As Kim Lisa Taylor explains to Jason Hartman on episode #338 of The Creating Wealth Show, a syndicated real estate deal is just a fancy term for a concept most listeners are already familiar with, which is private lending or pooled money. As you might also be aware, Jason is not a fan of giving up direct control of your investment money to someone else, but he does credit Ms. Taylor with being an expert on the subject.

Kim’s Bona Fides

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.”

She holds both California and Florida licenses to practice law and is a partner in the Corporate Securities Law Firm of Trowbridge & Taylor LLP.

Defining a Security

According to the official definition taken from the Securities Exchange Act of 1934, a security is defined as:

“Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle,option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”

Kim’s Version of a Real Estate Deal

For the purpose of today’s discussion, a security is a real estate deal that involves inviting passive investors into an arrangement that requires a monetary investment in return for the expectation of profit based on the efforts of a promoter. Another term for this is a real estate syndication.

In order for the deal to qualify as a security (and to be able to legally sell shares in it) the investors must be passive and NOT involved in actively managing their own money. The example Kim and Jason discussed would be where a syndicator buys an apartment building and decides to turn it into a syndicate.

To Advertise or Not to Advertise

Where it gets interesting is that, until a few years ago, the Securities and Exchange Commission (SEC) forbade real estate syndicates from advertising their deal. A manager or promoter could only approach investors with whom he already had a financial relationship about investing in the deal. Obviously, this was a huge obstacle to overcome. Current rules allow a real estate deal syndicate to advertise, though it still limits the investors he or she eventually partners with in a typically governmental byzantine way.

Let’s take a crack at explaining it.

Two Types of Investors

For syndicate investment purposes the SEC breaks potential investors into two broad categories, sophisticated investors and accredited investors. A sophisticated investor is one who, by his or her education or experience, has a proven ability to evaluate financial risk. Yes, this is just as subjective a judgement as it sounds. There are various ways to evaluate a sophisticated investor. Ms. Taylor’s firm does so via a pre-qualification questionnaire that allows the applicant to explain in their own words.

It’s more cut and dried when it comes to defining an accredited investor. According to SEC rules, you qualify as an accredited investor for a real estate deal if you have $1 million in net worth (exclusive of your home equity) or earn $200,000 ($300,000 for married couples) in annual income.

Syndication Business Structure

As you might suspect, Ms. Taylor has specific advice on how to set up your own real estate deal as a syndicate. The process involves creating two separate business entities. The first entity is for the manager(s) and his(their) activities as such. This could be an LLC, partnership, or corporation. The main thing is that it remains separate from the entity that holds the property. Taylor suggests this entity should be formed where the majority of people managing are physically located.

If the managers are spread out geographically, the state of Delaware is an option, thanks to a friendly attitude towards businesses and a well-developed body of law. It also has a separate court (The Court of Chancery) to hear business disputes.  

When it comes time to buy the property, the manager should set up an investment LLC which will hold the property’s title. This LLC should be formed in the state where the property is located.

Reminders from Jason

As Jason and Ms. Taylor near the end of the interview, he wants to remind people of his 3rd Commandment for Successful Investors: thou shalt be a direct investor. Obviously, becoming involved with a real estate syndicate as an investor involves relinquishing control over your money. If the syndicate is small (maybe $1 – 3 million), you might be able to monitor more closely who’s writing the checks and using the company credit cards. As it gets larger, who knows? You’re at the mercy of the managers. Jason closes with the suggestion that if you want to become involved with this type of real estate deal, start your own syndicate and YOU be the manager.

For more information on this topic, visit Kim Lisa Taylor’s website at . (Flickr: Image | MarkMoz12)

More from Jason Hartman:

Will Newer Technologies Change the Real Estate Game?
Jason Interviewed on Panama Papers, Self-Driving Cars, and Jekyll Island

The Jason Hartman Team