; this is truly a security. And if you’re going to do this kind of deal, then you either need to register these as securities offerings by getting pre-approval before you offer them, or you need to qualify for an exemption from securities laws and operate the company in that way. And the biggest stumbling block to anybody wanting to do that was that most of the private offering exemptions that would have applied to what they were doing did not allow them to advertise those deals.

JASON HARTMAN: So they were advertising. I mean, I remember seeing the advertising. What happened to these people?

KIM LISA TAYLOR: You know, a lot of them just kind of ended up dissolving, and it really just—I’m sure there’s a lot of them still in existence. But they just were not able to continue to offer their properties for sale in that way. So, now what they need to do is actually just go ahead and comply with the laws like all of the other real estate investors out there have been doing all along. And that is just, acquire the property in the name usually of some kind of a company, and then offer investment opportunities to people with whom they already have preexisting relationships.

JASON HARTMAN: So, what makes—what is the allowable technique, then? If someone is syndicating a deal—say they find an apartment building, and one of the things you said is that apartment buildings are like the most common syndication, right?


JASON HARTMAN: So say they have an apartment building that they want to buy, and they want to go raise money for it. Are they allowed to advertise?

KIM LISA TAYLOR: Well, up until the end of this month, they have not traditionally been allowed to advertise. There are a number of different exemptions to securities laws that could be applicable to an offering like this. We call these types of offerings where you’re forming a company and bringing in investors—we call them real estate syndicates, or syndications. And these kinds of syndicated deals can be offered either under federal exemptions to securities registration, or state exemptions. If everything is all within one state—the promoter of the deal, the investors, and the property—if that’s all in one state, then there could be a state exemption that would apply to allow some advertising to be done to find investors. But traditionally, if you’re not getting preapproval from either a state or federal regulatory agency before you actually offer the investment opportunity to investors, you usually cannot do any kind of advertising or solicitation, because that’s kind of the difference between a public offering—one that’s been preapproved by a regulatory agency—and a private offering, which is what these exemptions are aimed at. They’re saying—the regulators have said, if you are only going to offer this to people that you already know, and you’re not going to advertise it to the general public, then we’re going to stay out of the way, and we’re going to let you do that. But there are a few rules that you’ll have to follow, and so, whatever exemption you choose will have its own different set of rules.

JASON HARTMAN: So, what are these exemptions called? Are they like, the 506 exemption?

KIM LISA TAYLOR: Yeah, under the federal law, there’s several. The one that is by far the most popular and most often used is called Rule 506. Regulation D, Rule 506; there’s also some others you may have heard of called Rule 504 and Rule 505. Those have some limitations that don’t make them quite as popular; they have some dollar limitations. But under Rule 506, syndicator can raise an unlimited amount of money from an unlimited number of accredited investors, and up to 35 sophisticated investors, as long as they don’t do it through any means of general advertising and solicitation. The investors can be from any state. Even foreign investors could be included. And the only thing that it preempts, this Rule 506, this federal Rule 506, preempts state laws, so that the only thing that can be required by the states is notice from the syndicator that they have sold securities to someone from that state, and giving the state jurisdiction over them in the event that the state determines they did not follow the Rule 506.

JASON HARTMAN: Okay. So what are those dollar limits you mentioned?

KIM LISA TAYLOR: For the Rule 504, it’s a million dollars in a 12 month period. For Rule 505 it’s $5 million in a 12 month period. And you’d have to have a 6 month gap before you could do another offering.

JASON HARTMAN: Okay, so that’s the amount that the syndicator can raise.

KIM LISA TAYLOR: Under the Rule 504 or the Rule 505. Under Rule 506 it was an unlimited dollar amount.

JASON HARTMAN: Okay. And is there any maximum amount the investor can put in?

KIM LISA TAYLOR: Not on either of those particular, the Rule 504, 505, 506. There are some other exemptions and some proposed exemptions that would have some dollar limits on things investors could put in.

JASON HARTMAN: And does it matter if—what if it’s a business? Say a startup business? The next Facebook. Does it make any difference if it’s a business versus say an apartment building or a real estate deal?

KIM LISA TAYLOR: Not at all. You can raise money under these securities exemptions for small businesses, for any purpose, really. It’s just a common enterprise.

JASON HARTMAN: And what requirements does the investor have to meet? Like, describe the different types of investors. There’s a sophisticated, an accredited, there’s neither; is there another category?

KIM LISA TAYLOR: Well, I think those are probably the most common ones. The accredited investor is someone who has an over $1 million net worth, exclusive of any equity in their primary residence, or they have income, if they’re an individual, of over $200,000 a year, or if they’re a married couple that files joint income taxes, the level has to be over $300,000. So it’s a million net worth, 200,000 if an individual, 300,000 if they’re a couple.

JASON HARTMAN: And that’s an “or?”

KIM LISA TAYLOR: That’s an “or.”

JASON HARTMAN: So they could have a net worth of $100,000, but as long as they make over $200,000 a year as a single person, or $300,000 married filing jointly, then they can do it, right? They’re considered accredited.

KIM LISA TAYLOR: That’s right.

JASON HARTMAN: Now, do they have to have done that for any length of time? Or could they just have suddenly had a good year, and they’re making 2, 300,000 if they’re married, and they can be accredited?

KIM LISA TAYLOR: It has to be for the last two years with an expectation that that would continue within the next year. At least as far as the income requirement. I don’t believe there’s a time limit on the net worth requirement.

JASON HARTMAN: And what about the sophisticated investor? That’s a different category.

KIM LISA TAYLOR: It is. So that’s someone who’s not accredited, who by reason of their educational, business, or financial experience, either by themselves, or with assistance of their investment advisor, has the ability to evaluate the risks and merits of the offering.

JASON HARTMAN: So, how do you quantify that? That one seems like a Pandora’s box there.

KIM LISA TAYLOR: Yeah, it’s very subjective. I like to suggest that the investor should explain that in their own words. And so, we use something called a prequalification questionnaire that we offer to our clients, and they can submit that to the investor, and the investor can say, in their own words, what they believe makes them sophisticated enough to be in the deal. And they can explain their business, financial, or educational experience that they feel qualifies.

JASON HARTMAN: Now, we’re kind of talking here from the perspective of the syndicator. Like, if someone listening wants to go out and buy big property, or start a business and raise money for it—we’re kind of taking it from that angle. But why is it important, Kim, as an investor, that you know that the person syndicating the deal, or being the general partner on the deal, now—by the way. That term, general partner, and limited partner, those terms—do they have anything to do with this?

KIM LISA TAYLOR: Sure. Usually—you know, the terms are kind of used generically. They definitely have specific legal meanings, but within the context of this discussion: when you’re speaking about a general partner, you’re usually talking about, you know, someone who’s managing the deal. Someone who’s in charge, someone who’s gone out and found the opportunity, and is making it available to investors. And then the limited partner, or the member of the LLC, or the investor—those are kind of synonymous terms, and that’s the person that’s usually putting up the money in a passive investment scenario.

JASON HARTMAN: So, why is it important though, my prior question there—why is it important that the investor understand this stuff? Because before we started recording, we talked about how you want to make sure that your syndicator is obeying the laws, because if they’re not, that could jeopardize your investment, right?

KIM LISA TAYLOR: That’s exactly right. Yeah. It’s very helpful for the investor to understand how these deals are structured, and what the legal requirements are for these exemptions, so that you can kind of determine whether or not the person that’s asked you to invest is following the law. Because someone who is not following the law—we say there’s two kinds of people that don’t follow securities laws. And it’s those that don’t know, and those that don’t care. And in either scenario, your money could be at risk if you’re investing with one of those people. So, if you understand the law, and what’s required, then you can make sure that the people that you’re investing with are following the law. And I think that it’s probably a less risky investment.

JASON HARTMAN: But there’s really no way the investor can know if their syndicator or general partner or whoever’s trying to raise money for this fund is following the law. I mean, maybe they didn’t say, for example, break the advertising rule with you, but they did it with the next 10 investors that they got, right?

KIM LISA TAYLOR: And that’s true, you don’t know, as far as how they’re advertising. Unless you received the ad for the investment, and you’re responding to an illegal advertisement. You know? So, we’ve written an article on it called The Ten Things That An Investor Should Know Before Investing In A Real Estate Syndication, and it just kind of outlines the types of things that the investor could ask, and if the syndicator is forthcoming with that kind of information, and has that information, then it’s a pretty good bet that they understand the securities rules and they’re following them.

JASON HARTMAN: Okay. Now, when someone wants to set up a syndication, they need to form an entity. Actually, in your case, you suggest they form what, two entities, right?

KIM LISA TAYLOR: We do, we do. We usually suggest that the manager of the deal is its own entity, generally because there’s more than one person usually involved in the syndication. It’s a lot of work, and so, there’s a lot of hats to be worn. It’s usually more successful if there’s multiple people involved in the management of a syndicate. And then we would form also the investment LLC, and that’s the manager-managed limited liability company that will usually take title to a property and then sell interest to investors.

JASON HARTMAN: Is there any particular state? Is one state more desirable than another to form these entities?

KIM LISA TAYLOR: It depends on what you’re doing. If you’re doing what we call a specified offering, where you have a specific property under contract and you’re trying to raise money for the down payment, the closing cost, for that specific property, generally you would want to form at least the investment entity in the state where the property’s located.

JASON HARTMAN: Okay, so say for example it’s in Arizona. Then you’d just form that entity right in Arizona, right?

KIM LISA TAYLOR: That’s right. Because Arizona’s going to want you to—even if you formed it out of state, they would want you to register that there, in order to legally operate in the state.

JASON HARTMAN: Okay, so, you form what, an LLC, in Arizona?

KIM LISA TAYLOR: Typically we’ll form an LLC. That’s the most common structure for these kinds of syndicates.

JASON HARTMAN: Now, that’s the entity that actually holds the property, right?


JASON HARTMAN: But then there’s the manager of the deal, and that’s a separate entity, right?

KIM LISA TAYLOR: That’s right.

JASON HARTMAN: And where should that be formed?

KIM LISA TAYLOR: Well, and again, that’s going to depend on where are the people that are going to be involved in that management entity. If they’re all in Arizona, then we would suggest that should probably also be an Arizona LLC. But if they’re in multiple states, you might look at forming that in Delaware, or some other state.

JASON HARTMAN: Why Delaware? I think I know the answer, but I want to ask you.

KIM LISA TAYLOR: Sure. A lot of people like Delaware. Delaware has a really well developed body of law that is favorable to companies. And it also has a Court of Chancery that handles business disputes outside of its normal court system, so things don’t tend to get bogged down as much as they would in other states.

JASON HARTMAN: What is this Chancery Court? I’ve read about that. What does that mean, chancery?

KIM LISA TAYLOR: You know, I’m not really sure.

JASON HARTMAN: It’s probably British.

KIM LISA TAYLOR: Yeah, probably. Probably goes back to some English common law. But yeah, it’s really just a separate court system that’s designed specifically to handle business issues.

JASON HARTMAN: And there are no juries in the Chancery Court. Typically they say that Delaware is very favorable to businesses, right?

KIM LISA TAYLOR: That’s what I’ve heard.

JASON HARTMAN: And not to investors. If the investors should be suing the syndicator, right?

KIM LISA TAYLOR: Well, yeah. I wouldn’t—we don’t do litigation, so I wouldn’t probably be the person to ask that.

JASON HARTMAN: Okay, fair enough. That’s really interesting! Now, one of the things that I heard about Delaware—and I was talking to a tax attorney about this a couple of weeks ago, because there’s this group in Arizona that’s forming these funds, and trying to raise money. And they said that they formed their entity in Delaware. Now, I don’t know which entity that is, because you made a further distinction for me about the multiple entities. But I guess a lot of these hedge funds really like Delaware, because you can write in the contract, in the offering agreement, that you have no fiduciary obligation to the investors. And basically, just contract away that responsibility. And I guess that’s the only state where you can do that! That’s pretty attractive for the person setting up the fund, or setting up the syndication, right?

KIM LISA TAYLOR: Yeah, I think that goes to some further ethical issues that are probably beyond the scope of this discussion.

JASON HARTMAN: I agree with you. That’s one of the reasons I picked at this offering. And didn’t like it. Because, you know, as an investor, I want them to have a fiduciary obligation to me, right?

KIM LISA TAYLOR: Right, right.

JASON HARTMAN: Yeah, interesting. Well, now is a pretty exciting time in your business, Kim. Because in about—I mean, today is the ominous September 11th that we happen to be recording this, but in just about less than two weeks, there’s gonna be a big change, right?

KIM LISA TAYLOR: That’s right, that’s right. Under the previous Rule 506, you could not advertise. There was no advertising or general solicitation. It was simply not allowed. And that meant that you couldn’t do print ads, you can’t stand up at a [unintelligible] and advertise your offering; and so, there were all these restrictions on how you could advertise, and to whom you could invite into your offering. In fact, it went one step further—that you actually have to establish that you have a preexisting relationship with somebody before you could even tell them about your deal. And the preexisting relationship is not just having known someone for a period of time—it’s actually knowing their financial situation, and understanding their investment goals, and whether they were suitable to invest in the kind of thing you had to offer.

So, and then you had to have the preexisting relationship starts when you find out their financial information, then you have the suitability conversation with them, and then you had to further allow for some passage of time before you could invite them into a current offering that you had. So, there were all these nuances and restrictions, and it was very subtle, some of the distinctions between what was legal and what was not legal, and it was a great source of confusion for a lot of people. Now that rule is still intact. But, the SEC approved via the JOBS Act some regulations back in July that now take effect on September 23rd that will allow advertising for deals that are only being sold to accredited investors. So, they’ve added a couple of stipulations onto it saying, you can now advertise—and the really great thing is, you can advertise to anybody.

But you have to restrict the people that actually invest in your offering to accredited investors. Under the old rules—and so now we’ve got this new rule, it’s called Rule 506 Subsection C. So the old rule used to just be called 506. We’re now going to call that 506 Subsection B, to distinguish the two. So under the old rule, 506 B, the investors were really just allowed to fill out that prequalification questionnaire that I mentioned earlier, and they would just check a box, saying yep, I’m accredited, I meet one of these standards for net worth or income. Or, I’m sophisticated, and here’s why I’m sophisticated. Now under the new Rule 506 C, the burden has been shifted to the syndicator to determine whether or not that investor is truly accredited. And so, they’re going to actually have to do some underwriting—the same as if someone were applying for a loan—where they’re going to have to look at their net worth, their financial statement, or they’re going to have to look at their W-2 forms, or their tax returns, and their credit reports, to determine if they meet the income requirements. If the investor doesn’t want to give that information to a syndicator, then they have the option of going to their own CPA or licensed attorney or registered financial advisor to get them to write a letter saying that they’ve reviewed those documents for that investor within the last 90 days, and that they certify that that person meets the standard for accredited. And then they can invest in the offering.

JASON HARTMAN: Okay. But overall, I mean, syndicators have to be loving this, right Kim? Because wow, now you can advertise to the whole world! The limit before used to be that you had to have that prior relationship, and there are some nuances to that, definitely, from what it sounds like. But now, they can just put an ad in a magazine, they can go on TV, they can go speak about it at public events, etcetera. But they do have a little more burden on the back end to verify that they’re really accredited investors that they’re dealing with, right? Or sophisticated.

KIM LISA TAYLOR: And that is true. But one of the limitations that we see is that our clients tell us that they’re raising most of their money from sophisticated investors.

JASON HARTMAN: Not accredited.

KIM LISA TAYLOR: Not accredited. So if you want to bring sophisticated investors into your deal—say for instance, people with self-directed Individual Retirement Accounts. A lot of them would meet the definition of sophisticated, but not accredited. If you want to bring them into your deal, then you really have to go back and still do the old Rule 506 B and follow those rules with getting to know them before you make them an offer.

JASON HARTMAN: Wow. Yeah. Interesting. But I mean, generally speaking though, was my prior statement right, that the people—like, your clients—have gotta be loving the JOBS Act, right? I mean, they’re just chomping at the bit waiting for September the 23rd, I bet. I mean, this—no? Or?

KIM LISA TAYLOR: Yeah, no, we are definitely seeing that. We’ve seen an uptick in the number of calls that we’re getting. We hold workshops, and you know, where last year we were getting 20-30 people into our workshops, now we’re getting standing room only and waiting lists. So, you know, we’re definitely seeing some additional interest in this. And I think it’s gonna be a big deal for the capital markets, and it’s going to allow a lot of investors who have been kind of stuck in the stock market to start to learn about these offerings, and they may not have even been aware that there were options, and alternatives to the stock market, and now they’re going to start seeing these ads, and they’re gonna kind of wake up to that, and maybe it’ll open up some doors for them as well.

JASON HARTMAN: Yeah, that’s a good point. The Wall Street people have to be hating this, probably. Because they’re just all about money; money is their business, and if money is diverted into other opportunities, that’s bad for them, right?

KIM LISA TAYLOR: Well, it is, but the SEC did some pretty deep analysis on all of the—how is this going to affect the markets when they started passing these rules? And one of the things they found is, there’s almost as much money being raised through private offerings as there are through the public markets.

JASON HARTMAN: But this’ll just expose that private market to a much larger audience.


JASON HARTMAN: Yeah, wow. Wow. That’s a real boom. It’s a big change. Yeah, very interesting. One of my last questions I just wanted to wrap up with—and I so appreciate your time. This has been very educational. The listeners will love this. I usually object to investing in deals that someone else is running. These pooled money type of deals. Because you just don’t have any control over the way they’re spending the money, the way they’re managing the deal. Ostensibly the idea here is that you are—you’re taking and investing, and you’re buying their experience. You’ve got someone who’s far more experienced than you, hopefully, managing and setting up this deal, and you can benefit from their experience and their connections and their resources. But on the other side of it, you just don’t know—what are they paying themselves, what are they doing with the expenses—are they spending money on first class airfare, and wining and dining other investors to raise other money for the fund—how do you have any control over that?

KIM LISA TAYLOR: Well, a lot of these offerings are composed of a pretty small group of investors, at least in our segment. In our sector of the market, we’ve been helping investors that are usually raising somewhere less than $5 million. $1-3 million is very typical. I think that with the new advertising rules we’ll start to see some bigger funds; people probably wanting to expand and raise $10, $20 million. I think that the bigger the fund, the less control over that kind of a thing you have. The smaller the fund, though—you could have a very small group of investors, you know, maybe only 4 or 5, less than 10 investors, that are meeting quarterly on teleconferences, discussing how the property’s going, or how the—if it’s a blind pool fund to buy, say, single family fix and flips, or buy and hold, there can be quarterly teleconferences to discuss what’s in the portfolio, and what stages those properties are in. So I think this group of investors can get pretty intimate. And depending on who the syndicator is, they can have a pretty close relationship with them. Even though they may not be able to vote on every decision, they can certainly, you know, look for syndicators that are going to keep them informed, and will have maybe an opportunity to voice their opinion on what they’d like to see happen. And that manager would be willing to take that kind of thing into effect. So…

JASON HARTMAN: I agree with you, and that’s all just good business. Everything you mentioned, of course. But, when it comes to who’s writing the checks, who’s using the credit card, who’s paying the bills for this entity—the investor just doesn’t really see that. They don’t really have control over that stuff. There’s so much complexity involved, it’s a whole nother business! And in this case, it’s two other businesses. Because they’ve got their management company, and then they’ve got their entity that actually holds the property.

KIM LISA TAYLOR: Right. Well, there’s ways that these deals can be structured to put some checks and balances in place for that. And certainly the first thing that the investor should be doing is reading the private placement memorandum, because that’s going to tell them how the deal is structured; it’s going to explain what kind of fees and distributions the manager should be entitled to, and what the investors themselves is going to be getting. And when they should be getting that. And so, the first way to arm themselves is to understand the documents and to ask a lot of questions, and to stay informed about what’s going on with the deal.

JASON HARTMAN: I remember this one company I invested in—a couple apartment deals several years ago. And they presented beautifully written business plans, or offering memorandums. And they were just very well done. But when I started to look at it, Kim—and I still did the deal—I started to look at all the ways they’re making money. They’ll have an acquisition fee when they buy the apartment. They’ll have a disposition fee when they sell it. That goes right to them, not the investors, right? They just take that money off the top. And then they’ll get their own return, and they might even offer the investors a preferred return. But if the deal goes bad, maybe they can’t even pay the preferred return. But the preferred return isn’t what we’re all investing for anyway; we want a nice big upside. And I don’t know, it just—it seems like the position you want to be in is at the top of the food chain. You want to be a syndicator. I want to be your client, more than I want to be—

KIM LISA TAYLOR: Unless that deal doesn’t go well, and then you don’t want to be that person either.

JASON HARTMAN: Yeah, well, what happens in that case? I mean, it’s all someone else’s money anyway, right?

KIM LISA TAYLOR: Well, you know. I think it really comes back to the matter of communication, and getting to know these people. I think there’s a lot of syndicators that believe that with this advertising for investors, that they’re going to be able to send a postcard and someone’s going to send them a check for $100,000.

JASON HARTMAN: Right, which won’t happen.

KIM LISA TAYLOR: Yeah, no. So you know, you’re still back to relationships, and reputation, and being a member of your community, getting to know the people that are going to invest with you. And not only should you be getting, if you’re the person putting the deals together, you’ve gotta know the investor well enough to know that they’re gonna be compatible with you, and that they’re not going to create a problem for you somewhere down the road. But the investor also needs to understand and have a comfort level with the syndicator. But one of the things that we always write into our offering documents with very limited exceptions is an opportunity to remove the manager. So, if they’re not doing a good enough job, we’ll usually say that 75% of the investors’ interest can vote them out, and bring in somebody else.

JASON HARTMAN: The deal there is like homeowners associations though. You gotta get enough investors paying attention. You’ve gotta go and organize those investors, and oh, that’s difficult.

KIM LISA TAYLOR: Oh, yeah. I used to do homeowner association litigation.

JASON HARTMAN: That’s a mess. We both know what that’s all like. You more than I, but I’ve seen it from the outside. Well, very good. But, definitely some parts—and I tell you, if I saw a deal where they’re in Delaware and they want to contract away their fiduciary liability, I would be—I don’t know. I don’t think I’d be too interested in investing in that deal, as we discussed. But yeah, really good stuff! Your firm, this is what you do! And you’re obviously an expert. Give out your website, if you would.

KIM LISA TAYLOR: Sure, thanks a lot. Our website is And I can be reached at [email protected]

JASON HARTMAN: Fantastic. Well, Kim, this has been just fascinating. Is there anything else you’d like us to know before we wrap up?

KIM LISA TAYLOR: You know, there’s just one little thing I’d like to point out about crowdfunding, and there is a lot of confusion in the market about crowdfunding. And what’s legal, and what’s not legal. The JOBS Act authorized the SEC to develop regulations that would allow people to engage in crowdfunding in a way that investors could invest and expect a return on their investment. There is currently some crowdfunding that is legal pertaining to investors who invest in something not expecting a profit, but more like a donation.

JASON HARTMAN: Like Kickstarter, or Indiegogo.

KIM LISA TAYLOR: Yeah. Those things are legal. But until the SEC actually develops and publishes the final rules and regulations on crowdfunding for profit, it’s not legal, and if you go to the SEC’s website today you can punch in crowdfunding and you’ll get to their frequently asked questions, and you’ll come to a point where it says, we’d like to remind people that crowdfunding for a profit is currently unlawful. So, there’s a lot of companies out there that purport to be doing it, and they’re just jumping the gun a little bit. Everybody’s really excited about it, and it’s going to be a big deal when it actually happens. The anticipated timeframe for that to happen and become legal is somewhere in 2014. So, if you’re thinking about doing crowdfunding, just hang on a little bit longer, and don’t get too excited about it, because we don’t want to see anybody get in trouble.

JASON HARTMAN: Well, that actually leads to a really good question. I mean, what is the difference between “crowdfunding” and advertising to accredited investors? Crowdfunding is probably just a much smaller, and more investors, and non-accredited, non-sophisticated?

KIM LISA TAYLOR: Yes. Yeah, I think that is truly the difference. And there’s some wrinkles that have to be ironed out between the federal and the state laws, whether—under Rule 506, remember, the federal law specifically preempts the state laws’ rules on advertising. Some of these other federal rules, they don’t do that. So if you did a Rule 504 or a Rule 505 offering or something under these proposed crowdfunding rules, it wouldn’t necessarily preempt those state laws, so that you might also have to look at your individual state and see if it’s going to allow you to do that kind of advertising. And if it does, you still may not be able to do it. So there’s a lot of stuff that has to be worked out, and we just see a lot of people out there that are just kind of jumping the gun and we’re fearful that some of those people are gonna end up in trouble, and we just don’t like to see that.

JASON HARTMAN: Yeah, very good points, very good points. Well, Kim Lisa Taylor, thank you so much for joining us today. The website is, and what a great wealth of information. Again, thank you, and happy syndicating!

KIM LISA TAYLOR: Alright, thanks Jason.


ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit, or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Platinum Properties Investor Network, Inc. exclusively.

Transcribed by David

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