1 00:00:00,599 --> 00:00:07,679 In this module, we're going to show you how to protect yourself from the very beginning from either deals going sideways, or 2 00:00:07,679 --> 00:00:15,809 making a mistake by choosing the wrong kinds of investors, you know, the investors that are just nightmares. So this is a 3 00:00:15,809 --> 00:00:23,249 very simple process, there's really two different kinds of decisions that we need to make. The first decision that we have 4 00:00:23,249 --> 00:00:30,449 to make is about entity types. So we'll go over what the basic entity types are. And then we'll also go through what the 5 00:00:30,449 --> 00:00:39,389 structures look like. And that structures of typical syndication companies, and how they run their deals. Once you 6 00:00:39,389 --> 00:00:46,919 have that in mind, you'll know how to basically build that whole framework that lets you do syndications in a much safer 7 00:00:46,919 --> 00:00:56,609 way. And this really boils down to protecting you as the syndicator, from anything going wrong and protecting you from 8 00:00:56,609 --> 00:01:05,249 liability. That's one of the key tenants that we want to do. Because if you ignore that, suddenly, you could be liable 9 00:01:05,249 --> 00:01:13,049 for a lot of money for things that were just simple mistakes, or just acts of God that you didn't have control over. 10 00:01:25,230 --> 00:01:34,020 The topic of entity selection and structures may only be interesting to lawyers. But I'll tell you, you'd be surprised how 11 00:01:34,020 --> 00:01:42,330 important this is. So let me tell you a little story. And this isn't about a syndicator. But it is about commercial real 12 00:01:42,330 --> 00:01:54,270 estate. So if I invite you to go ahead and Google about this as well, and look it up, look up Ghost Ship fire, and you'll see 13 00:01:54,270 --> 00:02:02,490 the articles that pertain to it. So here's what happened. In 2016, there was a series there was a bunch of buildings that 14 00:02:02,490 --> 00:02:11,070 was owned by one woman in the Bay area of California. And she owns like I said about 20 buildings, and one of those 15 00:02:11,070 --> 00:02:19,470 buildings was known as the ghost ship. Now she had rented out that, that building, and she knew that the people who were 16 00:02:19,470 --> 00:02:26,970 living there really weren't supposed to be living there they were supposed to be doing. I believe it was supposed to be an 17 00:02:27,000 --> 00:02:35,670 office building. And she knew that they were doing something more like co-habit, dating, living and something like that. 18 00:02:36,810 --> 00:02:47,760 Well, in 2016, there was a huge fire at this building known as the Go ship, which had been was being used for like a big party, 19 00:02:48,450 --> 00:03:00,540 people were unable to escape through the exits that didn't have the proper fire doors 36 people died to severely injured 20 00:03:00,570 --> 00:03:12,750 out of that. So catastrophic debts. Now, why this relates to structure is because she owned all 20 of those buildings in her 21 00:03:12,750 --> 00:03:20,580 trust. Now a trust is just another entity type, just like the other entities, we're gonna go over today that you wouldn't 22 00:03:20,580 --> 00:03:28,800 use a trust for syndicating. But she decided to put all of her properties just inside of her trust and thought she was 23 00:03:28,800 --> 00:03:38,910 protected. She doesn't own 20 buildings anymore. So that's why this is so incredibly important. So let's get right into it and 24 00:03:38,940 --> 00:03:56,310 discuss what is what the basic entity types that we're talking about are. So we've got a few different choices that you could 25 00:03:56,310 --> 00:04:04,860 make. Now, if you chose to put everything under your own name, you will be basically acting as a sole. 26 00:04:06,479 --> 00:04:10,799 Pro PRI tour, 27 00:04:11,729 --> 00:04:19,799 you'll be acting as a sole proprietor, that is just you, there is no liability protection. And and that's all 28 00:04:19,799 --> 00:04:28,319 it is. And there's more detail in the notes for here. We've given you a handout as part of this module that breaks us down 29 00:04:28,349 --> 00:04:36,389 into a table similar to what I'm drawing right here. But for our purposes, I'm gonna go through it a little bit faster than the 30 00:04:36,419 --> 00:04:49,919 level of detail that's there. So there's a sole proprietor then there is a partnership. This is two or more people coming 31 00:04:49,919 --> 00:04:59,699 together for a common enterprise. Then there is your limited liability partnership. And then there is your limited 32 00:04:59,699 --> 00:05:10,439 life. ability company. And finally there are corporations. Now, you may be asking, Well, what about S corporations versus 33 00:05:10,439 --> 00:05:18,269 C corporations? Well, S corporations versus C corporations are not specific kinds of corporations, their 34 00:05:18,299 --> 00:05:27,149 ways of being taxed. And so we'll talk about taxes, just very, very briefly here. But that's why it doesn't say S corp 35 00:05:27,149 --> 00:05:36,959 versus C Corp. So let's just look at a few little things that that kind of call this out. And as I go through the start 36 00:05:36,959 --> 00:05:51,569 thinking about what makes most sense for you, in terms of number of people involved, the asset protection, the 37 00:05:51,779 --> 00:05:52,889 maintenance, 38 00:05:56,399 --> 00:06:02,999 and governance and taxes. 39 00:06:05,100 --> 00:06:13,350 Because at the end of the day, there's probably one entity type that makes the most sense for you. So when it comes to sole 40 00:06:13,350 --> 00:06:20,820 proprietor we're talking about there's one person, and that's you Everything is under you your name, your social security 41 00:06:20,820 --> 00:06:30,960 number, or an EIN that it's assigned specifically to you as a person, there is no asset protection whatsoever, in a sole 42 00:06:30,960 --> 00:06:39,480 proprietor. In terms of maintenance, and governments, though, it's very, very simple. There may be you have to do a 43 00:06:40,530 --> 00:06:50,400 DBA, or doing business as filing with your local municipality. But that's it. And then in terms of taxes, this all goes on your 44 00:06:50,400 --> 00:06:52,890 individual taxes, you don't have a choice about that. 45 00:06:58,500 --> 00:07:11,370 Now, let's talk about partnerships. Partnerships are always two or more people, there is no there's no asset 46 00:07:11,370 --> 00:07:20,340 protection for the general partner, that's the people doing all of the work for but there is a limited amount for 47 00:07:22,649 --> 00:07:24,149 for limited partners. 48 00:07:30,330 --> 00:07:38,310 The governance is actually pretty easy. There is not a lot that you need to do for a partnership, but check with your 49 00:07:38,310 --> 00:07:46,530 local state, if this is something of interest to you. And then in terms of taxes, you probably are going to be paying 50 00:07:46,560 --> 00:08:04,500 as a partnership. Then there is your LLP, which also requires would be two or more people. And now there's some asset 51 00:08:04,500 --> 00:08:14,310 protections for the general partner, and good asset protection for the the limited partners. So why would you 52 00:08:14,310 --> 00:08:27,480 choose a partnership over an LLP, really, it comes down to cost of filing, and then this the difficulty of governance 53 00:08:28,590 --> 00:08:41,640 governing it. There can be some moderate amount of maintenance that needs to be taken place on the LLP in order to keep it 54 00:08:41,640 --> 00:08:59,250 valid, and you will be taxed as a partnership. Now we get to the LLC, and the LLC can have just one person. But in order for it 55 00:08:59,250 --> 00:09:07,230 to have the best kind of level of asset protection, really do it should be, you know, two or more people in the same sort of 56 00:09:07,230 --> 00:09:14,820 format where you have someone acting like a general partner, so that would be your managing members of the LLC in order to 57 00:09:14,820 --> 00:09:26,400 manage it. And then and we'll talk about managed, member managed versus manager managed LLC is in just a bit. So one or 58 00:09:26,400 --> 00:09:40,380 more people for an LLC. It has it has good asset protection and also easy to moderate 59 00:09:42,840 --> 00:09:43,710 governance. 60 00:09:45,780 --> 00:09:52,920 Not very difficult, but there is some work to be done. Again, check with your local state or where you're going to be filing. 61 00:09:53,370 --> 00:10:01,260 Now we'll have specifically what those things are, what the dates are that you're going to have to send things in I make elections, 62 00:10:01,260 --> 00:10:10,470 that sort of thing, and then also what those filing fees are. In terms of taxes, though, now it starts being a little bit 63 00:10:10,470 --> 00:10:15,210 more interesting. You have a choice of either being taxed as a partnership 64 00:10:18,660 --> 00:10:21,270 or an S Corp 65 00:10:25,740 --> 00:10:30,420 which should you choose partnership or an S corp? Well, that's one of those questions where I'm gonna say you should 66 00:10:30,420 --> 00:10:38,010 probably should talk to your accountant. Because once we start getting into how those distributions happen, the answer 67 00:10:38,010 --> 00:10:46,020 changes radically, whether there's somebody should be doing a partnership or an S corp, what makes the most sense for them. 68 00:10:46,740 --> 00:10:54,720 So that one is better to ask a your personal account, who knows, though, who knows your situation, and what you're doing 69 00:10:54,720 --> 00:11:04,020 much, much better than we could possibly do on a module. In terms of corporations, we can also just have one person. In 70 00:11:04,020 --> 00:11:15,270 most jurisdictions, there is good asset protection, though slightly different than in an LLC. But the maintenance of them 71 00:11:15,270 --> 00:11:23,700 tends to be fairly complex, you need to have a board of directors, that board of directors may not do anything, 72 00:11:23,700 --> 00:11:32,430 but they need to be there, they need officers and there needs to be all these rules that need to take place. Now, while your LLC 73 00:11:32,430 --> 00:11:39,090 will have an operating agreement, your corporation will have bylaws. Typically the things that are required for a 74 00:11:39,090 --> 00:11:48,450 corporation to stay active as and look like a real company in order to get that asset protection that you want. 75 00:11:49,470 --> 00:11:57,870 There's just more things you have to do regular minutes have to be taken from board meetings, etc. So they're just more 76 00:11:57,870 --> 00:12:06,420 complex, it's not to say that it's not a, it's not the best choice because it could be if you need a very specific kind of 77 00:12:06,420 --> 00:12:17,280 governance in order to look right for investors than a corporation is a perfect way to set up. A REITs are always set 78 00:12:17,310 --> 00:12:24,540 up as corporations in one of their main entities. And then a lot of times they have other different structures in those 79 00:12:24,570 --> 00:12:33,930 other entities as well. Also, if you're going to be issuing shares, rather than membership units, so typically for like a 80 00:12:33,930 --> 00:12:43,440 blind pool, you'll do it as a corporation, because it's a little bit easier to manage what that looks like. And then taxes 81 00:12:43,470 --> 00:12:45,570 is either your S corp 82 00:12:48,030 --> 00:12:49,140 or C Corp. 83 00:12:53,550 --> 00:13:01,080 So again, look at the handout and to really kind of see what would make the most sense for your situation, and kind of 84 00:13:01,080 --> 00:13:07,020 write out what's important to you, you know, if you've got more than one person, well, you're not going to be doing a 85 00:13:07,020 --> 00:13:14,730 sole proprietor. And you probably shouldn't do a sole proprietor anyway. Most of the time, you're going to be 86 00:13:14,730 --> 00:13:24,510 choosing between either an LLC and a corporation. So let's go and talk about common structures. And we'll see how 87 00:13:24,510 --> 00:13:42,930 this plays out a little bit clearer. So, like I said, in a there are two kinds of LLCs. There are is a manager managed. 88 00:13:45,990 --> 00:13:55,710 And this is just background, we need to have the rest of the conversation. And there is member managed and it's probably 89 00:13:55,710 --> 00:14:07,290 self evident. But an LLC that's managed or managed is managed by a manager manage an LLC that's member managed is managed by its 90 00:14:07,290 --> 00:14:16,110 members. What that means is all the regular decision making that takes place is either going to be made by the manager or the 91 00:14:16,110 --> 00:14:29,700 member. Now in the typical structure that we do, typically we are using, there are two different layers of entities. So 92 00:14:29,700 --> 00:14:33,780 we have your cindicator entity. 93 00:14:38,190 --> 00:15:01,530 And I'm going to just draw that and there is your hopes already drawing the picture. And there is your investment entity And 94 00:15:02,040 --> 00:15:05,610 almost always, you will use these kinds of structures. 95 00:15:07,830 --> 00:15:19,080 So our syndicator entity is typically either an LLC or a corporation, I generally don't see anything other than those, I 96 00:15:19,080 --> 00:15:31,170 guess it could be an LLP in certain situations. And, but normally a syndicator themselves is formed as either an LLC or a 97 00:15:31,170 --> 00:15:40,290 corporation, because they want to get the advantage of asset protection, then your investment, and today, that is 98 00:15:40,320 --> 00:15:51,780 almost always an LLC, it's rare that it's anything other than analysis. So let's go into the different kinds of structures. 99 00:15:52,350 --> 00:15:54,840 So it all starts with you. 100 00:16:01,830 --> 00:16:03,660 You are a syndicator. 101 00:16:08,730 --> 00:16:17,880 So most are structured like this, as the syndicator, you have formed a syndication entity 102 00:16:23,520 --> 00:16:25,860 in order to do your deals 103 00:16:34,140 --> 00:16:47,160 and when you find that entity, you when you find that you're the investment that you're going to do, you put together another 104 00:16:47,160 --> 00:16:52,470 entity that is called your investment entity 105 00:17:01,590 --> 00:17:11,760 which your investors all invest into. 106 00:17:14,880 --> 00:17:28,500 Now, whether this is manager managed, or member managed is, is really up to you. Typically, it will be a manager manage 107 00:17:29,910 --> 00:17:39,060 entity. So that all the decision making about how the investment is run will primarily be made by you. Now you may very well 108 00:17:39,060 --> 00:17:46,620 decide things like when it's time to sell or things like that should be made by all of the investors. That's perfectly 109 00:17:46,620 --> 00:17:53,220 reasonable. And I do that most of the time, those kinds of decisions. But the decisions about who to choose as a 110 00:17:53,220 --> 00:18:04,680 property manager, or are those kinds of things those typically I just leave to management. And I don't bring in the the the 111 00:18:04,710 --> 00:18:05,580 investors. 112 00:18:12,060 --> 00:18:23,370 So this is the most common structure, this is probably what you're going to be doing 95% of the time, is a manager managed 113 00:18:24,270 --> 00:18:33,600 investment entity with the syndicator entity as the manager. I will give you a little background on why we 114 00:18:33,600 --> 00:18:40,710 don't do it this way. So let's say there is a great property. 115 00:18:54,480 --> 00:19:02,700 And here's you as the syndicator. And so you start syndicating this property, you find some investors to come into 116 00:19:02,700 --> 00:19:13,320 the property, well, midway through one of these investors gets mad. And he decides that the way this entity is being run 117 00:19:13,530 --> 00:19:26,250 is just terrible. And so he sues the entity and he sues you because you are the manager. So you can see that there is no 118 00:19:26,250 --> 00:19:35,490 asset protection whatsoever on this. And now you need to respond to this lawsuit. The other thing that can happen is 119 00:19:36,210 --> 00:19:45,030 if there is somebody external, who slips and falls on the property, they're going to sue the entity and they're going to 120 00:19:45,030 --> 00:19:57,840 sue the manager of that entity which could be you. So we are trying to avoid that that isn't a good solution for you. We want 121 00:19:57,840 --> 00:20:06,900 to give you as much protection And as possible now, the and that's why we set it up with the syndication entity. So let's go 122 00:20:06,900 --> 00:20:21,000 back up here. Alright, so this here, if there's a problem on the entity, well, they can sue the entity, and they can sue the 123 00:20:21,000 --> 00:20:31,440 manager, but they can't sue the manager of the manager. So that's why you have that cindicator entity there to act 124 00:20:31,440 --> 00:20:41,460 as a buffer between you and your investors. So you may be asking, Well, that's all well and good. But what about those situations 125 00:20:41,460 --> 00:20:50,130 where there's multiple properties that I'm going to be syndicating? It's very simple. It looks basically like this. 126 00:20:57,000 --> 00:21:16,710 So here's your cindicator entity. Now, in this case, so say we've got two buildings, I will still third building. 127 00:21:22,440 --> 00:21:27,510 So you've got these three buildings that you want to invest in? How do you do that, so that you can make it 128 00:21:27,510 --> 00:21:32,070 something that is easy for your investors. 129 00:21:37,470 --> 00:21:44,910 To come into? Well, all we do is we put together a single investment entity 130 00:21:52,230 --> 00:22:02,670 that you are the manager of em, because it's just it's not a property of an entity. It's just a, it's just the entity itself. 131 00:22:03,060 --> 00:22:16,560 And then each of these is its own property entity. And then your investors, they invest in this investment entity. And 132 00:22:16,560 --> 00:22:26,850 that's the typical structure for what we do in in a pool situation. To make sense. So here's how to start thinking 133 00:22:26,850 --> 00:22:36,930 about what makes the most sense. First off, there's no reason to not go ahead and get started in file, that syndicator entity. As 134 00:22:36,930 --> 00:22:44,220 soon as you're think I'm definitely going to be putting a deal together. There are a lot of times costs that are 135 00:22:44,220 --> 00:22:52,710 associated with not only putting it together, but many jurisdictions have taxes that apply in the first year for 136 00:22:52,710 --> 00:22:59,280 entity for the minimum maintenance. So do know that if you decide Yeah, I'm gonna go for it, I'm going to put this 137 00:22:59,280 --> 00:23:06,420 together, it is possible that you're going to be paying some costs. But it also is the way I like to see it, it's raising 138 00:23:06,420 --> 00:23:13,110 your hand to the universe saying, I'm gonna do this, I'm gonna make money, I'm gonna put together some syndication. So to 139 00:23:13,110 --> 00:23:21,630 me, it's like taking massive action towards your future. So I think it's a good thing in order to form it right away, but you 140 00:23:21,630 --> 00:23:30,600 need to decide for yourself whether that makes sense. So, I would first form this indicator entity and as you start looking 141 00:23:30,600 --> 00:23:38,430 for properties, then you can start looking then when you identify something, you can put together the right investment 142 00:23:38,430 --> 00:23:51,480 entity or property entity as it see as would make the most sense for you. So make that decision, decide what entity type makes 143 00:23:51,480 --> 00:23:59,460 the most sense for you, and then start thinking about okay, well that's how I would structure this deal, probably in terms of 144 00:23:59,640 --> 00:24:10,740 making it a man manager managed entity managing one property happens most of the time for for new syndicators. In the next 145 00:24:10,740 --> 00:24:16,950 module, we are going to talk about how to find investors for your syndication deal.