Ep #331 – Todd Robinson – Multifamily Real Estate Attorney

Here is some of what you will learn:

Developing your team
The importance of Face Time
Understanding the partnership dynamic and how to succeed with partners
The importance of attorney review
Understanding survival of clauses in representations and warranties
Understanding the Rent Readiness provision
Waterfall returns
Private Placement Memorandum

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Full Transcript Below:

Todd Robinson – Multifamily Real Estate Attorney (Ep331)

Intro: Hi! I’m Rod Khleif. Each and every week I record an interview with a thought leader that I know you’re gonna get a ton of value from. Now here on YouTube are the video versions of my podcast, Lifetime Cash Flow through Real Estate Investing. Now to make sure you get the latest information please subscribe and hit the notification bell. Let’s get started.

Rod:   Welcome to another edition of “How to Build Lifetime Cash Flow through Real Estate Investing”. I’m Rod Khleif and I’m thrilled you’re here. You’re gonna get tremendous value from the attorney that we’re interviewing today. His name’s Todd Robinson and Todd specializes in multifamily real estate finance investing and everything soup-to-nuts in that arena and actually works both sides of the fence, does a lot of work with lenders and banks and private equity firms but also works with investors like those of you that are listening and puts deals together, does syndications and finance and even helps in litigation and really has a you know soup-to-nuts all the way from the purchase and sale agreement all the way through to closing. Todd welcome to the show my friend

Todd: Thanks Rod. Thanks very much for having me and I appreciate the opportunity.

Rod: Absolutely so let’s talk about you know let’s talk about actually you know let’s talk about some of the things that you do in this arena and then I want to dig in to some of the issues that you’ve seen maybe some of the mistakes you’ve seen people make and why it’s important to have someone like you on an investor’s team because most of my listeners are investors. So take it away my friend

Todd: Yeah absolutely Rod and yeah as you mentioned I primarily represent real estate investors in the multifamily space. I do have some other real estate investing clients that are buying and selling office buildings, retail strip centers and the like and really my services are kind of all encompassing when it comes to working with these investors and I consider myself a partner on their team not just a service provider you know stuck in the well dry you know I would consider myself an integral part of any sort of real estate investing team that’s going to buy and sell assets and so really when it when a client comes to me with a deal you know as soon as they execute the LOI they’re flipping it over to me and I’m working with them on strategies, on the equity raise, on structuring, how are we going to syndicate this deal, and if we need to syndicate the deal what kind of preferred return are we going to offer what does the market saying we need to offer and then we get into negotiating the purchase and sale agreement and that’s I think we can get into the weeds on that because there’s lots of strategies and pitfalls on both the sales side and the buy side that I think are overlooked sometimes in the purchase and sale agreement that end up coming down down to the wire become an issue at closing sometimes

Rod: I love to dig into that, just to circle back to something you just said I didn’t realize that you actually got involved you know in the discussions relating to the syndication structure you know returns you know how to actually set up you know the if there’s going to be a preferred to return the split. So you get into all of that? So you get into the weeds?

Todd: Correct. Yes I’m structuring the companies. I’m structuring the operating agreements for these syndicated deals. If it’s a joint venture partnership with an equity group, we had a big deal in Houston a 30 million dollar deal recently where the borrower was partnering with an equity group, an equity fund who was putting in 70 percent of the equity. Well we had end up syndicating that at the hole code level versus the prop Co level and it was a little bit more complex but yeah I’m discussing that with the clients from day one

Rod: Okay no I love it. So let’s talk about some of the things that you are engaged to handle and you’ve already spoken about some of them but maybe a little more on a micro-level it for someone that’s never done a larger deal and a lot of people listening that I’ve done you know eight-plexes, twenty-plex, 20-unit, 30-unit but have never syndicated never done you know pulled in equity from other investors. So it sounds to me like they would engage you once they’re at the LOI stage. Should they, I mean I would guess they should have already talked to you and started a relationship and I mean can you speak to that a little bit?

Todd: Correct yeah absolutely there’s a group that just came down from New York this week that I had lunch with. That’s a new client of mine and you know Atlanta is a very hot market Georgia is a very hot market as you’re well aware and so these guys came down and they’re really just starting their partnership and I am actually gonna create just their general holding company partnership agreement but they came down just to meet with brokers and find properties they didn’t know a lot of people down here. So first thing we did is we had lunch and I sent out probably three or four emails to the brokers that I know in the Atlanta area and what they wound up touring a property based on one of my recommendations. So I think yeah initially if investors are interested it would be prudent to get legal counsel involved really before you even identify the property so that we can start having those conversations. One of the things I asked these guys you know they are green, brand new into the industry. I said, “Well first, do you have lending contacts? do you have lending lender connections? because if you don’t you can find all the properties that you you know that you think are great deals but if you have a solid lending partner to close those deals, it’s going to be difficult. And also as you know the off-market deals are the ones that are the most beneficial most of the time in order to develop that off market network you need to be working with the brokers, you need to be paying a lot of attention to the brokers because these brokers you know they have listed deals but they often have five or six back pocket deals that are not listed that they’re really gonna send out to the to the people they have close relationships with

Rod: Yeah no question so you know I was going to dig in to segway into building a team and you know brokers and it’s wonderful that you know you’re so you know you’re certainly very well-connected in Atlanta probably on the lender front as well as well as the broker front and guys, this is how you build your team. It’s always done through referrals. It’s not like get the yellow pages or Google or whatever to find the people on your team. You do it through referrals and so you know Todd just described why it’s so critical to start these relationships upfront and referrals are the way to go. And you want to start these relationships. You start them on and let’s say you’re investing let’s use Atlanta because that’s where Todd’s from. Let’s say you’re in New York like these clients that he just met with you know you start that relationship over the phone and you start the relationships even with brokers over the phone, you ask for referrals even property management companies, lenders all these different team members that you’re gonna need in whatever market you’re gonna focus on but then you’ve got to go break bread with them and I’m so glad you brought up the fact that they came down and had lunch with you guys. That is so critical. You can’t just do these relationships over the phone and wonder why you’re not getting deals, why you’re not getting intention. You know people need to see that you’re real and that you know you know see your integrity, see your passion. Do you agree Todd?

Todd: Oh absolutely I am a big proponent of face to face meetings even with my clients you know. I have clients all over the country and I will visit them on a routine basis. I have a lot of clients in New York. I’m in New York probably every other month just making the rounds, meeting with people, having lunch, face time you know I may go into office business, letting them know I’m there for them and letting them know that you know it’s just a way to deepen that connection and deepen that relationship

Rod: Right and of course this is you know you’ve got your finger on the pulse of what’s going on in your marketplace. So you’re gonna know the people that are real you know they’re you know I hear horror stories from students sometimes and certainly associates that you know they for example we’re pushing forward with a private equity firm and you know thought they had their money locked up and then they basically you know they’re unscrupulous firms out there and you know things happen along those lines that that are not positive. And so it’s so critical that you get referrals from you know from people like yourself and build those relationships. So let’s talk about you know so you start the relationship, you have the relationship going, you get an LOI going on a property, then someone would engage you at that point. No oh actually this circle back you mentioned that you’re even helping these clients with their partnership agreement which guys is critical you know I have a long document I give my coaching students that speaks to all of the hard questions you have to ask and answer upfront you know would you agree Todd I mean you’ve got to ask those hard questions

Todd: Absolutely you know how are the distributions gonna be split? How are the expenses gonna be shared? Who’s gonna manage the LLC? Now not just the property but who’s gonna be a manager of the LLC? are they gonna get paid for managing the LLC? is it going to be a buyout clause with the other partners? what if one partner wants to transfer his interest into his wife is the other partner is going to agree to that? how are you going to address that down the road? So the purpose of specially you know generally these partnerships for real estate investors are two, three, four people. Well you’re gonna have to, and the purpose of the partnership agreement is to try to identify all of those potential issues that could happen 5, 10, 15 years from now

Rod: Yeah yeah

Todd: Yeah I counsel clients quite a bit on those issues up front

Rod: Right you have to. And I’ve been in partnerships that have been huge successes and I’ve been in some that have failed and the ones that have failed, it failed for two reasons. One, we didn’t ask the hard questions upfront or two, the communication broke down. And guys you know asked me how I know? That’s my stock line at my live events so you know I created a list of questions some of which are you know all of which the ones you just mentioned that need to be asked upfront. The first question actually is do you actually need a partner that’s the first question I know sometimes you don’t, but so so important to ask those questions up front so you start there. And then let’s say you’ve got an accepted LOI and they bring you in, what are the sorts of things that you would help them with? Let’s say they’re gonna syndicate so let’s kind of micro down the different documents that you would help pair the different things that you know people should be thinking about and just kind of have some fun going back and forth

Todd: Yeah definitely well you know there’s a deal that we’re working on in Atlanta at the moment that were in that stage where the LOI was just executed the buyer with it they called for highest and best offers. My client got the winning bid and we’re off to the races and so typically the LOI has a turnaround time to get the purchase and sale agreement prepared that would be my next question and who’s gonna prepare the PSA? is it going to be the seller? is it gonna be the buyer? It really doesn’t matter and this one seller’s doing it but as buyers counsel I’m gonna you know redline the heck out of that document cuz I’m sure it’s going to be one-sided it’s gonna be really in the seller’s favor. You can’t just take these documents at face values because there’s gonna be a lot of things in there a lot of traps in there that at the end of the day if it comes down to you know what does the document say? oh it’s going to be in the sellers favor

Rod: Let me stop you. Guys don’t ever ever ever ever ever do a deal without having an attorney review the contract. I don’t even, I don’t care if it’s a real estate commission approved contract make sure you bring in an attorney to review it. I’ve written contracts. I’ve been doing this for 40 years and I wouldn’t even consider doing a deal I’ve done thousands of them I wouldn’t consider doing one without an attorney to review the contract because you’re gonna miss things, every time. Would you agree Todd?

Todd: Absolutely and you know the real estate commission approved contracts are often the worst contracts to put a dealer under contract

Rod: There you go. So I get that question all the time and you know so you know I’ve got a broker that’s preparing the contract and he’s using a real estate approved form. Do I need to have an attorney look at it? Yes the answer is always yes

Todd: Right. I mean brokers do not view the contracts under the same lens you know they’re looking maybe holistically with a 30,000 foot view, what are the deal terms, what’s the purchase price, when’s the closing date, and that’s it. There’s so much meat in between getting under contract and getting it closed that they’re not going to pay much attention to that that attorneys are generally trained to look for

Rod: Can you speak to you know since we’re on the topic and we’re gonna move into the other documents as well but you speak to some of the traps that you see. Like let’s say you’re a buyer and a seller attorney prepares the contract you know. I didn’t prepare you for any of this so that’s probably not fair but if can you, any pop to mind, anything pop to mind it’s like sneakily put in there maybe

Todd: Yep so a couple things that pop to mind one would be survival of the representations and warranties. So the seller, the seller is going to make certain reps and warranties about the property, about the condition of the property that you want those representations to survive, meaning extend beyond the closing date for as long as possible. If I’m preparing a contract, I start out with a year now that’s really really too long most seller as a seller has a sophisticated counsel on the other side they’re gonna knock that down to 90 days and we end up between somewhere 90 days and six months. But you want those representations to survive so that after closing you get in there and you say oh my gosh these guys completely misrepresented this

Rod: Yeah right complete BS and that happens

Todd: The rent roll is false, there’s deferred maintenance that wasn’t disclosed, all of these issues. Well now you can go back to the contract and say, hey seller you represented that that the roof was 10 years old we’ll come to find out I found a receipt it’s 30 years old. Now I got to pay a hundred grand to get it fixed. If you’re within that representation and warranty to survival period you can absolutely go back and make a claim against the seller. Again we’re getting into litigation issues but that’s very that’s a very important provision to have

Rod: And you know sometimes you have to litigate unfortunately that is this business and we are a very litigious society which is why you’re so wealthy Todd

Todd: The other one that’s I think very important on the buyer side is the rent readiness provision

Rod: Rent readiness okay speak to that

Todd: What that means is the vacant units in a deal. You will have a representation that the seller will have those units in rent ready condition and rent ready condition is a can be a defined term under the document and it usually means you know the carpets are clean, the counters are wiped down, it’s in move-in ready condition and in my contracts, I will have a provision that that makes the seller affirm that they will be in rental ready condition and if they’re not in rent ready condition at closing, then the buyer will get either a credit on the closing statement of a certain amount or the seller will pay the buyer after closing a certain amount. Usually it’s between thirty five hundred and fifteen hundred per unit but I had to deal a couple months ago where you know and the way to test that is the day before closing. Buyers should do a walk-through of every single vacant unit. And then it’s often you know down to the wire negotiation but if the buyer comes back and says, hey these ten units are not rent ready. The seller agrees thirty five point three thousand per unit that’s another fifteen thousand off your purchase price potentially

Rod: Yeah and one thing he said guys that’s really important is because of the subjective nature of rent ready you know it’s probably not a bad idea to define exactly what that means otherwise you get into a you know a definitional argument. Yeah very good very good okay. So any other any other traps you have in mind?

Todd: Sure closing costs, who’s paying for closing costs? Now typically those you know in the person sale agreement that should be laid out specifically but I will often see sellers, attorneys will put in their items on the closing statement or in the closing cost that would typically be paid for by the seller that’s according to local custom. You’ll see that in documents well what’s according to local custom? Like for instance in Florida the seller usually pays for the title insurance premium while in Georgia where I’m located, the buyer are always faced with the title insurance

Rod: Oh interesting okay

Todd: So you got to make sure that the contract conforms to those local customs and rules and if you know for instance, if there’s escrow and settlement fees charged by the title company that could be as generally shared 50/50 between the seller in the buyer. But if some contracts could say that the buyer pays 100% of the escrow in the settlement fees. So you really don’t pay close attention to this closing costs

Rod: Okay okay yeah no that’s a real good and obviously customs are customs. They’re not laws but you know it’s, believe it or not most people stick with those you know unstated rules you know in most jurisdictions

Todd: Another one I would just mention is the seller’s obligation to maintain the state of the property during the pendency of the contract. We had a deal recently where you know and even though the sellers typically under most contracts so is required to do that but you want to be very clear that if the seller is going to be renting new units during the pendency of the contract that those rental rates are consistent with the establishment rates currently in place. Seller’s not giving away a free rent in order to get the occupancy up cuz these you know they can manipulate the numbers, they can manipulate the vacancy they can fit you know that you can have defaulting tenants who are not paying rent that should be evicted but since we got to provide a rent roll at closing, we’re not gonna evict them so we can show the occupancies at 95% when really it should be at 80% because these guys should be out of property

Rod: Right and you know and to get Fannie or Freddie financing it’s the ninety for ninety you know you need to be above ninety percent occupancy for the last 90 days and you’re right. I mean they will play with it to make sure that nothing happens there that kills the deal though very very important good good stuff so okay so that’s the contract. What are the documentation would an attorney like yourself help with in a transaction so let’s drill down

Todd: So if the purchaser, the real estate investor is going to syndicate the deal, the next step would be figuring out that structure and figuring out whether where the equity is going to come from. That always my first question okay guys we got it we got a five million dollar deal we need three million of equity or four million of equity where is it coming from? If it’s coming from your pockets, then we don’t need to syndicate the deal we’ll just do a joint venture single purpose entity for the property and we’ll be good

Rod: Let me stop you one second. So guys if like right now we’re doing a joint venture deal in my backyard here and because all of the partners or all of the equity players are active in the deal, it can be a joint venture. Now if you take money from someone and you just give them a return, you have to syndicate. Okay so I just want to flag that okay please continue

Todd: That’s right. So under that instance you were then entering into securities private offering regulations and will have to comply with regulation D of the Securities Act and so at that instance we will create typically we create the property company called the Prop Co. and we create the manager entity which is going to be the company that will manage the property and the Prop Co. will syndicate limited partnership interests to the investors in exchange for a preferred return in the Prop Co. Typically the rates of return can be anywhere between eight and ten percent. Now if this is a more stabilized asset and it’s not really a value add play, when I was talking to a client recently about you know what maybe we offer six percent because this isn’t going to be, there’s not going to be a lot of upside on the sale because we’re not doing a lot of value add right now and I think you know Rod I’m sure as well as anyone that where we are in the cycle a lot of the value-add deals are gone you know

Rod: We’ve actually got it’s for us it’s been feast or famine we’ve got almost a thousand doors we’re raising money for right now and they’re all really solid deals and I can say that because they’re we only dealing with 506 C accredited investors but the you know but they are tough we’ve kissed a ton of frogs to find these deals and I think most of them were brought to us by our students but there all screaming good deals but let me circle back to something you said. On the Prop Co. is that it’s normally an LLC yes?

Todd: Yes it’s normally an LLC that’s generally the preferred corporate structure. It can be a partnership it can be a limited partnership agreement but generally it’s an LLC. And so you’re syndicating what the investors will be purchasing are called membership interests in LLC and if you’re syndicating it you usually have two to two different classes of shares Class A is the preferred share that you’re gonna sell to your investors and we can figure out what that value is going to be, what that preferred return is going to be. The Class B shares are really kind of just the profit interest shares that the managers would have or the GP’s. I interchanged LP even though that’s more of a partnership but it’s just easier to talk about it that way but the sponsors of the deal are going to be holding the Class B shares in the Prop Co

Rod: Right right and that’s just semantics it could be, you could reverse the A and B but I think the you know it’s been A for a long time because it makes the equity investors feel better that they’re getting A shares instead of B shares but yeah I remember when it was all limited partnerships and why just just to humor me for a second I mean before LLC were even thought up I remember it was all limited partnership. Why would someone do a limited partnership now versus an LLC? there aren’t any advantages, are there?

Todd: Not that I’m aware of. The general laws of each state are you know LLC limited liability company acts are generally the same as partnerships a lot of people switched away from limited partnerships to LLC’s is because if it’s a limited partnership usually the general partner of the limited partnership will have full liability. And so to address that issue the powers the limited liability companies

Rod: I used to have a separate entity, be the general partner of a limited partnership and was just a pain in the butt. I still actually have a couple of them left. LLC’s are just so much better all right now we digressed. But so you’re gonna do the Prop Co then you’re gonna do which is where you define, clearly define those returns or splits rather and preferred return and all of that and then you said the management one. So to speak to the management contract

Todd: Yeah so the management, that’s really you know if there’s, that’s the sponsors entity. So that’s the entity that is going to get the profit split from the operations of the property. Now and I was if you want to speak to waterfalls if we can get pretty into the leads about that some people some real estate investors and sponsors will do a waterfall, when we say waterfall what we mean is you know initially the split is seventy percent of the profits to the investors, thirty percent to the sponsors. Until the rate of return reaches a certain benchmark which is called an internal rate of return that internal rate of return say the preferred interest is eight percent well when the internal rate of return which is ten percent, that profit split from seventy thirty goes to sixty forty

Rod: Yeah we do deals like that you know and that’s just incentivizing the GP team you know the general partners as it were KP’s key principals to kick butt and do well and that will confuse some equity investors sometimes. Sometimes it is a little confusing but you know we do that if we had you know 20% IRR. We go to 50/50 and then and frankly it’s fair

Todd: It’s fair. It incentivizes the sponsor group to exactly take that property come, push rents, add you know get in good tenants

Rod: Yeah sure and it’s a win-win. It’s a win all the way around. So back to the management company, speak to that a little bit

Todd: I call it the management company because it’s really just the manager of the Prop Co. So it’s really just a separate LLC but sometimes the way I structure it is I’ll call it you know if it’s 123Main Street LLC that’s the Prop Co. then it’s 123Main Street Manager LLC and that’s just the entity that is owned by the sponsors

Rod: By the GPs, the KPs, the sponsors, so guys just so you get that so the Prop Co is the one that defines you know the equity, your equity investors and you know that the GPs as it were and then the management company is you and your fellow sponsors, your other GPs that’s how you’re gonna hold your interest in the Prop Co okay. So let’s say it’s a 70/30 split, you are thirty percent as an operator sponsor will be in that management company okay

Todd: That’s right and then even at that point, the 30 percent example is shared pro rata between the members of the

Rod: Right. If there’s three let’s keep it simple. Let’s say you’ve got three sponsors, three KPs, three GPs, the same thing and let’s say they’re split equally then effectively and in that deal you’d have 10% each effectively okay alright. So what other documents would you do in that scenario that will help people understand kind of the backend structure to this?

Tod: Right right well you know if you’re doing a 506 B or 506 C offering, the difference there is whether you’re going to sell the membership interests only to accredited investors, are you going to have some unaccredited investors in 506 B is up to 35 unaccredited investors but the main the main disclosure document that the sponsor will need is called a private placement memorandum. That is a, my standard PBM form is pretty long it’s got a lot of disclosures in it because you always want to over disclose rather than under disclose right. This is a document that the Securities and Exchange Commission likes to see because you want to disclose all of the risks of an equity investment to a an investor

Rod: Sure. The world could end. I mean you’d make it to that level and it needs to be a scary document that protects you the you know the more onerous it is, the less chance somebody can say you didn’t warn them right I think it knows go south you know and there are there are operators out there right now doing deals that frankly make the hair on the back of my neck stand up you know we’re at, right now we’re doing 65 percent loan to value and then because we’re very conservative but you know there’s some scary deals being done right now. And so in that vein make sure you’re well protected because you know when there’s a hiccup, that’s when all this stuff comes to light. When an investor has an issue, that’s when all this stuff comes to light and they pull out these documents and make sure you know see if they’ve got a you know something to hang their hat on to you know go after the sponsors

Todd: Exactly and you know kind of simultaneously while I’m working on the PPM and the syndication documents the sponsor team is doing the underwriting and running the numbers and making sure the deal makes sense because those numbers need to be in the PPM because we’re disclosing the entire deal to the investors. So we have to make sure the underwriting is pretty solid, circulate those documents

Rod: Nice okay so you do the PPM then of course you do what’s called the subscription documents which is what they sign to say they’re gonna participate in the in the deal correct anything else that we’re forgetting here that you might be involved?

Todd: Those are the main highlights you know the operating agreement, the PPM and the subscription documents, is what you would need there. Sometimes there’s investor questionnaires that you’ll have you know yeah there’s a duty on the sponsors to get an understanding if someone says they’re accredited investors or there’s a duty on the sponsors to verify that information. So we can do that through an investor questionnaire and as long as we get their answers you know there’s really no duty beyond getting the VP questionnaire answered you know it sound like it’s not like the sponsor has to go and check bank accounts and things like that to make sure they’re actually accredited

Rod: Okay and so let me ask you this. What sorts of mistakes have you seen made and again I know you weren’t ready for this question but what sorts of mistakes or issues have you seen either from other attorneys or someone tried to do it themselves or even represented people that that just things that have popped up that might help my listeners you know prevent a seminar

Todd: Yeah I know I have a pretty interesting kind of war story I could say

Rod: Okay great perfect

Todd: To that effect and it was a deal that we had in Houston.

Rod: So let me ask you this, I’m sorry let me ask you this so you practice I know you’re based in Georgia but do you do real estate transactional work all over the country? what or do you specialize in particular states? Speak to that for a minute

Todd: Yeah I do real estate transactions all over the country. I mean my bar license is in Georgia but I can certainly I have clients all over the country and I represent them and deals all over the country and you know if there’s a deal out of my jurisdiction and what we’ll typically do is get what’s called a local counsel and I associate with that helps me understand if there’s any particular local rules that I need to be aware of. I’ll often have them review the security D to make sure it complies with local customs and things like that

Rod: State specific stuff yep okay no that’s good I’m really glad that I asked. So yeah okay so let’s hear that Houston war story I’ve got great friends great friends that are syndicators in Houston. In fact I was just there oh I don’t know a couple months ago speaking to a few hundred people. I did it to a group yeah

Todd: Yeah this was a pretty large, a heavy a value-add deal it was a twenty five million dollar purchase and I think there was I’m in a ballpark here but there was it was a five hundred unit deal and like 250 units were down

Rod: Wow

Todd: Yeah yeah huge yeah the loan was thirty five million it was just a big deal and the sponsor group who got it under contract partnered with an equity fund the private equity fund out of New York to put in all the equity mostly 70% of the equity

Rod: Who are you representing?

Todd: I was representing the borrowers.

Rod: okay

Todd: And I put the syndication deal together. I didn’t do the purchase and sale agreement actually at the local council do that but I was brought in really to help negotiate the loan docs and to help with the syndication piece of it but and I’m probably some of these sponsors are gonna listen to this podcast. So it’ll be interesting to get their feedback but they were you know my opinion they were green a little green and it was a large deal. It was a big deal and I think they could have handled it. I really honestly do but I started getting some concerns from the equity partner about the way the sponsorship group was structured and I say that to mean there was five or six of them that were in the deal and the equity fund just wasn’t getting the warm and fuzzies with these guys and so you know he didn’t get a clear picture of who is gonna be responsible for the construction

Rod: That’s an important question when I’ve got 200 vacant units what the hell they’re doing? I mean that’s it. That’s a logistical project there

Todd: Right and these guys were all in different states and so there wasn’t really gonna be like the boots on the ground guy that’s gonna be in Houston that could handle it. So the equity fund ended up having a real problem with that and you know. So who’s responsible for the construction? who’s gonna process the draws? who’s gonna work on the tax credit issue?

Rod: And guys just so you know that whole draw structure is a really big deal because you need to know how your lender treats those because those are big checks and if you’re waiting 30 days for one of those checks and you don’t have a big operating reserve, that’s a recipe for a nightmare

Todd: Absolutely

Rod: You agree Todd?

Todd: Yeah very good point very good point yeah because as the minute that construction is delayed you’re just, you’re getting into a domino situation and they’re really hard to come back from that

Rod: Right

Todd: So the short of that story is that the equity group pulled out of the deal weeks before closing if not a week before closing just said I’m not comfortable with the sponsor group. Now you know I think the deal could have gotten done I think it would have been fine but you know it’s his money it’s his seven million dollars. So he pulled out of it

Rod: Wow

Todd: And I will say though he even though he pulled out of it he made everyone whole which was I think a really noble thing to do and he ended up paying the acquisition fee to the sponsor he paid the legal fees. He paid all of the fees so that the sponsor group ended up back at zero they didn’t lose anything but they lost the deal.

Rod: They lost the deal

Todd: And so I guess the message there is if you’re going to get into these larger deals, you got to make sure you have a solid business plan, a solid structure you’re identifying who’s what roles people are gonna have and you can present a really consistent picture to these equity funds and these other groups. Funny enough I had you know so the sponsor group had around three million dollars that they raised on their own in addition to the equity fund that was coming in and simultaneously at the same time, I had a deal in Atlanta that was closing like the next day. So in a matter of a couple of days I contacted the sponsor group out of Houston. I said guys I know you you know this deals gone but my other client over here needs about three million dollars

Rod: Perfect

Todd: And so they ended up funneling the money into that deal and it turns out that deals just a cash cow it’s good project

Rod: All is well it ends well

Todd: Exactly but you know if your listeners are getting into larger deals, they’re starting to find equity partners, they’re gonna that’s one thing they’re gonna look for. What’s the you know guys consistent what’s your track record? who’s gonna do what? and I would have heart back on something you mentioned a little while ago was a lot of these groups or equity funds or private equity funds or joint venture partners you know a lot of them have the word equity or capital in their name but sometimes most of times they don’t have either one. And so I’ve actually litigated quite a few cases where these real estate investors are signing term sheets. They’re putting down 50 grand to the JV, to the equity fund and then a couple days before closing the equity fund disappears and they don’t return their 50 grand

Rod: No kidding yeah see I’m really glad you brought that up because I mean I’ve got students that have been right before closing and have equity funds kill the deal. Then they end up buying the deal because they bailed and so, there’s some unscrupulous players out there guys and this is why you must get referrals. In fact I’m doing a deal right now that looks like we’re gonna shift over to bridge debt and I’m asking for referrals okay because you know I’m a little uncomfortable with bridge debt in this current economic climate because you know who knows what’s gonna happen with interest rates. So you know we’re stress testing it to make sure it’s gonna be okay but I want referrals myself. So very very important and listen, you’ve been a wealth of knowledge. I know you referred to me by one of my students that’s done business with you and I’m really glad that I got to meet you and have you on the show because really has been very very powerful interview you know any parting thoughts for investors getting into deals. Anything that I haven’t brought up may that we haven’t talked about red flags things to be aware of anything that I missed?

Todd; Yeah I really appreciate the opportunity to come on and you know I think the biggest I guess moral of the story or parting thoughts would be that you know buy it right. You know don’t don’t overpay for the product. Make sure as you mentioned earlier, building that team, having that support staff is critical and if you do it right, investing in multifamily can be you know a lifetime of wealth and happiness. If you do it wrong, it could be a real problem

Rod: It can be a seminar yeah no question. Well listen it’s Robinson Law in Atlanta. I’ll put the contact information in the show notes very much a pleasure to meet you and spend some time with you and we are definitely going to stay in touch thanks Todd

Todd: I appreciate it. Thanks so much

Rod: Alright buddy see you

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