Have you ever found the perfect property you want to invest in, but stop yourself because you just can’t afford it? Why waste a good investment opportunity just because of the price? With real estate syndication, you can purchase and manage a property that you otherwise couldn’t afford through the help of other investors. In this episode, Monick Halm talks with Bethany LaFlam, a real estate investor and a seasoned deal lawyer who primarily practices in real estate syndications and funds. Here, Bethany helps us understand real estate syndication better and how we can best get into partnerships with other investors to reach our goals. Staying on the safe side, she then advises caution when entering into these deals, sharing with us some common mistakes people make and the importance of syndication attorneys.
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Doing Real Estate Syndication The Right Way With Bethany LaFlam
On this show, I interview amazing bad-ass real estate investing women, who generously come to share their stories, best advice and biggest mistakes. I am super excited to have with me bad-ass extraordinaire, Bethany LaFlam, who is a real estate investor. She is also a seasoned deal lawyer with years of experience. She primarily practices in real estate syndications and funds. She worked in big firms, owned and operated her own law firms and advises clients on both legal and strategic matters. She has done a lot of different areas like real estate, aerospace, gas, medical services and tech. Her main focus is on real estate and that’s what we’re going to be talking about. She’s awesome. I’m super excited to have her with us. Welcome, Bethany.
Thanks for having me. I appreciate it.
Thanks for coming. Let’s talk about your life as a real estate investor. We’ll get into a little bit more about the law stuff, but how did you get started in real estate investing?
As you saw on my bio, I did a lot of work on the tech side and in operating companies. I started practicing law representing syndicators and securities. I looked at a lot of the deals. I thought, “No wonder everyone is so excited about this. You may not have to wait for 5 to 7 years to get a return. I can get cashflow. I had read Rich Dad Poor Dad ages ago and until you’re ready to hear it, you don’t hear it. I’m late to the party, but I got started because I was looking at all these deals and decided that I needed to get on that action.
You started passively investing in real estate.
I’ve reviewed a ton of deals and one of my co-investors that I always invest with, Carrie, she’s a real estate transactions lawyer. I’m on the security side. We evaluate deals together and I felt a little more comfortable with a seasoned real estate professional in my corner. It helps.
I’m a syndicator. I talk about syndication on this show, but for those who are just joining us and don’t know, could you explain what is a real estate syndication?
Real estate syndication is if you’re going to invest in any kind of real estate asset, when you raise money from passive investors to help secure and then operate that asset. A lot of folks are out there buying and flipping houses. I’ve talked to plenty of those people. This is usually for bigger investments. It’s OPM, using Other People’s Money and part of my job is to help keep people out of jail when they do that.
Syndication is basically crowdfunding real estate. You’re bringing groups of investors together to purchase larger properties and there are active syndicators. The active investors are the ones that are easily on that side or the ones that are finding the property. We bring the groups and investors together, we get it under contract, we get finance and we run the asset. There are passive investors who vet the deal, then invest their money and wait for it to come back with friends. That’s what passively investing in a syndication deal is. Bethany, you help active syndicators put together these deals. I teach about syndication and I say, do not do this without an attorney that knows what they’re doing. A securities’ attorney helping you with this because you could win yourself some free housing, with bars and free orange jumpsuits. That is not what you’re going for. Tell us a little bit why it’s so important that you need to work with a syndication attorney. What are some of the things that could happen if you don’t?The SEC is not fooling around. If you violate securities laws, you could land yourself in jail. Click To Tweet
The reason to work, as you said, is SEC is not fooling around. If you violate securities laws, you could land yourself in jail. That’s a pretty extreme case. You’d have to do the bad acts, but it’s easy to fall into the traps. SEC has some very strict rules around how you’re allowed to raise money from home. One of the things that we do is we help syndicators rather avoid those traps. What could happen? It could be fined, it could be jail time, it could be never being allowed to raise money again or being involved in any kind of investment situation again.
There are a lot of things that could happen. As a syndicator, I’m sure you’ve seen with co-sponsors, you have your co-sponsors fill out a bad actor questionnaire or you should if you’re not. I’m sure you are but many of your audience might be thinking, “What is that?” That’s to make sure that the SEC hasn’t barred anybody from raising money and then have them be a part of your deal because you could be guilty by association as well. It’s not your potential bad acts whether on purpose or accidental, but it’s also the folks with whom you associate.
What are some of the common mistakes that people make not even thinking that that could be a problem? What are some of the, “Just accidentally do it?” I see it all the time on Facebook, but I’d love to hear it.
Facebook is exactly right. The one really big one is if as a syndicator you’re raising capital under 506(b), which means you’re allowed to accept non-accredited investors, which we can talk about in a little bit if you want to.
Before we go into it, let them know what is an accredited investor?
An accredited investor is someone who meets the requirements the SEC has set forth to meet that status. It could either be by net worth, more than $1 million, not including your personal residence or $200,000 of annual income if you’re single and $300 for a married couple. The past years, but also expected this 2020. That’s something to think about right now in these times is what do you expect you are going to be this 2020 as well. 506(b) allows you to accept up to 35 non-accredited but still sophisticated investors. You still can’t swindle someone who has no idea what you’re talking about and take their last $25,000. Somebody has to still be sophisticated and savvy about business matters, but not necessarily accredited.
If you choose that exemption and most people choose one of the 506(b) or 506(c), then you cannot advertise. Advertise is not taking out an ad on CNN necessarily. It’s blasting on your social media about this awesome deal that you have and you want to invest. It’s an email blast to folks you don’t know. 506(b) requires that if you’re going to bring in investors, then you’ve got to have a substantial pre-existing relationship with all of those folks. Usually, that means having met in person and done other deals before in the past. Really knowing someone, not just a blind email list or an email grab from a page that you have on Facebook. For people who are experienced syndicators, they get, “I can’t go begging for money on a Facebook client.” Where I see some people trip up is, they’ll post, “We closed on this awesome property.” They’ll do the walkthrough live on Facebook and they’ll go and raise money again after that.
Is it during a different deal?
No, it’s the same deal. They’ll finish the raise and it looks like they’ve advertised and you can’t necessarily prove that the folks who came in after that walkthrough didn’t come in as a result of seeing it on the walkthrough. If you’re going to do a closing video, you better make sure you’re done raising for that deal.You can't pay people just to raise money. Click To Tweet
That it is actually closed. It’s done.
Some people will still raise a little bit of money for operations post-close. They get enough to close and then they continue the raise. It’s totally fine within limits and I can talk to people about that individually.
What are some other mistakes that people will make unwittingly without an attorney?
If you’re going to take anybody’s money who is not actively involved in the deal, not co-sponsoring, not doing a job other than raising money, because you can’t pay people just to raise money, that’s one big one. Let me stop right there. One really big one is people are always trying to get around the rules of paying people to raise money who aren’t broker-dealers. If someone does not a licensed broker-dealer, then they cannot be compensated for raising money for any deal that is not their own deal that they’re actively doing work in. A lot of people will bring in co-sponsors to be the money raisers and pay them some part of their GP and that is a big no-no.
What else do they have to do in addition to raising money?
A real job, not just investor relations, “I’m going to contact all the people I brought in. I’m going to make sure they’re happy with this investment I brought them into,” that is not the same. That is not enough. That is covering your own butt with your friends for raising money. They can do diligence on a deal. They could be co-signing on the loan. They could be underwriting. They could be doing asset management after the fact. There are a lot of different jobs that are required when doing these deals. Give them one. If someone wants to come in and be a syndicator, then let them learn on the job. That’s fine. They’ll say, “I have a whole bunch of wealthy friends. I want to do these deals, teach me. Put me to work and then I’ll give you access to all of my friends.” That’s okay. It’s got to be a real job.
Other mistakes that people make is, if you’re raising money from passive investors, you need to have a PPM, a Private Placement Memorandum. That’s what I spend a lot of my days doing is drafting PPMs. That spells out all of the potential risks that could come along with the deal so that when you have a passive investor come in, you can say, “Here’s our offering package. You’ve got our business plan.” We make sure that nothing in the business plan violates the Securities laws, advertising laws and all those things in the business plan. A business plan means like your pitch deck. That’s your pro forma and all of the details about the deal. You have to make sure it says projections when it should think projections and no promises. The PPM is like the sky is falling doomsday document that you would never mark it with. It’s all the reasons why someone should not invest in anything ever.
It’s all the ways you can lose your money in an investment.
The reason you need that is because if the sky does fall, let’s say, a global pandemic hits, your investors probably put their hands out and say, “I want my money back now.” You can say, “We told you this could happen.” It protects the syndicator if stuff goes south from having to give all the money back or maybe jail time if it looks like fraud. It is one of those, “We told you this could happen.” It sucks for everybody. It totally does. I wouldn’t say ever blow off your investors and act like that, but it is something that will keep you out of trouble if stuff goes south. That is a conversation that I have been having for the past two months with syndicators of, “How do we talk to our investors?” “What do we have to do?” I’ve had people call me and say, “Do we have to give them their money back now?” They don’t know. That’s another reason to have a good securities lawyer in your corner and the answer is, “No,” by the way. You don’t.
What is the difference between a true JV and syndication? Some people are like, “I’m going to take some money from my friends and family who are helping me purchase a deal, though I don’t have to go through all that trouble of getting a PPM and going through the lawyers because that can be expensive.” What is it that it’s just a joint venture? What do you need for a joint venture and when is it a full-blown syndication?
Let me start with what it’s not. A joint venture is not, “We’re only raising $500,000,” or, “It’s only four people.” It’s not based on how much you’re raising or how many people it is. If you are bringing in capital from anybody who is not actively working in the deal, then you are selling security. You should have a PPM and a good securities’ lawyer to provide it. I don’t care if it’s $50,000 from your grandmother and that’s it. If she’s not actively working in the deal, you’ve sold security and you should protect yourself. Probably, especially if it’s family, then that’s still a securities offering. A JV means that some partners, however many it is, get together and they’re all actively working in the deal and they put up their own money or they get alone or whatever it is, but any money that’s at work is somebody who’s doing a job.
What are some of the jobs because not everybody is going to the job site and fixing it up? What are some jobs that would be, “This is a true joint venture?” Maybe one person is more money side, the other person’s doing more of the sweat equity. What is it that would allow it to just be a joint venture?
My answer here is very similar to when can you pay somebody to raise money questions, which is it’s got to be a real substantial job and not just trying to get around the securities laws. They could be doing diligence on the deal, underwriting, and asset management after the fact. Those are the big ones. If it’s multifamily for example, it could be anything leading up dealing with the lawyers because that’s a job. Coordinating all of the offering materials, getting the business plan done and researching the property and doing the business plan in and of itself, it’s an undertaking. To get it right, usually, it’s got a lot of meat in it between the projections and “What’s the value-add if it’s a value-add?” “What’s the upside for the investors?” “Why aren’t we buying this property?” “What do we think it’s going to do?” Knowing the market and what is good about this asset is something that’s an expertise that might not take you eight hours a day necessarily, but that’s valuable that and lend that to the other JV partners.
That’s JV and the syndication though is that somebody’s putting their money and they’re not actively managing it. They may need a private placement memorandum and other subscription documents for doing it well. For anybody who is thinking about using OPM or real estate, do it safely and do it well. One more distinction. Let’s say you have a private lender. They don’t have an equity stake in the property. Let’s say they lend you $100,000 at a fixed rate of return, what documents do you need for that?
If they are still not actively involved in the deal and they’re not an institutional lender and you’re using their money, if you structure it as debt instead of equity, where it would have otherwise been security, then it’s still security even if it’s interest versus equity. You still want to take a look at whether or not they need a PPM. With a commercial lender, no, but if it’s your aunt who’s going to just loan you $50,000 but not be a part of the deal, that’s still security, even though you structure it as a debt. You would want to add a note then at that point though. You should put the risk disclosures in a PPM.
Let’s go back to talking about you and your personal investment. I like to ask every guest I have, what was your biggest mistake and what did you learn from it as an investor?
The first biggest mistake is I waited too long to start and that can come from a lot of different things. Just lack of knowledge and maybe being a little bit insecure about this particular asset class versus tech. The second, I don’t know yet if it’s a mistake, but I did invest in office space at the end of February. I think things are going to come back and recover so I’m not worried about it, but we never know. You’ve got to be comfortable to ride it out. This is not day trading.
What did you learn from that?You can't invest if you can't afford to lose it. Click To Tweet
I learned that you can’t invest if you can’t afford to lose it. You’ve got to at least understand that it’s possible that you could lose it. Do your diligence and choose things that you are knowledgeable about enough that you can feel comfortable. I’m still comfortable. I haven’t lost it. I don’t think I will, but it might be a little longer to get a return than I thought. Don’t invest if you have to next quarter get something back. You don’t know. You have to be able to ride it out.
The money you put in syndication, it’s going to hopefully come back with friends, but it’s not money that you can access easily. It’s not coming back until it’s time.
It’s not up to the passives when it comes back. That’s the other thing that people have to understand is you’re putting a lot of faith into the management team, the GP team. Choose to invest with people that you trust.
What are you most proud of?
I can be cliché, my daughter, of course. I’m most proud of the young woman that she’s becoming. Professionally, I’m most proud of that during quarantine, we’ve been a little slower because there’s not in many syndications happening right now and so there is not as much work. I am writing a book and starting a business with my sister, which will be launched. I’ve kept myself busy and productive. I didn’t go into a funk during quarantine and I can come back out practicing law still fresh and sharp.
What’s your book about?
It is Sci-Fi, a little bit dark but it’s about a couple who can’t conceive. They decided to clone the husband, have the wife carry the clone and all the things that go wrong with that.
What advice do you have for a woman who’s starting in this field? I’ll say maybe, as a woman who wants to be a real estate syndicator?
The biggest piece of advice is to surround yourself with other bad-ass women who are doing what it is you want to do and let them help you. Don’t try to go it alone. Don’t try to get somebody else to do it for you. We have resources available to us that we can team up with people. For example, I co-invest with my real estate partner, Carrie. I trust that together, we can figure it out and we don’t need someone to tell us what to do or how to do it necessarily, but we surround ourselves with smart and intelligent women that are doing it. There is somebody out there doing what is you want to do who will help you without telling you.
What do you wish you’d known at the beginning that you now know?
I wish I would have taken my own advice that I just gave. Fear keeps a lot of folks on the sidelines. You find a good mentor, partner and team. I wished I would have taken that advice and started sooner.
Before we get into our famed end of show trinity, which is a brag, gratitude and desire, how can people reach and find out more if they want to connect with you?
It’s time for our trinity which is a brag, gratitude and desire. What is your brag? What are you celebrating right now?
I already alluded to it, but I’m bragging that I am writing a novel, which I never thought I could do. It’s fun and exciting.
What is one thing that you’re grateful for?
I am grateful for the strong, powerful women in my life. It is such a support and it’s empowering, it’s motivating and it’s helpful. All the things that I think we need are to be there and supporting each other. I don’t do competition with women. I think cooperation is definitely where it’s at. I’m grateful for women like you.
Thank you, likewise. Last but not least, what is one thing you desire?Choose to invest with people that you trust. Click To Tweet
I want to get into the active syndicating side. I’ve sat on the other side of the table. I’ve done the passive. I want to lend what I’m learning through seeing all of these deals and doing the legal side of it. I want to apply that and lend my expertise to syndicators and co-sponsor deals.
So shall your desire be or so much better than you can imagine. Thank you for this great interview. It was awesome. You can find Bethany LaFlam at [email protected] or www.PremierLawGroup.net. You can con connect with me at REIGoddesses.com. If you want to join some of our syndications, you can join our Investor Club, go on the website, then start a conversation and get a pre-existing relationship so that you can invest in these exciting opportunities. It was great having you. Everyone, please subscribe, like, give five stars and all the things. Share this with your friends and join us next time for another awesome episode.
About Bethany LaFlam
- Seasoned deal lawyer with 20 years experience.
- Current practice focuses primarily on real estate syndications and funds.
- Big firm experience and has owned and operated her own law firm, advised clients on both legal and strategic matters and represented clients on startup, mergers and acquisitions and securities matters.
- Represented clients in real estate, aerospace, oil & gas services, medical services and various technology industries.
- Engaged by clients as a strategist to develop sustainable business models, assist when raising capital, and prepare for successful exits;
- Previously consulted clients on commercialization and monetization, which a specific focus on sports and music tech.
- Served as an advisor to and held leadership roles with multiple non-profit corporations; JD from Pepperdine University School of Law.
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