Creativity In Sourcing And Ethically And Legally Funding Niche Deals

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Byron Elliott is a Founding Partner of Three Pillars Law He focuses on supporting real estate syndicators through the acquisition due diligence closing entity formation and private equity offerings His continued support includes contract drafts and reviews lease agreements and general legal consultation He has successfully supported syndication deals in self-storage RV Park manufactured housing mobile home and mixed-use asset classes and has personally invested 13 000 000 in multiple asset classes Highlights 00 00 – 06 42 Opening Segment Who is Byron Elliott Byron Elliott is a real estate syndication attorney and an active and passive investor with over 100 units He has also been in the army for 24 years He retired from the army and attended law school at the University of Denver Byron transitioned from general practice to the real estate space specifically the syndication side of the house 06 42 – 13 25 Boutique Firm Offers Syndication Advice to Keep Clients Safe Boutique firm with four full-time staff and focus on syndication Offers due diligence transactional assistance and mentorship Concerns about co GP model come from potential for overreaching and SEC scrutiny 13 26 – 20 06 What should we do as passive investors 8 of 50 000 over the life of the deal or until some hurdles met and it s retired or it can be 8 based on the capital account the balance in the capital account right now The interplay is how you characterize the return of each dollar that goes back to the investor Every single dollar that goes back to the investor reduces the capital account you can see over time that 8 preferential is less Other sponsors treat the preferential almost like a return on an interest payment And that ll be reflected in the K1 20 07 – 23 00 Closing Segment Reach out to Byron Links Below Final Words Tweetable Quotes There are lenders out there who will loan up to 40 of the after renovated value of the property on a fixed 20 year note And you don t make a single payment until a year after the project s complete So if you imagine combining both of those programs it makes some of these historic properties that people are pretty fearful of Otherwise it makes them pretty interesting from an economic perspective – Byron Elliott —————————————————————————– Connect with Byron by visiting his website www 3pillarslaw com Or email him through byron 3pillarslaw com You may also call him through 303 319-5317 Connect with me Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 00 Byron Elliott There are lenders out there who will loan up to 40 of the after renovated value of the property on a fixed 20 year note And you don t make a single payment until a year after the project s complete And so if you imagine combining both of those programs it makes some of these historic properties that people are pretty fearful of Otherwise it makes them pretty interesting from an economic perspective 00 00 34 Sam Wilson Byron Elliott with three pillars law as a real estate syndication attorney and an active and a passive investor with over 100 units Byron welcome to the show Thanks 00 00 43 Byron Elliott man Appreciate it Thanks for 00 00 44 Sam Wilson having me on absolutely The pleasure s mine Byron there are three questions I ask every guest who comes in the show in 90 seconds or less 00 00 51 Sam Wilson Can you to tell me where did you start Where are you now And how did you get there 00 00 54 Byron Elliott So a little bit of my background I m a retired army officer I was in the army for 24 years The last few years of that attended law school at the university of Denver And at the same time that I was getting ready to retire and transition out of the military 00 01 09 Byron Elliott Kind of pivoted from doing general practice type work into the real estate space specifically the syndication side of the house And so we ve been doing that for a few years now Really enjoy it on the legal side of the house working with new clients first second third time syndicators 00 01 26 Byron Elliott And then we also invest so we re active operators in a couple properties as well in a pretty niche asset class So wear two hats pretty much all times 00 01 36 Sam Wilson That s really really interesting I mean a lot of times we get you your syndication attorney isn t also an active investor 00 01 43 Sam Wilson So I think that s pretty cool that you get to understand kind of both sides of it on the deals that you are doing on your own Are those deals that you re also raising money for 00 01 51 Byron Elliott We have we ve done a couple So what s kind of nice about that is I can get a little creative with the type of assets that that we syndicate for on the personal side because for me 00 02 01 Byron Elliott It s great professional development on the legal side of the house So to your point if I m working with a syndicator who s looking to get into mobile home parks Well I can talk a little bit more about mobile home parks I think than the average syndication attorney because we own two of them 00 02 15 Byron Elliott So we raise money for those deals makes Fs historic properties We ve got some little boutique hotel properties and then kind of the standard single family duplex short term rental stuff Feel pretty well versed in multiple asset classes 00 02 29 Sam Wilson Yeah I d say so that that is quite a mix of asset classes 00 02 33 Sam Wilson Was that intentional to get into all of these or were these just deals that just came to you And you said man that makes sense 00 02 40 Byron Elliott Yeah So we actually intentionally invest in a certain part of Colorado And so while some people just niche down on one asset class and they ll look all across the country we like to be able to visit our properties in a given day 00 02 53 Byron Elliott So everything is go once a week to the properties we make sure we ve got boots on the ground We ve got a good property management team So when the opportunity presents itself regardless of asset class if we do the underwriting the deal makes We ll take a look at it 00 03 08 Sam Wilson Wow That s really cool 00 03 09 Sam Wilson I love that And you mentioned something there for a moment where you talked about historic tax properties I had a guest come on the show or historic properties I had a guest come on the show recently that was using historic tax credits and a it was a really interesting interview 00 03 22 Sam Wilson And I hate to say it but I can t remember what the episode number was We ll have to go back and find that for the show notes but is that something you guys are using as historic tax credits in order to to renovate these proper 00 03 33 Byron Elliott We do And we actually we use three programs that although you re navigating multiple lenders and multiple programs especially government programs it takes a little bit more time 00 03 43 Byron Elliott It s a little bit more tedious but we utilize the sale of historic tax credit So we find a building that is on the national historic registry It s either in a in a national historic district And it shows as a conforming property or it s listed on their by address So that s kind of step one is you identify the property 00 04 03 Byron Elliott So when you re out driving around looking for an opportunity you see something with boarded up windows on the second floor we ll pull it up on a national historic registry make sure it s a it s a contributing property And there s a couple things you gotta do You have to submit a what s called a part one which is basically yes or no it s a historic property 00 04 19 Byron Elliott Part two is taking your scope of work that you want to do So whatever renovations or improvements you wanna put it on this part two application So I ve got a really good architect who does that for us And then once that s approved You go ahead and execute your scope of work renovate the property 00 04 34 Byron Elliott You close it out with a part three which is basically somebody comes and certifies You ve made the renovations in accordance with the standards from the part two and you can actually recoup up to 55 of your overall renovation costs and tax credits And so that s a that s a beautiful thing Even better is you can there s actually a market for these 00 04 53 Byron Elliott So on one hand you can either use the tax credits and reduce your taxable income over a certain period of time Or you sell em on this market for 90 cents on the dollar and recover a whole bunch of capital Right So Yeah it s a it s a beautiful program And then we couple it with a program called pace which some people are familiar with 00 05 12 Byron Elliott It s a nationwide program that has to be adopted at the state level and in further adopted at the county level But if you can work through a pace program basically it s taking that same scope of work and identifying what are the energy efficient or water conservation improvements that you re making on the building 00 05 27 Byron Elliott And then there are lenders out there who will loan up to 40 of the after renovated value of the property on a fixed 20 year note And you don t make a single payment until a year after the project s complete And so if you imagine combining both of those programs it makes some of these historic properties that people are pretty fearful of 00 05 46 Byron Elliott Otherwise it makes them pretty interesting from an economic perspective 00 05 50 Sam Wilson Right Yeah no that s that s that s really really interesting And do you guys you said there was like three or four programs you mentioned there so you ve got the standard historic tax credits then you ve got pace Is there anything else in there 00 06 01 Sam Wilson I I 00 06 01 Byron Elliott missed Yeah So the solar energy stuff So that s that s part of the pace project anyway And so you can get that and finance it on a 20 year note but you get 26 tax credit for whatever your cost was and same thing you can sell those credits or you can keep em 00 06 16 Sam Wilson Wow That s really cool 00 06 18 Sam Wilson How fun is that man You got your hands in a lot of different stuff Thanks for taking the time to kind of break down just a one of the nuanced investments that you guys are working on I really wanna spend the rest of the time here on this show though talking about three pillars law talking about what you guys do on the syndication side of the house and really just getting your getting a feel from you from from what you re seeing in the 00 06 39 Sam Wilson From what you re seeing and how how investments have changed Can you can you kind of just give us a state I guess a state of the union from a from an attorney s perspective on on on the opportunities you re seeing come to you to get syndicated how have they changed Where are we where or even just where are we right now 00 06 54 Byron Elliott Yeah So I guess a little background about our firm So we re kind of a boutique firm We re in castle rock Colorado about 20 miles south of Denver We have four full-time staff and then we re structured in a way where we have of council attorneys who can add additional expertise or additional bandwidth if needed 00 07 12 Byron Elliott And so We offer due diligence We offer transactional assistance but probably 80 to 90 of our work is the syndication stuff Most of our clients are our first second third time syndicators So for us that s a lot of fun We really enjoy the clients They re energetic they re motivated They re very receptive 00 07 33 Byron Elliott And and we have the opportunity to kind of walk them through all the various parts of an offering Like what are to your point the structuring big movement right now with lots of co GP activity going on So I m seeing a lot of that is people who would probably be nervous about syndicating a deal on their own 00 07 49 Byron Elliott Otherwise you see a handful of 2 3 4 cogs working together Bringing capital and conducting additional activities beyond just raising capital but working together pull deals together It it s a lot of fun 00 08 02 Sam Wilson Are there are there risks that you re seeing people are taking in the co GP model that you look at it and you go this is an unnecessary risk 00 08 10 Sam Wilson And if so how do you mitigate it 00 08 11 Byron Elliott Everyone s everyone always kind tries to push a threshold Right Trying to maybe base a co GP interest solely on the amount of capital that s raised Right It seems like a neat easy formula Whoever brings Whatever percentage of the capital to the deal gets that same proportionate ownership interest of the GP 00 08 31 Byron Elliott And that s just to me that s not good business I think there s some better ways to craft the deal where you re still meeting what the SEC s looking for in terms of avoiding kind of a broker dealer arrangement We re talking a little bit beforehand is Every time the S E C relaxes a definition 00 08 46 Byron Elliott So in this case made a little bit easier to raise capital relax the accredited Def accredit investor definition I always get concerned that people that try to push the threshold even further especially on the heels of relaxing the rules a little bit makes me a little bit nervous And so 00 09 01 Byron Elliott Constantly coaching mentoring about changing the structure in a way where it doesn t reflect a proportional ownership interest based on the amount of capital raised Right so yeah there s there s always a little bit of risk there the fee structure sometimes I think is something that we need to pay attention to 00 09 18 Byron Elliott So depending on the type of deal that the sponsor s doing and I m just assuming this is an operator right Not a not a fund to fund just capital razor type but right The sponsor right Depending on the type of deal that they re doing there s certain fees that are customary and and make sense But both from an investor optics perspective and maybe from an S sec scrutiny perspective we just wanna make sure that those fees are aligned with the actual activities being performed 00 09 45 Byron Elliott And what s customary in the standard for that work being performed So for example everyone s familiar with a value add opportunity So you you find a property that s underperforming for some reason bad management mom and pop owners who haven t raised rents there s expansion opportunities there s upgrades whatever it may be 00 10 04 Byron Elliott So you you you find this property you do capital raise for it And for the first fall to 18 months there s kind of a renovation our expansion effort that goes into that And so your typical sponsor fee which I think is is customary for the sweat equity involved in risk incurred I think is is totally fine 00 10 23 Byron Elliott You got an acquisition fee to help kind of recoup some of the costs up front Right And then maybe a construction management or project management fee is okay in that context because you are managing a project you re working with a GC or subs If it s a development play a developer fee is perfectly customary 00 10 40 Byron Elliott Right But I think when people start trying to take all of those fees but they re not vertically integrated where they re actually performing all of those activities I think that gets problematic 00 10 50 Sam Wilson So you re saying on a on a development fee if they re if they re just third party and all of it maybe even then you re going okay well that s that s you re not actually doing the work and you re still taking the fees 00 11 01 Sam Wilson Is that what I m hearing Or am I missing 00 11 02 Byron Elliott something Yeah Yeah I think that s problematic Right If you re outsourcing everything and but you re trying to take a the same fee the same fee that you re paying a third party I think that s problematic Right 00 11 13 Sam Wilson right Yeah That s interesting And what do you think 00 11 15 Sam Wilson And again I know this is kind of probably Not not subjective is that s the wrong word I m looking for Hypothetical but what do you think are some of the the problems that that creates is that because we then could get scrutinized by the S sec and then they re gonna find problems with the way that we re taking fees 00 11 30 Sam Wilson And like I don t know Can you can you walk us through the problems that could 00 11 32 Byron Elliott generate Yeah I think there s there s really two two problems that you re looking at there One is from like I said an investor optics perspective I mean at some point other than maybe friends and family they re know getting there and scrutinize your private placement memorandum and take a look at how much how much fees you re taking out 00 11 47 Byron Elliott And if if you re not providing those services I think that s kind of a non-starter I think there s some trust issues there from An sec perspective I think at the end of the day you re concerned about a a material misrepresentation or omission And so maybe you re taking fees that you didn t outline in the PPM 00 12 03 Byron Elliott Maybe you are taking some cut of the raise that you didn t outline in the sources and uses statement So just want to be really neat and clean on the PPM and and make sure that you re operating agreement lines up with what you re suggesting you re gonna take in fees and when when you take em 00 12 20 Sam Wilson Yeah yeah absolutely Absolutely Yeah And when and that s that s that s it man I ve I ve seen some deal docs here recently that have come come to me and they ve just they ve not been Like I read through em and I m like okay this is a problem Like this is not as clean as this should be Are there things that we as passive investors some high level things as passive investors we should be doing just as a cursory scrutiny of of deal docs that may kind of weed out some of these issues early on 00 12 49 Sam Wilson If we re looking at it from a passive investor perspective 00 12 51 Byron Elliott Yeah So I d take a hard look at always the definitions right Words have meaning And so the definitions in the doc itself particularly when it comes to distributions are very very important So let me give you an example Let s just take a very basic deal right 00 13 08 Byron Elliott 8 pre some 70 30 split whatever it may be is pretty customary right now The definition of the preferred return could be a number of things So the preferred return could be based on a percentage of an original capital contribution So the first 50 K and it s steady 8 of 50 K over the life of the deal or until some hurdles met and it s retired or it can be 8 based on the capital account the balance in the capital account right now where the interplay is is how you characterize the return of each dollar that goes back to the investor 00 13 44 Byron Elliott So some operators well every single dollar that goes back to the investor reduces the capital account So then you can see over time that 8 pre is less and less And Right Other sponsors they ll treat the pre almost like a return on an interest payment And that ll be reflected in the K one And the capital accounts only reduced when there s something distributed above the pre right 00 14 06 Byron Elliott That s probably middle ground Right The the previous example was very sponsor friendly This one s middle ground right And very investor friendly is capital is is only returned at some sort of liquidity that So you get your pre and you get your split and then capital is returned at a refinance or or dissolution 00 14 22 Byron Elliott So those definitions are pretty important to take a look at in the waterfall and then making sure you understand where you are in terms of of priority So one of the things that we re seeing right now is a lot of people are starting to implement preferred equity positions Hmm Right And so if you really dig into it the detail the details of what that preferred equity definition is is generally that person is first in priority after payment of expenses in debt 00 14 50 Byron Elliott Right So before anybody else gets a single dollar they get paid whatever their 10 12 So their highest in priority And you gotta take a look If if your offering has a preferred equity position and you re looking at a class B or a class C unit where you actually have an equity position you could be lower in priority 00 15 09 Byron Elliott And your returns may not kick in for 2 3 4 years Who knows Maybe even at liquidity 00 15 14 Sam Wilson Right Right And is that what we re seeing What is that being differentiated a lot in class a class B shares is that what you re talking about When you say preferred equity where it s like a class a share and you may get a a 9 9 return and that s all they get class a gets 9 class B might get 6 but then have a 70 30 split with the with the sponsor 00 15 35 Byron Elliott That s exac that s exactly it Right And so people are are using this structure really when they re trying to satisfy lender requirements And so if a lender doesn t want the sponsor to be a hundred percent leveraged right So the sponsor goes out and does a debt offering and and raises 300 000 in debt on a nine month 12 month 24 month 00 15 54 Byron Elliott note 00 15 55 Byron Elliott and then is trying to get a 70 30 loan from the bank I mean they re a hundred percent leveraged Right And so what the sponsor may do instead is have this preferred equity position that doesn t look like debt on the balance sheet for the company it s important to note though you still I mean from an underwriting perspective a hundred percent leverage you re satisfying that debt that preferred equity on top right 00 16 16 Byron Elliott That there may not be a whole lot left to distribute Right 00 16 20 Sam Wilson right Yeah If you re class B or class C shareholder Yeah That s absolutely absolutely Right And that s interesting though because I see it from a different perspective just in the sense that that that I kind of like the class a class 00 16 33 Sam Wilson Share structure because I have I have different classes of investors in my not classes but I have different preferences of investors diss satisfy I ve got some some 75 80 year old investors that they don t really care about A two X equity multiple in seven years They want cash flow now 00 16 48 Sam Wilson And then I ve got other investors that are more my age and your age going Hey you know what I probably don t need you to cash today but I d love to see this double in five So I ve used that as a class a class B structure to kind of serve both of my investors And haven t really thought about it from the perspective of what you re referring to 00 17 03 Sam Wilson When you say Hey this is being set up in order to satisfy lender requirements but it does sound like a a serious risk though We need to be looking at and just considering what that how much that preferred equity Is and I guess that s probably the next part of the deal is how much preferred equity is there in the deal 00 17 18 Sam Wilson If it s 70 of the equity is preferred equity and 30 is your class B shares then then it probably ha takes on a whole new a whole new meaning versus maybe some other other ratios 00 17 28 Byron Elliott in the deal yeah it you made a great point I really liked the point you made about understanding your investors 00 17 33 Byron Elliott Right And so I think people that are that are newer into this field they try to go with kind of a boiler plate approach something very very basic but I think It s a natural progression to move from that to really honing in on the type of investors you have and matching them with the type of offering that you re doing 00 17 51 Byron Elliott So to your point there s some great opportunities out there for people that aren t looking to cash flow immediately because they re investing in self-directed IRA they have a longer term plan That s exactly right And that s a really great point that we kind of tease out with our clients 00 18 05 Byron Elliott Each time we re working with kind of a newbie in the space 00 18 07 Sam Wilson Mm-hmm Yeah that s really really cool I love that Thanks for sharing the details on that I think it s always important just as as the as the market evolves And as as the landscape is constantly changed to be looking at the various 00 18 19 Sam Wilson That both investors and sponsors are taken in saying Hey how how do we classify these I think I probably don t look at the definitions as well as I should as much as I rely on just talking to the sponsor and saying Hey is this a return on a return of capital 00 18 31 Sam Wilson But to your point I myself when I m a passive investor in deals need to spend more time reading the definitions So thanks for pointing that out There s something that s kind of speaking of risks and things that are going on the market right now There is this I don t even know how to put it but there is a a model of raising capital that I am personally unsure about 00 18 51 Sam Wilson And I ve and I ve heard it heard it touted from a few different angles and they call it this B to C 5 0 6 B to 5 0 6 B transition kind of syndication model where they raise 5 0 6 B for 30 days and they shut it off Wait 10 days and then go to 5 0 6 C and start advertising it Have you heard of this 00 19 08 Sam Wilson And how do you feel about it 00 19 10 Byron Elliott Yeah So we ve seen some message traffic from some of my peers and then some capital razors out there and obviously the way you describe it it sounds really enticing If that s if that s an opportunity I would tell you our firm we don t really have a position on it yet 00 19 25 Byron Elliott We ve socialized it internally And I ve got some attorneys here that are very very experienced have actually worked with the S E C Has socialized this internally with people at the sec And there s I I haven t seen anything definitive And so our team is still kind of snooping around and taking a look at at what that looks like 00 19 42 Byron Elliott I m also seeing A lot of message traffic about people that are investing through a fund of fund model mm-hmm and there s perhaps somebody who has a 5 0 6 C offering it s a sizeable offering and it s structured in a way to incentivize people to go out and raise capital on every behalf 00 19 59 Byron Elliott Right So to your earlier example a class a unit that comes in it s 2 million minimum and it s got a 9 profit And then you have a class B unit That s your typical retail investor 50 K Right But they ve got like a 7 prof so that s teed up in a way to encourage somebody who has an investor network to maybe pull together a fund to invest in that offering 00 20 21 Byron Elliott And then somewhere they can split the difference between the spread mm-hmm right Something that concerns me a little bit is when you have a 5 0 6 C offering that s supposed to be comprised of nothing but accredited investors And then somebody s trying to set up a fund to fund structure with a 5 0 6 B offering which is supposed to have that preexisting substantive relationship with each ind each individual investor 00 20 42 Byron Elliott Well Right there in terms of looking through that 5 0 6 B offering that there are non accredited investors in deal so we re always kind of examining that and there s a lot of message traffic that gets promulgated out there in the various mastermind groups and social media platforms 00 20 56 Byron Elliott So really gotta get into to deal details and see if that actually makes sense or not Yeah 00 21 03 Sam Wilson That s that that s really sound advice And I appreciate that I mean it s one of those things that I think it s all hunky Dory until still until stuff hits the fan And then everybody s everybody s looking around for somebody to blame 00 21 14 Sam Wilson Like I think when when the market s going up and everybody s making money there s probably not much to worry about but when when there s blood in the streets then you know there s gonna be a select group of investors who are probably looking For the sponsors that didn t do things the way they should or maybe bent the rules a little bit 00 21 29 Sam Wilson And now is never is the time to do that but especially not now So I appreciate appreciate your hesitancy and the risk aver I hear in your voice when you tell me about those those types of things going on Cause it just it just doesn t make sense It it s I think it s playing with 00 21 46 Byron Elliott fire 00 21 47 Byron Elliott Yeah And I and I would tell you I m pretty aggressive about my clients Want to get something done Try to figure out the way to get it done and so my job is to scrutinize and and point out where there may be some red flags and some issues But if we can at the end of the day meet the client objective I ll still comporting with the sec requirements 00 22 02 Byron Elliott I mean we ll do it 00 22 03 Sam Wilson Absolutely No that s cool Byron thank you for coming on today There s so many more questions I have I know we re out of time I ve got lots of questions This has been a blast I ve learned so much from you here today Just on some of the risks that we re seeing being taken on cog risk everything down to taking a hard look at definitions and distributions 00 22 21 Sam Wilson You ve been been really really good to have you on And then also learn about historic tax credits and how you guys are finding opportunity in your own backyard to do a variety of really cool real estate opportunities and deals So thank you again for coming on today If our listeners wanna get in touch with you or learn more about three pillars law what is the best way to do that 00 22 39 Byron Elliott Yep So obviously we ve got a website right Who who does business now a day without without a website But you wanna reach out to me personally It s my first name s Byron B Y R O N at the number three pillars law com cell phone 303 319-5317 I love talking about real estate I like navigating problems 00 22 58 Byron Elliott I like talking to people that are putting deals together so feel free to contact me personally 00 23 03 Sam Wilson Awesome Byron thank you again Appreciate your time today Thank you so much 00 23 06 Byron Elliott Thanks really appreciate the opportunity Click here to visit this podcast episode