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Just how does a real estate
syndicator or a fund sponsor?

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Think about the exit? How are we
going to exit out of this

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property? What is the mechanisms
that we can do that this video

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is going to go through the five
different ways of exiting out

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getting your investors back
their money?

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My name is Tilden Moschetti. I'm
a syndication attorney with the

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Moschetti syndication Law Group.
Let's go through those five

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different ways in order to get
out of a property to exit and

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then get investors money have
that capital event occur. So the

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first way is very clear cut,
it's probably what you think of

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first, well, don't we just sell
the asset? Yeah, that's exactly

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what you do. You sell the asset.
Now, whenever that happens, the

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asset gets sold. The money's
sitting there. And now what do

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you do with it, you just follow
through what you told them, Look

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at the operating agreement, look
at the PPM look at everything

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you've told them, and use that
like a recipe. For example, if

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you've got a waterfall structure
with a preferred return and

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says, Well, first you give
investors the money back, then

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you give a preferred return of
8%, just making numbers up here.

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And then we've got a 7030 split.
So 70% goes to the investors and

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30% goes to you the sponsor, you
just follow that like a clear

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cut example. And then you give
everybody and accounting you're

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done at the end of the day,
that's the most common way that

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happens in I mean, that's
certainly the way that you're

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going to plan will has the
possibility of happening because

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certainly, it happens probably
in 90% of deals. Probably the

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second most common way is called
a refinance exit. So if the

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property value is here, right,
but you've also got, the loan

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amount is already down here. And
so it's got pre existing debt,

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or maybe it doesn't have debt at
all, what the sponsor can do is

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say, Okay, I'm gonna go put debt
on it, I'm going to put it up

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here. And so now I can give
investors that money. So we set

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the fair market value, let's say
the shareholders own 70% of the

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asset. And I'm able to get
because it's such a great asset,

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I'm able to get a loan to value
of 75%, you go to the bank, you

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say, give me 75% on the value of
the property, and then you go

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back to your investors and say,
Look, fair market value of this

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is, is here, we have this pool
of money from refinancing,

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here's the money. What it
essentially is doing is making

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it that you are the sponsor, you
the sponsor are buying the

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property at fair market value.
Now, this has some clear

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advantages, it lowers the risk
of the deal going sour, and

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lowers the risk of not the risk
of it sitting around, it lowers

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the risk of it not trading for
exactly what fair market value

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is. The reason the The caveat is
you really want to make sure

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that you're doing it at fair
market. As soon as you come to

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the investors with this idea
with this proposition of what

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you're going to be doing.
Shareholders are immediately

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going to be a little taken
aback. They're going to be

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asking themselves, how do I know
that I'm really getting fair

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market value and not getting
taken advantage of that they're

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not getting that property for
pennies on the dollar, they know

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it better than I do. So you need
to make sure that the mechanisms

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are in place. So your
syndication attorney should have

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baked in that possibility if
it's there to make sure that,

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okay, we've got this mechanism
will determine fair market value

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based on an appraisal by a third
party. And then that appraisal

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will go to the investor so that
they can understand it. They can

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ask questions, they can question
it. Sometimes if you if we think

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we perceive that the trust level
might be a little bit less, we

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might say and if there's a
question on fair market value,

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the shareholders themselves can
ask for an appraisal, another

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appraisal. And if it's off by
more than 5%, then we take the

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then we can do a third appraisal
and we take the average or

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whatever that is. So there are
mechanisms in order to take care

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of that answer. That's a fairly
common thing to bake into a real

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estate syndication, so that
those sponsors are able to

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basically keep that property for
themselves. The third way that

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happens is called a
recapitalisation. So through

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recapitalisation what, this
isn't actually a pure sale. This

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is changing the way that whole
capital stack happens. So

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perhaps let's say that the
property was bought for $5

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million, it's worth $5 million,
and you've decided you want to

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recapitalize it, so if it was
Buy all cash, right? So that $5

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million worth of value and you
go to the bank, and they were

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willing to give you a loan to
value of 50%. So now that's two

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and a half million dollars in
cash, you can then go to your

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investors and say, great news,
based on the equity, you know,

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you guys own 75% of the equity,
we're now going to dole out 75%

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of this loan out to you in order
to make sure that everybody has

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that money. So that's a money
that's being paid out. It

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reduces it's a return of
capital, so reduces their bases,

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and basically gets them their
money sooner. Why would you do

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this? Well, to get their money
sooner, it's going to drive up

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your IRR like sky high, because
now you've gotten them a bulk of

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money up front, right, so
they've gotten a huge amount of

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value, you just want to make
sure ultimately, at the end of

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the day is that the fees that
you're going to pay are worth

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it, right, because there's still
loan fees and appraisal fees and

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all those things that go into
recapitalisation. And you want

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to make sure that your investors
are benefiting out of it at the

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end of the day. The fourth way
as a way that I oftentimes get

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asked, and it sometimes works,
but it sometimes doesn't. And

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that way is through what's
called a 1031 exchange. Now, if

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you're in real estate, you
probably know what a 1031

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exchange is, it's where you take
an existing property and you

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exchange it for a light kind
property, replace the dead

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replace the money, things like
that. And then you don't have to

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pay any gains. So the gains tax
never happens, it doesn't

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trigger that. Now, the reason I
say it sometimes works in

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sometimes doesn't is because as
an entity as its investment

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entity, it can act just like you
as a person, it can do this

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thing, where it's going into
into another property. But where

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we sometimes run into problems
is if there are people who want

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to leave the fund or the
syndication, and you want to pay

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them out, sometimes we have a
problem there. And you really

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want to talk to a good qualified
tax attorney who specializes in

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1031 exchanges will definitely
know about this issue, and be

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able to help make sure that
either it's going to work or

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it's not going to work and make
sure that it's all done in the

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right manner. The last way is
through what's called merger or

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acquisition. So this is where
you take that investment, that

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all that equity that's in the
investment entity itself, and

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you turn it into something that
might be through an upgrade into

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another REIT. And it might be
into a merger into another fund

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that another fund buys it out.
And gives the investors the

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opportunity to either stay in,
or in an opportunity in order to

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exit. This works sort of like a
like a 1031 exchange, or

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actually works sort of like an
upgrade, but not exactly because

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their tax cut, the taxes are a
little bit different. But it's

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an opportunity for your
investors to either stay in if

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they really want to, if they're
attached to that, that asset or

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as a as an ownership or to move
out in general. That's not as

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common, maybe because the the
kind of portfolios that exist is

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they're not being absorbed in
that way, all the time. It

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definitely happens on a larger
portfolio, where a REIT might be

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interested in buying out the
entire portfolio and willing to

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go through the legal hurdles of
doing an upgrade. Or if it's a

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private equity fund or a larger
syndicator that is once to

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incorporate that into its fun.
They can happen. It can also

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happen with the sponsor, like
hat, who also has a separate

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fun, who wants to absorb that as
an opportunity can be set up

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ahead of time, but they got to
know it ahead of time your

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investors have to know it
because again, it looks like

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maybe something fishy is going
on here. And I'm getting either

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getting this new thing that I
never bargained for in the

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beginning. So you're want to
make sure that your syndication

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attorney has baked in that
possibility into the PPM into

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the operating agreement. So it's
there. So at the end of the day,

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if there's any question and your
investors start asking you why

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why you're doing it and what
basis you can do it. You can

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point to them and say this is
why and this is why it's a good

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thing. My name is Tilden
Moschetti. I am a real estate

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syndication attorney with the
Moschetti syndication Law Group.

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We specialize in Regulation D
rule 506 B, and rule 506 C

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offerings for real estate
syndicators, real estate

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investment funds, businesses,
really anyone who's trying to

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raise money, they want to take
investor money and be able to

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use it in order to make them
More money and make the sponsor

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you as more money as well.
That's where we help. Give us a

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call if you'd like to meet and
discuss your project and see if

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there's a good fit between what
you're looking to do and what we

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offer.