JF1047: Are you Breaking the Law by not Filing Proper Paperwork for your Deals? Find Out Now With Kim Lisa Taylor
If you have been borrowing money from individuals consistently, you may have been selling a security without even knowing. If that sounds like you, I highly suggest listening to today’s episode and figure out what you need to do in the future to properly cover yourself. From JV agreements to disclosure statements, a great attorney like our guest today can tell you everything you need to be on the right side of the law. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Kim Lisa Taylor Real Estate Background:
-Founder of Syndication Attorneys PLLC, a boutique corporate securities law firm
-Written over 100 securities offerings and JV Agreements for entrepreneurs raising money from private investors
-$50,000 to $100,000 or more at a time Highly sought after speaker, author and lawyer
-Based in Saint Augustine, Florida
-Say hi to her at http://syndicationattorneys.com
-Best Ever Book: Rich Dad Poor Dad
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
With us today, Kim Lisa Taylor. How are you doing, Kim?
Kim Lisa Taylor: I’m great! How are you, Joe?
Joe Fairless: I’m great as well, nice to have you on the show. A little bit about Kim – she is the founder of syndication attorneys, a boutique corporate securities law firm. She’s written over 100 security offerings and joint venture agreements for entrepreneurs raising money from private investors.
She’s a highly sought after speaker, lawyer and author. She is based in St. Augustine, Florida. Check out her company at SyndicationAttorneys.com, which is in a link in the show notes page. With that being said, Kim, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Kim Lisa Taylor: Yeah, I’m a real estate securities attorney and I’ve been doing this since 2008. I’m also a real estate investor and a real estate developer myself, so I have some first-hand experience in the real estate investing world. I also have a broker’s license and I have attended numerous real estate guru events around the country, learning a lot of different real estate investing techniques to be able to serve my legal clients better. I too was born in Michigan, I see you were as well.
Joe Fairless: Oh, cool. What part?
Kim Lisa Taylor: [unintelligible [00:03:38].12]
Joe Fairless: Sweet! Well, it’s nice to talk to someone who’s also born in the same state as I was. I have a monthly meetup, and I was talking in this meetup about some of the lessons I’ve learned on this show. One of the lessons was that if you raise money from someone and they’re expecting to make money off of you passively, then it’s a security. And then they asked me a follow-up question, and I felt like an idiot because I was like “Well, I don’t know…”, so I have to ask you this question… What about hard money lenders? Don’t they give you money passively, and they’re expecting you to make them money, but there’s no security documents involved there?
Kim Lisa Taylor: Well, they’re in the business of loaning money, so the onus of legal compliance falls then on them, to make sure that they’re in compliance with lending laws. So the same set of securities will also apply when you’re dealing with private investors who aren’t in the business of lending their money. They’re different than the relationship that you would have with hard money lenders.
Joe Fairless: Okay, there is the distinction. So if I as Joe Fairless were to come across a fix and flipper locally, and they said “You know what, Joe? I’ve got this deal, it’s a fix and flip. I need $50,000 and I think I can give you a 12% interest rate with two points at closing”, and I say “You know, I’ve never done this before, but that sounds good. Sure.” Is that a security?
Kim Lisa Taylor: Well, if you’re borrowing money from private individuals, then yes. You’re actually offering them a piece of paper which is a promissory note in exchange for their money, so you’re offering them a security, and you’re selling a security.
Joe Fairless: Got it. So in that case, what legal documentation would need to be filed?
Kim Lisa Taylor: Well, that’s a really loaded question, because there’s a lot of different levels of how you would need to address something like that. If you’re just borrowing money from one person one time, it’s an isolated transaction, you really don’t need to do anything, and nobody’s gonna be concerned about that, or if you’re borrowing from family members…
It’s when you start going out to people that you meet at local real estate investment clubs or other acquaintances that you have to start to take more caution, and certainly when you get to the point where your business depends on repeated borrowing – I call that a serial borrower. When you’re in the serial borrowing business, you should start paying attention to securities laws, and the obligations when you’re selling securities are things like you have to give disclosure to your investors of all the different things that could go wrong and the way that they might not get paid back, because someone in the business of loaning you money already knows that… But somebody who’s not in the business, they don’t understand those risks, so you have an obligation to share that with them.
Additionally, you have the obligation to give them all the information they need to make informed consent; that means that you’ve gotta tell them all about that deal – where it is, what you plan to do with it, how you’re gonna spend the money, how you’re gonna get rid of it, how you’re gonna dispose of that property and all of that. So those are the kinds of obligations you start to incur when you’re selling securities.
The other thing is that you have to qualify either your offering of securities to your investors either by having it pre-approved by a regulatory agency, or qualifying for an exemption from registration [unintelligible [00:07:19].14] There are many different exemptions that might apply to someone’s situation; it just depends on how much they’re raising, where the investors are located, what kind of financial qualifications the investors might have, whether or not the person that needs the money is advertising for that money… Knowing all of those things, a securities attorney would be able to help them decide what would be the appropriate exemption, and then help them understand those rules so they could follow them and not get in trouble.
Joe Fairless: That’s helpful. Let’s use a specific example, because I know it’s different if you go across state lines. But if you have everything contained within one state, then those are different requirements. That’s correct, right?
Kim Lisa Taylor: Yeah, there’s something called an interest paid offering exemption that if you, the property and all of the investors are contained within one state, then you’re gonna look to see if there’s a securities exemption in that state that would apply to your situation, and you’re gonna follow the rules for that exemption.
Joe Fairless: Where do you look if there’s a securities exemption in that state? Is “securities exemptions in Ohio”, or California, or whatever, just on a Google search?
Kim Lisa Taylor: Yeah, you could start with that. It’s usually gonna be buried somewhere in some financial regulation, so it could be a little tricky to try to find, but at the state level, those kinds of regulations, those inter-state regulations are called blue sky laws – don’t as me why, that’s just the name that they’ve developed over time… So if you look up a Google search on “blue sky laws in Ohio”, then you would probably get directed to the right location where you could look at those different securities exemptions in Ohio.
Joe Fairless: Okay. Now let’s use a specific example. We’ll use Florida, where you’re at, and we’ll use a real estate investor in Florida – he has a fix and flip and they reach out to another real estate investor who they have a relationship with, and they’re like “Hey, I need $50,000 to do this fix and flip, and I’ll give you 10% a year, and a couple points at closing.” Just so I’m clear, what documentation in that example should they have?
Kim Lisa Taylor: It’s gonna largely depend on the qualifications of the investor.
Joe Fairless: Which one? The one who has the money?
Kim Lisa Taylor: Yeah, the one who’s providing the money.
Joe Fairless: Okay.
Kim Lisa Taylor: So if that investor — first of all, let’s say they’re a hard money lender… Then they’re gonna provide the promissory note and the documents that you wanna use, so that person who’s seeking the money doesn’t really need to really worry about providing [unintelligible [00:09:59].13] documents.
Joe Fairless: In this case they’re not a hard money lender; they’ve invested in real estate, but they’ve never done this before, they’ve never passively loaned money in this structure.
Kim Lisa Taylor: First of all, you’re gonna need to have a promissory note. If that person is an accredited investor, so that means they’re someone who has over a million dollars net worth or over $200,000 income annually if they’re single, or $300,000 if they’re a married couple; if they meet one of those definitions, then they’re an accredited investor.
Accredited investors are presumed to be rich and smart enough to be able to protect their own interest, so you probably really don’t need much more than just that promissory note. But when you start going out and bringing in a lot of accredited investors and you’re doing this again and again and again, every time you do it, your exposure increases, so you want to protect yourself.
You can protect yourself by having a private placement memorandum or an offering circular that will explain what you’re doing with the money and all of those risks, and provide all of those material facts. What that document does is it shifts the risk of loss from you to that investor, because now that investor is assuming the risk of the investment because they’ve been fully informed.
If you don’t have that document and all you’re using is a promissory note, maybe you can be compliant with the law, but you’re giving yourself a lot of risk; it’s like driving without insurance.
Joe Fairless: And what about if that investor who has the money, who’s wanting to lend it to the other one – what if they’re not accredited?
Kim Lisa Taylor: Well, then you probably have an obligation to provide that disclosure document. Under Florida laws, the interstate offering exemption – that’s called a private offering exemption in Florida – requires that if you have anybody who’s not accredited, then you have to provide this offering circular in a federal realm. It’s called a private placement memorandum… Generally, the same type of document.
Joe Fairless: And that is a 100+ page document that tells them all the different ways they can lose their money.
Kim Lisa Taylor: It’s not that big.
Joe Fairless: Mine are… [laughter] Maybe I have too many disclosures.
Kim Lisa Taylor: [laughs] Yeah, maybe you don’t need quite that many. I think the ones that we draft are about 50 pages.
Joe Fairless: Okay. So putting ourselves — I’m not a fix and flipper, but let’s pretend we’re a fix and flipper. If we’re a fix and flipper in Florida and we’re trying to grow our business, and so far we’ve done all of our deals with our own money… Now we’ve reached out to this one person we know who’s not accredited but came into $100,000 and wants to invest it. As a fix and flipper who wants to partner with this person and give them the structure that I mentioned earlier – 10% interest, a couple points at closing – I need to have a private placement memorandum?
Kim Lisa Taylor: Well, if you’re just gonna do it in some isolated transaction, it’s not a big deal. But if this is gonna be part of your business model going forward and this is just the first person and you plan to do it again and again, then you need to set yourself up to be able to do it correctly all of the time.
Joe Fairless: And why is there a distinction between the two? Why isn’t it just one way or the other?
Kim Lisa Taylor: Well, technically you should be doing it every single time, but the reality of it is that people aren’t gonna do that. If someone were to come to me with the same scenario, I would say “Do not use that person’s money in that way. Don’t borrow their money. Set up a joint venture with them where they remain actively in control with their money and they are the ones who are making decisions on how their money is gonna be spent.”
The shift into the world of securities comes when you’re taking control of someone else’s money, and they’re no longer in control of how that money is being spent. So if you did a member-managed LLC with that person, took title to the property and then the two of you collaborated when you needed money for something, then you would say “Can you write a check for this or that?” Let them be the one actively in control of their own money, and then you don’t have to worry about all of the risks and all that.
Joe Fairless: So just simply do a joint venture agreement where it’s a member-managed LLC.
Kim Lisa Taylor: That’s right. Because if you create a manager-managed LLC, by definition now you’ve put that role of being a passive investor and you’ve put that investment back into being a security.
Joe Fairless: What else commonly comes up – and maybe this doesn’t commonly come up; maybe I just came up with the scenario… But I do think for fix and flippers this is an important topic, but other than what we’ve discussed, what else can you think of that you wanna mention as it relates to securities law that we should talk about?
Kim Lisa Taylor: Well, I can talk about some of my most successful clients and I can tell you that the characteristics that every one of them share is that they have figured out what investment model they wanna use, whether it’s single-family, mobile home parks, multifamily commercial properties… They’ve picked a niche and they’ve gotten really good at that niche, they’ve gotten coaching in that niche and they’ve actually hired a coach who has helped them get their first few deals done.
After that, they’ve gone on and done their own deals and they’ve been able to partner with other people who are just starting out. So my best advice is pick a niche, a real estate model that you wanna follow, learn as much as you can about it, become an expert in that field, and get a coach to help you gain that expertise. Then to get your first couple of deals done, maybe you’re gonna partner with a more experienced person who has already syndicated a few deals, already put multifamily or whatever your thing is together and done it before you.
Partner with them, learn the ropes, and then you’re gonna be able to leverage up from their experience.
Joe Fairless: What niche have you focused on from an investing standpoint?
Kim Lisa Taylor: I have single-family properties and also a multifamily apartment complex, as well as a 13 lot luxury housing development.
Joe Fairless: And which one has been pound for pound the most profitable for you?
Kim Lisa Taylor: Definitely the multifamily yields the best returns.
Joe Fairless: Where is that from a geographical standpoint and can you tell us about it?
Kim Lisa Taylor: Our property is in Columbus, Ohio.
Joe Fairless: Okay, Columbus.
Kim Lisa Taylor: Yeah. Our property – we’re planning to turn it into condominiums and sell it, and that’s how it’s gonna be profitable for us, because it’s kind of a smaller property… But leveraging off of my client’s experience, the ones that have gone into the bigger properties – if you get in those properties where you have a million dollar loan balance and a hundred units or more, those are definitely the most lucrative. Multifamily is definitely an area where it’s better to go big than it is to stay small, because you can get nonrecourse loans if you have over $750,000 loan balance now with Freddie Mac.
Also, you can hire professional property managers when we get to a critical mass, a certain number of units… You can hire your own full-time staff at the property and you have complete control over those people, versus trying to rely on a local property manager who’s going to give your property part of its attention.
Joe Fairless: I know you mentioned earlier your best advice, but I didn’t ask you the question, and I’ve got this lead-up music and everything when I ask that question, so I have faith that you’re gonna come up with something even better than that. What is your best real estate investing advice ever?
Kim Lisa Taylor: You have to do two things. If you wanna be able to syndicate properties, then you need two things. You need to pick the business model – we talked about that – but the second most important thing is you have to develop a network of potential investors. In order to do that, you’ve gotta go out and meet people, and you’ve gotta meet them in all different kinds of settings that you can possibly come up with, from your social groups local to you, real estate investment associations’ meetings, events, business associations, you can host your own educational events, or online marketing and SEO.
Joe Fairless: And we should definitely publicly advertise, even if we have a 506(b) offering, right?
Kim Lisa Taylor: If you have a 506(b) offering, you’re not allowed to —
Joe Fairless: I’m kidding, I’m kidding… [laugher] Yes, 506(c), that’s where we publicly advertise. 506(b), we keep it amongst our circle of friends and colleagues.
Kim Lisa Taylor: That’s right.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Kim Lisa Taylor: Sure.
Joe Fairless: Alright, let’s do it! First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Kim Lisa Taylor: Rich Dad, Poor Dad.
Joe Fairless: Best ever deal you’ve done?
Kim Lisa Taylor: Lot developments in South Carolina.
Joe Fairless: What’s a mistake you’ve made on a particular transaction that you’ve been involved in?
Kim Lisa Taylor: Staying small when it was probably much more profitable to go big. So buying too small when I should have been having my sights on bigger properties.
Joe Fairless: The best ever way you like to give back?
Kim Lisa Taylor: Teaching.
Joe Fairless: And where can the Best Ever listeners get in touch with you?
Kim Lisa Taylor: The best way to get in touch with me is through the website at SyndicationAttorneys.com, and there’s a place they can schedule a free consultation if they like, or a call, and there’s a lot of free information on the website; there are articles and podcasts and [unintelligible [00:20:32].03]
Joe Fairless: Excellent. Well, Kim, thank you for being on the show. Thank you for clarifying things in my mind and helping the Best Ever listeners who fix and flip, helping them think about how they should be approaching bringing in investors, what type of documentation is needed, and what isn’t necessarily needed or not practically needed. And then talking about the disclosures, the PPMs etc., as well as your focus on making sure that we are doing as large of deals as we can and not thinking too small; especially with multifamily, the numbers are in the larger stuff.
Thanks for being on the show, Kim. I hope you have a best ever day, and we’ll talk to you soon.
Kim Lisa Taylor: Thank you!
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