Deal Structuring Trends in Commercial Real Estate with Jake Marmulstein

In this episode, Kim Lisa Taylor is joined by Jake Marmulstein, Founder, President and CEO of Groundbreaker Technologies, creator of an all-in-one investment management software for small to medium commercial real estate investment firms that raise outside capital. With Groundbreaker’s clients pursuing a variety of strategies, Marmulstein and his team have a good overview of what kind of deals currently exist, the audience size of each, and the current talk “on the street.” He and Kim discuss using an investment management platform as well as the latest trends in deal structuring for commercial properties, from preferred returns to profit splits, manager fees and more.

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Edited transcript from the teleseminar ‘Deal Structuring Trends in Commercial Real Estate’ with Jake Marmulstein of Groundbreaker

Kim Lisa Taylor:

Hello everybody. Thank you for attending Syndication Attorneys, PLLC’s free monthly teleseminar where we talk about topics of interest to real estate syndicators, with opportunity for live questions and answers at the end of the call. I'm attorney Kim Lisa Taylor. Also joining me on the call is Charlene Standridge, our law clerk and business development director. And we do have a special guest that I'm going to introduce in just a moment. 

But before we get started, please note that all of our calls will be recorded and may be used for future promotion, posted on our website or social media, or broadcast in a podcast available to the public. If you don't wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call. And you can do that at our website, SyndicationAttorneys.com. 

Information discussed during this free teleconference is of a general educational nature and should not be construed as legal advice. This is an audio-only conference. We do have pictures of myself and our esteemed guests. We were trying video a little bit, but it tends to get a little slow and choppy sometimes, so we thought you could just look at our beautiful smiling faces for today's call. 

Today’s topic is Deal Structuring Trends, with Jake Marmulstein. Jake is the CEO of Groundbreaker, which is an investor management platform that's been around for quite some time. I'm going to let Jake talk to you a little bit about himself and tell us what Groundbreaker does. So Jake, welcome to the show and take it away. 

Jake Marmulstein:

Awesome. Thank you, Kim. I really appreciate it. So, thank you everyone for joining me. We started Groundbreaker as a concept when I was working at a small real estate investment trust, and I just noticed that the process for getting deals funded and keeping records updated and servicing investors was a disaster, between the way we stored data and had to maintain it, not to mention getting investors what they wanted was really inefficient and also fraught with some risks. 

So, that's really what led to Groundbreaker, and it's just evolved into an all-in-one investment management system at this point, that kind of helps streamline the whole entire workflow around capital raising, and managing investors, and providing reporting in one place, where teams can collaborate and get things done faster, in a more secure way, and give investors a convenient way to self-service.

Kim Lisa Taylor:

Yeah, that's a fantastic service. These investor management platforms, I think, are one of the best innovations in the syndication world for people that have multiple deals, because it just gives you a place where you can store all of the information about each of your deals and each of the investors in your deals, and it's a place where your investors can log in and see what's going on with their investment. 

It takes you up a notch in professionalism when you have that kind of a platform for your investors to go to. They know you're a legitimate business. You're not just doing this on an Excel spreadsheet. And I think it gives them a lot of comfort, to know that you're doing things the right way. Wouldn't you say that's true, Jake?

Jake Marmulstein:

Yeah. I mean, I noticed that in the world of investments, that there's a lot of ways to be able to access your investment information, through online brokerages and even robo-advisors and different systems, but real estate actually doesn't have that kind of tool. And it's because I think it's also very fragmented, and there's really no central place for investors to view their investments, unless they're working with a large institutional investment firm. 

But for kind of the small syndicators out there, medium-sized syndicators, it's hard to maintain all that. And I think that the tool that we have makes people have those abilities that institutional firms have, and give their investors a very professional way to access information. 

Kim Lisa Taylor:

It's really kind of a way to almost automate fund management, as well as just management of your individual deals, wouldn't you say? 

Jake Marmulstein:

Yeah, there's components in the back office that just, I mean, it takes people days, maybe longer, to get things done that you can do in an hour in Groundbreaker. I think the whole world around billable hours, in that regard, is seeing a shift, and technology is helping give people the ability to automate otherwise-manual tasks.

Kim Lisa Taylor:

Yeah, which is really the way of the world right now, is that we're all just trying to keep up with the world of automation and all the different things that can be automated in our lives. All right. Well, tell us just... I'm not trying to make this a commercial about investment management platforms, but I do think that a lot of our audience would like to know how they work. And I promise you guys, we will get to deal structuring trends. 

And the reason I wanted to talk to Jake about that is because he does see a lot of different deal flow and perhaps some different things than what we see as attorneys, so I just wanted to get that from his perspective. So we will get to the deal structuring trends, but before we go there, just tell us about what would the process look like if somebody wanted to engage an investment management platform? What do they have to go through, in order to get their information into your system? And how easy is that to do?

Jake Marmulstein:

Yeah, so the process for us is pretty simple. We just take whatever existing data that an investment firm has, such as the subscription agreements, K-1s, they're offering them random. And if they have any K-1s, if they have any distribution notices or reports of any kind, we can take all that data in, as in the form of PDFs or Word documents or Excel, and then we import that data for the company, into the software. 

But if there's really nothing to go on, and you're just kind of looking at this as your first deal that you want to have other investors take a part in, then we spin up a portal in a matter of two weeks. We hook it up to your website, and there's very little amount of technological knowledge anybody needs to get going. And we handle the rest. 

Kim Lisa Taylor:

So that's kind of from the syndicator perspective. So it's great that you guys really help people get these things set up, because I've known of some other platforms where it's like you've got a month worth of data entry, just to get your company set up. So it sounds like you guys really helped streamline that process.

Jake Marmulstein:

Yeah. We just saw that companies don't, they don't have the time to be able to do this themselves, and their data is also somewhat of a mess sometimes. So it's actually surprising, what we get and the things that we help the companies resolve, just by looking at their practices of storing information on their investors. Sometimes we end up finding errors that end up saving them some headaches down the road. 

Kim Lisa Taylor:

That's great. So it's kind of just a third review on what they're doing, and making sure that it comports with what you've seen from other syndicators, too. I think that's a beautiful check and balance that you guys offer. What about from an investor perspective? What's it look like from the investor perspective?

Jake Marmulstein:

So, an investor that's working with a syndicator would get, essentially, they would get invited and onboarded by the sponsor through an email which, again, is something that we provide. And we give them a guide on how to use the portal, how to log in, reset their password, access documents and such, so that they understand how it works. And they'll have a username and password that they can use to get in through a web browser. 

Kim Lisa Taylor:

And what kind of stuff would they see once they're in? 

Jake Marmulstein:

Investors would see how much capital they've committed, how much distributions they've gotten back on the aggregate. They'll see every single deal that they're in, their ownership percentage, the investment date, any distributions and description of those, as well as any documents that are related to those deals, whether it's quarterly reports, annual reports or K-1s.

Kim Lisa Taylor:

So this is really helpful for a syndicator that has, over the course of several years, had multiple offerings, and you've had investors you've invested in more than one deal. So it helps you and them keep track of what's invested in each one, and they can just, at a glance, check the progress on that. I think that's great.

Jake Marmulstein:

Yeah. It's a purpose-built platform for real estate investment. And it's very easy to use, so they can go in and see graphically what their allocation is across different property types, how much capital they've committed. They don't need to pick up the phone and ask the sponsor or send an email to find out information. They can just self-service. So it's convenient for them. And the software works on mobile, so that they could be able to log in from their tablet or phone if they want to, on the go. 

Kim Lisa Taylor:

Yeah. And historically, I think these kinds of things were done by maybe fund managers or companies that had staff dedicated to this, but it's really become more of a do-it-yourself platform, like you said, where its syndicator doesn't need to engage some other service provider that's going to be dedicating staff to their project, which can be really cost-prohibitive. By automating the process, I think you guys have been able to cut some of the costs from what people have traditionally used. Is that your experience?

Jake Marmulstein:

Yeah, absolutely. It helps sponsors to be able to scale and limit the additional overhead expense of having full-time folks that are performing those job functions. And it also helps the investors, because investors might keep their own records and have to update those. If you're giving them that access, you're increasing the convenience and simplicity of their lives. So, that transparency is going to end up helping the sponsor, in the end, to have happier investors. 

Kim Lisa Taylor:

You don't have to disclose your prices on this call, because I think that's probably something you'd want to talk about in a one-on-one conversation with that prospective customer, but I know that there's pricing that runs the gamut from relatively inexpensive to very expensive, even for these automated platforms. And I think you guys are pretty reasonable, when it comes to the price spectrum. At least, that's been my experience with some other platforms that I've seen. 

So, just something to keep in mind. And we'll give out Jake's contact information at the end, if anybody would like to set up a demo of the platform and see how it works. But if you really want to take your business to the next level and you're doing multiple deals, this is the way to go. If you just have one deal with 10 or 15 investors, you probably don't need to do it, but maybe by the time you get to your second or third deal, you should definitely be thinking about this.

It's going to really simplify your life. Not only can the investors get into the platform and look at what's going on with their investment, it's a place for you to post all the documents and keep a record of all the documents that you've provided to investors over the course of their investment with you. And that's something that's extremely important for legal purposes, for SEC compliance, and just good business practice in general. So I think that it's something that everybody should be considering, as you grow your business. And so this is just kind of our introduction to that, so you could learn about it.

But let's turn our discussion now to talking about some deal trends, because you do see a lot of different deals and you do look at their offering documents. How many deals do you think Groundbreaker has processed since you guys have been in business, just a wild guess?

Jake Marmulstein:

Yeah. So, thanks, Kim. In getting people's deals into Groundbreaker, we've seen thousands of deals, and then some. And I talk to sponsors all the time about their deals, before they're a customer, when they're a customer. So yeah, it's quite a few. 

Kim Lisa Taylor:

And then you have some educational material that's posted on your website as well, don't you? 

Jake Marmulstein:

Yeah, we regularly talk about what's going on in the market, basic education on real estate deal structuring, on our blog. So if you guys wanted to check out Groundbreaker.co/blog, we have a lot of articles that cover the gamut from investor relations to fundraising to what's happening in the market.

Kim Lisa Taylor:

And just so everybody understands, this is Groundbreaker dot C-O, not dot com. It's Groundbreaker.co, so make sure that you note that when you're looking them up. But if you've looked at all of our articles and you've learned from our articles, this would be a natural extension, to go over and look at what Groundbreaker has to offer on their website, just to continue to further round out your education on syndication and maybe start taking it to a little higher level. So I would highly recommend that you do that, and that you have a demo.

If you're getting to the point where this makes sense for you, then I would recommend that you at least know about it, so that when you're ready, it's not a mystery. And if your investors ask you about it, then you're going to be knowledgeable. 

So let's talk about some of these deals that you've seen. What kind of splits are you seeing in the market? I mean, to me, from my perspective, I've seen some changes in what our clients are bringing to us, and then the splits they're able to do, just because of the kinds of deals they're seeing right now in the current marketplace. So tell me what you're seeing. Are you seeing some differences in this current market than what you've seen before? 

Jake Marmulstein:

Yeah, absolutely. And it's just a factor of the risk in the market, and the availability of capital, and the supply of good deals. So, typically, we'll see a preferred return and return of capital, and then some kind of a catch-up or split between the LP and GP, up to an IRR threshold, and then maybe a home run split after that. But the preferred return, which maybe used to be around a nine, maybe 10, has compressed to an eight as cap rates have been compressed. So that's definitely a change.

Kim Lisa Taylor:

So, part of the returns you're seeing, you're saying you're still seeing eights. I'm actually starting to see some that are even lower than eights. I'm seeing some sixes and sevens. I actually went to a multifamily conference where one of the really large, large syndicators was there. And I was asking them, "What are you guys doing?" And they said, "We're doing 5 percent or 6 percent for the first couple of years, as a preferred return, and then we step it up to 8 percent, after we've done our improvements or we've gotten a refinance or something that would allow the 8 percent to be achieved on a regular basis." 

And one thing I like about that structure is that you're not always carrying forward. Very typically, first couple of years on your deal, you might not achieve 8 percent. And if you've offered an 8 percent preferred return and it's cumulative, you're going to have to carry forward any deficiencies until some time when you've got a capital transaction that you can catch those up. But if you're starting out and just explaining to people in the beginning, "We're not going to achieve those, but we're going to get there in maybe year three and beyond," then I think you're setting their expectations and they're not going to be angry about it. You might deter a few investors that are still looking for 8 percent, but I think it's important that you under-promise and over-deliver. 

Jake Marmulstein:

Yeah. I totally agree with transparency and being able to be realistic with the returns that you're giving investors but, from my experience, I'd see more people that are just carrying over, but that just kind of depends on the sponsor, and the investor base, and maybe how long those investors have been with that sponsor, and the communication cadence between them. 

Kim Lisa Taylor:

And then you mentioned that you would then see, at some point, there's a transaction like a refinance or sale, where you've got either a partial or full return of capital. Is that kind of what you're seeing?

Jake Marmulstein:

Yeah. After the pref, we'd see a full return of capital. And then there'd be a catch-up, usually 100 percent or a 50/50 split, dollar for dollar, on profits, up until another threshold. 

Kim Lisa Taylor:

So are you seeing any actual profit splits between syndicate or investors from operations, prior to a return of capital? 

Jake Marmulstein:

I typically don't. I've seen some interesting deals that have those, but those are few and far between. What are you seeing out there? 

Kim Lisa Taylor:

We still write a lot. In fact, we prefer to write offerings that actually do some sort of a split, so that once the investors get their 8 percent, then there's a split, or maybe even then there's a catch-up for the Class B that equates to the split. And then if there's anything after that, then they would split it. I hate to have syndicators that are just trying to survive off fees for five to seven years, because the fees are can be kind of small and they're not able to survive off from what they're earning during the period of ownership. 

Then they're going to have to just keep chasing new deals. And eventually they get to where they've got too many deals and they can't handle them, and I don't think that's a service to the investors or to the syndicators. I think that's kind of a disservice. So, we still like it if the deal has enough meat on the bones to be able to do that, versus just giving the investors all of the cash flow during operations, but I have seen that as a trend. I know that some of the crowdfunding platforms that are out there, that are actually pushing the deals out to investors, are starting to go toward that model. I think it's a difficult model for syndicators to live with, though, unfortunately.

Jake Marmulstein:

Yeah. It definitely makes it harder, if you're getting paid most of it on the back end. That's what a lot of my clients are doing, though. So I guess there's maybe more history there, and they're able to get through that period of time because maybe they have other deals in their pipeline that they're getting paid out on.

Kim Lisa Taylor:

Yeah. So it's just a difference in philosophy, and it's also a big difference in how you train your investors. The syndicator's job is to train their investors, so that they don't have unrealistic expectations. And as long as they're doing that and explaining to them how the process works, I don't think investors object to splitting the cash flow after they've received their preferred return, in most cases. 

But we're starting to see a lot skinnier deals, where there isn't a whole lot of cash flow left after paying the split, just because of the current market that we're in. Hopefully this is a temporary situation and there'll be a little more cash flow to split, moving forward. 

But, Jake, I want to move on to another point you made, that sometimes you do a cap on the IRR. So there's a certain split, maybe it's like 70/30 or something, up front. And then once the investors have achieved a certain IRR, then that split changes. Is that what you're seeing? 

Jake Marmulstein:

Yeah. So that also lends itself to the last point where, if a deal outperforms and you've returned your investors’ capital, then the sponsor would be able to make a larger portion of profits through the home run provision, where that split would go maybe from an 80/20 to a 60/40, or something more generous. So, yeah. If it goes above like a 16 percent or a 20 percent IRR, then the sponsor is going to participate even more in those additional profits above the 20 percent, for example. 

Kim Lisa Taylor:

Well, what about projections? Are you seeing people that still have deals with projections of up into 20 percent annual returns for their investors? 

Jake Marmulstein:

Yeah. I see value-add opportunities that would be between 15 percent to 20 percent, and stabilized deals between 10 percent and 15 percent. So it's definitely rare that you see a deal that outperforms above 20 percent. But I was speaking with a client this morning who does manufactured housing, and he just has the ability to sort of  knock it out of the park in some of his deals. So he puts the home run provision at like 20 percent, sometimes 25 percent, but you don't always get there. 

Kim Lisa Taylor:

So, just a couple of comments on that. When I went to that multifamily seminar and they were talking about trends, they were really saying that we're no longer in the 20-plus-percent annual return world, that we're really in a world where the 15 percent to high teens for an annual return for your investors, mid to high teens is a home run. 

And then, I thought that you said something that was really interesting, that on the value-add deals you're seeing the 15 percent to 20 percent projections, but in the stabilized deals you're seeing 10 percent to 15 percent. That's not something we've really seen, but then again, a lot of our clients are doing those value-add deals and not really going in for the stabilized deals. But I guess your investors are willing to take a little less of a return, if there's less risk. Right?

Jake Marmulstein:

Right. It all has to do with the risk profile and the investor, the investor's appetite. So I think with many of the people that I'm working with, they have a lot of repeat investors. So maybe those investors just, they care more about the security and they're more conservative when it comes to that, than chasing higher yields. 

Kim Lisa Taylor:

Well, that's interesting to see that that's kind of a trend. So some new information for some of our audience, I think, that if you're going after some stabilized deals, that maybe you can offer some slightly lower returns to your investors and still get people that are interested in doing it, because the perceived risk is less. 

Do you foresee, just based on current market conditions, that there's going to be any future changes to even these kinds of deals? 

Jake Marmulstein:

Well, I think in the near future we're going to see even more cap rate compression. So depending on the deal, you'd see lower prefs because of those market forces. There's a lot of capital chasing fewer good deals. But, it's really up to the sponsor to choose how much appetite for risk he or she has associated with each deal. So on some deals you might have a lower pref and then you might have a more generous split. If the sponsor is feeling bullish on the deal, then they could end up having a higher pref … allocation of profits in the event that they outperform. But generally speaking, the market is heating up even more and so we're going to see a compression of cash yields.

Kim Lisa Taylor:

All right. Well, that's something to watch out for. But the other side of that is that, if there is a market correction, I can tell you that my law firm group significantly — starting in 2008 and up through 2012 (saw that)  Fannie Mae and Freddie Mac never stopped lending. They did lower their loan-to-value ratios for a little while. We were seeing loan-to-value ratios even down into 65 percent to 70 percent for a short period of time. But you can still do deals, you just have to raise more money. 

And if you can ride that out and refinance after, when the market starts to recover, you can still do really well on those deals. And we've had some clients that have done extremely well buying after the correction and holding for five to seven years, and now selling. And they've done extremely well. So if you can position yourself now, if you're a newer syndicator, or even if you're an existing syndicator and you've got some deals under your belt, the time to really develop your investor relationships and keep people interested in what you're doing is now, so that if that market correction occurs you're poised to start taking advantage of those deals, because all of a sudden there's going to be a lot more deals on the market and it will start to make sense again. 

Jake Marmulstein:

I couldn't agree more with what you just said. So, in the event that there is a correction in the market, then that supply and demand kind of balances out a little bit more, and so you're going to have a lot more opportunity, in that sense, to expand the profits of deals.

Kim Lisa Taylor:

Well, and just helping our listeners overcome some of the objections that the current investors might have with respect to a market correction. The people that got in trouble last time, where they were doing three- to five-year maturities on loans, and then they would have to have a balloon payment that they had a pay off in the short term. And if it happened right when the prices have dropped 40 percent, 50 percent on the value of the property, then they weren't able to get the refinance loan and nobody else could buy the property. So those are the people that got stuck, and got stuck in foreclosure. 

So really the name of the game right now, if you foresee that there's going to be a market correction, if you want to manage that risk, use lower loan-to-value ratios. Just because the bank is offering you 80 percent or 85 percent, doesn't mean you have to take it. You might want to, just as a business policy, say, "We're only going to go up to 75 percent loan value, just to manage the risk of our investors." 

And also make sure that you have long maturity, as long as possible maturity dates on your balloon payments, so that you can ride out any downswing and wait until the market comes back before you're forced in a position to try to refinance or sell. So those are just two ways that you can really start to manage that risk for your investors. And explain to them that's what you're doing, so it takes away some of their fear, saying, "Well, I'm not going to invest until after there's market correction," because they're listening to the news too, and they're hearing those predictions. 

What do you see as a distinguishing factor that sets apart highly successful syndicators from those that aren't successful? 

Jake Marmulstein:

So, this goes back to some of your earlier points about educating your investors and also preparing them and communicating with them, I think, transparency. Deals go well and they go poorly. So what distinguishes a good syndicator is that you communicate well, no matter what happens. And investors who feel like they're getting the full story are more likely to stick, even if there are maybe better opportunities out there in terms of return. And it also helps you avoid having angry investors who could be a potential liability for you.

Kim Lisa Taylor:

Yeah. I have actually seen that work so well for some clients that have had some deals that haven't gone very well. And it's not usually because of something they did or didn't do. It's something else that happened. Maybe there was an insurance claim that got undervalued and they couldn't repair the property to the standard they needed to in order to keep it rented, while they were fighting a lawsuit with an insurance company.

So there's things that happen outside of your control that can affect how a deal goes. And you need to be able to just explain to your investors, while those things are happening, exactly what you're doing to try to mitigate that. I always say that if you're having trouble with your property, step up your communications, right? Don't decrease them. Don't stick your head in the sand. Don't disappear. 

And if you stay in communication with your investors, maybe even communicating with them on a weekly or a biweekly basis at that point, just to explain to them what's going on, what you're doing to try to solve it, listening to them and realizing that many of your investors are very experienced business people and they might be able to offer some solutions that didn't occur to you. 

And so you have to listen to them, take their advice. You get to ultimately decide which advice that you take, but you do want to solicit input from your investors, explain to them everything that's happening and how you're trying to safeguard their investment. I've seen deals go all the way to foreclosure, where the syndicator did not get sued because the investors were just completely aware of all the things that went wrong and there was nothing that could be done about it. 

Jake Marmulstein:

Yeah. That all resonates with me. We have an article on our blog about how to humanize investor relations, that hits on all of those points that you just made. That's definitely familiar to me. 

Kim Lisa Taylor:

Oh, that sounds like a great article. All right, well, so how should our listeners contact you, Jake?

Jake Marmulstein:

If you want to just call in, it's 312-741-5717, or you can email jake@Groundbreaker.co. I'm just happy to chat, if you're still figuring things out, you can go to Groundbreaker and you can click on “Request demo,” and just fill out the form and we'll be in touch with you. 

Kim Lisa Taylor:

Well, I'll have to tell you that the reason we do these free teleseminars is to introduce our clients and potential clients to some outstanding resources that are available to them as they build their syndication practice. And I'll have to say that Jake really has some pretty in-depth knowledge of this market, and it sounds like they've got some pretty tremendous resources on their site. 

So I would just highly recommend that you avail yourselves with those things and reach out to Jake. Get to know him. Even if you're not ready right now, you will be, and you should proceed accordingly. 

So all right, Charlene, do we have some questions? We're ready to go to the live Q and A. While Charlene is looking to see if we've got questions, I would like to just give out our contact information. 

You can get information, you can schedule an appointment with us at our website, SyndicationAttorneys.com, or you can call Charlene at 844-SYNDIC8. What is that number? Just spell it out on your phone, S-Y-N-D-I-C, and the number eight. So that'll take you to that number, and Charlene can talk to you. Or, if you really need to talk to me, then she'll help you get on my calendar as well. But we just, we're so happy that all of you got on this call, and we're really happy to take your questions for Jake or me. So Charlene, do we have any questions? 

Charlene Standridge:

Yes, we do. Now, you guys can either raise your hand if you want, and then I'll call you and unmute you, and you can ask your question, and I have a few here that people have written in questions. So I'm going to start with those. And then if somebody has a live question that they want to ask, you can raise your hand and I'll call on you. Okay? So the first question that we have is from Michael, and he wants to know, "Does your software generate tax returns as well as sync with Turbo Tax?"

Jake Marmulstein:

No. Thank you, Michael, for your question. We get questions about how you can sync up accounting, all the time. Essentially, you have all your information in Groundbreaker and you can export it out as a file, and then upload it as a journal entry into whatever accounting software you're using. Maybe in the future, we might do an automatic sync with QuickBooks, but at this point it's purely in an Excel format, where you can take the data out of the system and it doesn't generate a tax return. 

Charlene Standridge:

All right. Our next question is from Nancy and she wants to know, "What is the cost of Groundbreaker?"

Jake Marmulstein:

I'm happy to offer a special deal for everybody on the call today, just to be transparent and give you guys an offering for joining and listening to this call. So we'll put it out there for $6,000 for the year and a $2,000 implementation and onboarding fee. 

Kim Lisa Taylor:

Wow. That's really a great price, Jake. I've heard some other companies that are significantly more expensive than that. So, thank you for offering that to our listeners. 

Charlene Standridge:

That's awesome. Danny has a question, and he wants a clarification. So I'm going to unmute you, Dan, and I'll let you ask your question. Here you go.

Dan:

Good morning. 

Kim Lisa Taylor:

Hi, Dan. 

Jake Marmulstein:

Hi, Dan.

Dan:

Hi. So, just a clarification on your deal-making segment, when you guys were talking about the returns of 10 percent to 15 percent on stabilized deals, for example, multifamily, they're on a five cap. How are these guys making those deals work? Or, is that an IRR? 

Jake Marmulstein:

Yeah, so I'm seeing 10 percent to 15 percent IRR. 

Dan:

Okay, because you guys said annual returns, so I'm trying to figure out ... There's a big difference between annual and IRR. 

Kim Lisa Taylor:

Right. Yeah, that was my mistake… 

Dan:

Okay. Trying to do some math, and trying to figure that out. 

Kim Lisa Taylor:

Jake, I think, deals with some of the people that are a little more sophisticated, and they typically do use the IRR. A lot of our clients like the average annual returns, in talking to them about it. 

Dan:

Yep, me included.

Kim Lisa Taylor:

Yeah, just because it's a little easier to explain. 

Jake Marmulstein:

Yeah, especially with the waterfalls. You just lose people, with those waterfalls. 

Kim Lisa Taylor:

Yeah, yeah. 

Dan:

And then are these, most of these deals, I guess Jake and Kim, are they for accredited or non-accredited investors or a little bit of a mix of both? 

Kim Lisa Taylor:

Well, we write offerings, 506(b) offerings, and we write a lot more 506(b) offerings that include non-accredited investors than we do 506(c) offerings. The clients that are doing the 506(c) offerings are those that have done enough deals that they've already run through their non-accredited investors. They've already got them invested with them, and they have a great enough track record that they can advertise to new people, just realizing that anytime you're talking to somebody that doesn't know you, that the first question they're going to ask is, "What have you done before?" 

So if you're a newer syndicator, then you really need to be offering deals to your friends and family who already know and like and trust you. And they'll invest with you just because of who you are, versus asking you about your track record. A lot of our clients that have done a bunch of deals, they still want to do the 506(b) offerings, because they still have met a fair number of non-accredited investors that are sophisticated and perfectly capable of investing with them, and they don't want to have them miss out on those opportunities. 

Dan:

And maybe Jake, or Kim, you too, I mean, what is maybe like the trend or an average or just your gut feeling on the slugs of capital that these investors are putting in, perhaps on these deals on the platform?

Jake Marmulstein:

I can talk about that a little bit. The average investment size across all of the clients that we have is about $150,000. And I think that skews maybe a little bit high. So I see investment sizes of $50,000 to $100,000, for most folks.

Kim Lisa Taylor:

And just to give you the SEC perspective on that, they claim that the median raise is about $1.5 million and includes 14 investors. 

Dan:

Okay. 

Kim Lisa Taylor:

And that's across all rule 506 offerings, and about 25,000 of them a year. 

Dan:

Okay. And then is there ... Jake, do you have a feeling on how that breaks out for non-accredited, or that's just a smattering of everything? 

Jake Marmulstein:

Yeah. I don't actually know how to distinguish from the non-accredited, but a lot of the companies that we work with who have non-accredited investors, you'd see $50,000 to $100,000. And then what pushes that average higher are those investors who are high net worth individuals, coming in at a million or half a million. 

Dan:

Yeah, yeah.

Kim Lisa Taylor:

Well, and the thing you've always got to guard against with that is that, if somebody ends up taking on a certain percentage of your deal, depending on the type of loan you're getting, the lender is going to want to underwrite them and, in some cases, may even require them to be a loan guarantor. Even though these are non-recourse loans, there are still guarantees that the lender is going to require for environmental indemnification and bad boy carve-outs. 

So really the lacks that occur at the property caused a loss to the lender. So, they still want people with that kind of net worth, or people that have a certain level of control over your deal. They want to make sure that they're on the hook for that. 

Dan:

Isn't the threshold still around 20 percent? 

Kim Lisa Taylor:

It depends. For Fannie Mae, it's 20 percent. It's 20 percent of the ownership of your total deal. And for Freddie Mac, it's 25 percent. And for CMBS loans, I've seen it be as low as 10 percent.

Dan:

Yeah. Okay.

Kim Lisa Taylor:

So you’ve just got to be aware of that, because you've got to make your investors aware. If they don't want to be underwritten and potentially have to sign on a loan, you got to know what those thresholds are and keep them below that, or just have the understanding that if you exceed that threshold, that's just a condition of your participation. One other way you could do it is to carve out a separate class for those investors that's a non-voting class, because the lender's always concerned about who has voting rights. They don't really care how you split the money.

Dan:

Yeah. 

Charlene Standridge:

Okay. I'm going to re-mute you, Dan. All right? 

Dan:

Thank you. 

Charlene Standridge:

And Devon, I'm going to unmute you. You have several questions in here, and I'm going to just let you ask them yourself. Okay? You're unmuted. 

Kim Lisa Taylor:

Hey, Devon. Devon, are you there? Do you have yourself on mute? 

Charlene Standridge:

I've unmuted him. He's got his hand up. 

Kim Lisa Taylor:

Devon, are you there? Hello? Maybe we can come back in… 

Charlene Standridge:

I could read one of his questions. He's got a couple in here, but I can read one of them. He says, "Do you deal primarily with the multifamily syndication, investors and deals?" 

Kim Lisa Taylor:

So Jake, that's a question for you. What kind of asset classes are you seeing on your platform?

Jake Marmulstein:

Really, a there's a variety, but we do see a lot of multifamily, probably an outsized amount of multifamily. But we also see single-family, we see development of commercial, office, we see industrial. So it kind of really runs the gamut, but multifamily has been, historically, fairly popular. But you can use our system to raise capital for anything. It doesn't really matter what the property type is. We also sell a lot of affordable housing, workforce housing, senior living facilities, as well.

Kim Lisa Taylor:

Just out of curiosity, does your platform work for anybody who's raising money for something other than real estate?

Jake Marmulstein:

Yeah. We go back forth on this. It's really focused on real estate because of the metrics that investors expect to see when they go to their dashboard, but you could raise capital for other types of things using Groundbreaker, because the workflows are the same.

Kim Lisa Taylor:

Great. 

Charlene Standridge:

All right, I'm going to re-mute Devon, since we weren't able to hear him. And then Marina has a couple questions. Her first one is, "Can you please talk about the fees you see, especially for heavy value-add, the construction management fee on top of the property management fee, and how much it is, and whether it is a lump sum or spread out during the renovation period?"

Kim Lisa Taylor:

Oh, that's a great question. I'm glad that she asked that, because we really didn't touch on fees, so we should. So, Jake, what are you seeing of that?

Jake Marmulstein:

Well, I guess there's a lot of different fees that people do, the asset management, acquisition. We're probably moving more away from fees and pushing fees down. But, yeah. If you have construction then you're certainly going to see more fees in development scenarios. But usually we see like 1 percent on acquisition, like 3 percent on management, maybe there's an asset management fee of 1 percent and then a fee on disposition as well, like 1 percent disposition.

Kim Lisa Taylor:

Let me just clarify those for a minute. So, 1 percent acquisition, based on purchase price?

Jake Marmulstein:

Yeah, on the total deal size.

Kim Lisa Taylor:

Okay. And what's a typical deal size you guys are seeing? I mean, are you seeing a lot of $3 million, $4 million deals or are you seeing more in the $10-plus-million range?

Jake Marmulstein:

It just depends on the sponsor, but more like $3 million equity raises and then we'd see $8 million equity raises, usually. And sometimes we'll see like a $15 million equity raise for a large multifamily.

Kim Lisa Taylor:

So if you're looking at a $3 million raise, you're probably looking at a $9 million or $10 million deal, plus. So you're seeing some of the larger-end deals. We have some clients that are still doing some of the smaller deals. And I see the acquisition fees on those smaller deals being usually 1 percent to 3 percent of the purchase price, but the bigger the deal, the lower the acquisition fee. And I've even seen a lender dictate, "No, you can't take more than a 1 percent acquisition fee in a deal with a loan balance that's over $10 million."

Jake Marmulstein:

Yeah. I have a client who does these small deals as well, $2 million deals; $500,000; $650,000 equity raise, where there are significantly higher fees. So what you're talking about seems totally reasonable in terms of the size of those fees on acquisition.

Kim Lisa Taylor:

What about asset management fees? What are you seeing for those and what are they based on?

Jake Marmulstein:

They're based on the property's annual gross income, so usually between 3 percent and 6 percent is what we'd see. And that's really the compensation for managing the operations of the property. And those get taken yearly.

Kim Lisa Taylor:

So that's interesting, because that's a difference in how we've been structuring our deals ... Four of our clients are doing 1 percent to 2 percent of the asset management fee based on gross collected income, and then they're taking a share of the profits. So if we're going to shift to that model where you're not taking a share of the profits from operations, period of the ownership, then that 3 percent to 6 percent asset management fee is really going to help you a lot. In fact, I think it's going to help in several ways.

One, it's always going to be ... Anything you earn from operations is always going to be taxed at ordinary income rates anyway, so it doesn't matter if you're taking it as a fee or if you're taking it as a share of profits, from a tax perspective, but the fees are typically determined before you pay out distributable cash to your investors, or they can be. Is that what you're seeing, Jake, or are you seeing people take their fees after they pay the profit to the investors?

Jake Marmulstein:

Well, so I just want to create the distinction. I think you were talking about asset management. 

Kim Lisa Taylor:

Yeah.

Jake Marmulstein:

I was talking about management, like property management. 

Kim Lisa Taylor:

Oh, yeah.

Jake Marmulstein:

We also see asset management of 1 percent to 2 percent of the total equity invested, and then the capital …

Kim Lisa Taylor:

Okay, of the total equity invested. Okay, so that's a distinction, because we're calculating asset management fees as 1 percent to 2 percent of the gross collected income, so that could make a difference if you're calculating it based on the amount of funds that are actually invested. And that might work in the syndicator's favor then, to have that based on that, so funds raised.

Jake Marmulstein:

Yeah. And as far as the question that you asked on management, if you're taking capital as a property's annual gross income, usually you're paying yourself for doing those operations. That's coming out before you factor in what you're paying the investors.

Kim Lisa Taylor:

So, if you're just splitting cash with investors, say you weren't taking an asset management fee, you could still end up waiting a really long time before there was distributable cash to pay yourself, because you've got to get to a point where the property has a cash-on-cash return greater than the amount you need to pay to your investors on their pref, before there'd be anything left for you to take. So if you're calculating your fees first, before you determine distributable cash, then that's going to help alleviate that situation.

Jake Marmulstein:

Mm-hmm (affirmative).

Kim Lisa Taylor:

And then what about disposition fees? What do you say?

Jake Marmulstein:

1 percent to 2 percent of the property sale price. 

Kim Lisa Taylor:

Refinance fees, do you ever see those?

Jake Marmulstein:

I don't know. Yeah, it's not really coming to mind, but what about you?

Kim Lisa Taylor:

Yeah. We see them. It's really just something to compensate the loan guarantor who's going to be helping to get that refinance loan for a company.

Jake Marmulstein:

Yeah, like a half a point or something like that?

Kim Lisa Taylor:

Half to 1 percent of the refinance loan amount is not atypical. That's common. 

On the construction management fees, do you see... Just to answer Marina's question, what do you see that based on, if you see that at all?

Jake Marmulstein:

I don't know. It's been a while since I've seen any new construction deals going on with our clients, so I'm kind of not sure how to answer that.

Kim Lisa Taylor:

Okay, that's all right. Yeah. Well, I see 5 percent to 10 percent of our cost. So when you go pay a contractor, you can write a check to the asset manager and whoever's doing that construction oversight, 5 percent to 10 percent of that. And again, that is sometimes limited by a lender. So if you're putting it in your operating agreement, be prepared to have them nix it or cut it back.

Jake Marmulstein:

Are you seeing a lot of new construction, Kim?

Kim Lisa Taylor:

I'm seeing some, in multifamily. People that have development experience, they're still seeing 30 percent returns on development projects, overall. So it's a better return for your investors and better return for the syndicator, but you've got to have the experience to keep it going, because there's a lot of moving parts, a lot of things that can go wrong, and there's a lot higher risk for your investors. So maybe your self-directed IRA investors aren't going to want to take on those kinds of risks, and some of your older investors that are getting closer to retirement, but maybe some of your younger investors are willing to take on that risk because they can, they can afford to. All right, Charlene, go ahead.

Charlene Standridge:

Okay. Marina has a couple follow-up questions. One is, "What do you see as KP compensation?"

Kim Lisa Taylor:

Well, I think that's what we were just talking about, all those fees and then the splits. So I think we've covered that one.

Charlene Standridge:

Okay. And then her other question was, you mentioned earlier about loans, and she heard that syndicators who agree with what you said, "And I've recently heard syndicators mention that longer-term fixed rate agency debt has hefty early payment penalties, and if they want to refinance or sell after two to three years, the early termination fee becomes prohibitive."

Kim Lisa Taylor:

Yeah. That's always something you got to watch for. And this is why whenever you're doing a deal, you always need to have a real estate attorney that's local to the state where the property's located and a securities attorney that's helping you comply with securities laws and structure your companies with investors. The real estate attorney is going to help you understand the loan documents and make sure that you're aware of all those provisions that might be in there, because your loan documents are a hefty package and there's a lot to understand. 

So you want a real estate attorney to help you review and understand all of the provisions in your loan docs, including any yield maintenance or defeasance fees or reterminations.

Charlene Standridge:

Steven wants to know, "How does this compare with Crowdstreet?"

Kim Lisa Taylor:

Well, Crowdstreet is a crowdfunding platform that's going to raise money by pushing your deal out to their investors. An investor management platform is just a place for you to put information about your offerings, so that investors that you find can go there and get the information about your deals. So it's not the same thing. One of them is actually raising the money, or facilitating the raise. The other is actually just a recordkeeping system and a place for your documents and everything to reside. 

Jake, just to clarify this, you can put a link on your own website, where your investors could go and fill out the offering documents and make the investment. Is that right?

Jake Marmulstein:

Yeah. You can put links to your portal anywhere that you need to, and be able to direct those investors to sign up for login to see your deals. And then you can even run deals publicly in Groundbreaker, too. Just give them a link to the deal. 

Kim Lisa Taylor:

And Crowdstreet typically is going to be doing 506(c) offerings that they can push out to their list of accredited investors. They're constantly adding accredited investors to their database so that they have investors that are interested in your deals. But I'll tell you, they've got some really tough terms right now, and they're extremely picky about who they will let on their site.

They're not going to promote deals for anybody. They're really looking for people that have done at least five deals, start to finish. And I think they've got a dollar amount that they want you to have achieved, as far as the assets that have been involved in your syndications. So it's not something that they're going to accept from newer investors. They're really, really looking for the cream of the crop, the most experienced syndicators. 

And then they're going to do a lot of hard negotiation and dictating on the terms, because they want to be successful in selling your offering. And if they think that there's going to be any difficulty in selling it, then they're going to push back and they're not going to want to take it on.

Charlene Standridge:

Okay. Pam wants to know, "What is the difference between IRR versus cap rates?"

Kim Lisa Taylor:

Let's just, before we answer this ... In fact, I don't think that's a question we want to answer on this. This is a question that you need to get from your real estate trainers. So I'd really like to just keep this one focused on the particular topic, but that's something you can look up at Investopedia. I use that as a resource all the time, so why don't you look those up and you can get some information about that there. 

I do want to point out that it is the top of the hour, so if anybody has to get off the call, Jake, why don't you just go ahead and get out your contact information again.

Jake Marmulstein:

Yeah, sure. All right. Well, yeah. Thank you, Kim. The contact information, the best way to get in touch would be email Jake@Groundbreaker.co or go to Groundbreaker.co and fill out the form. Whether you want to download or not, happy to chat and just get acquainted and hear more about your business and how we might be able to help you.

Kim Lisa Taylor:

So it looks like we've still got about 10 or 12 questions in the queue. Are you able to stay on the call, Jake, and answer some more questions?

Jake Marmulstein:

Yeah. I actually budgeted a little bit more time, in case this would happen. So I can spend maybe five more minutes.

Kim Lisa Taylor:

All right, great. Then let's just try to get through a few more calls. And just, if you want to reach us and you want to schedule an appointment with us, the best way to do that is at our website, SyndicationAttorneys.com, and there's a button there where you can schedule an appointment. All right, so go ahead, Charlene.

Charlene Standridge:

Okay. Rob wants to know, "Outside of long track records of some of the longtime clients, what are some of the practices of syndicators on your platform for finding new investors?" 

Jake Marmulstein:

I get that question all the time. I mean, everyone wants new investors. Right? The thing that I tell people, and the thing that I see in my successful clients who maybe have started with 15, 30 investors or so, is that they're just doing great deals, they're being transparent, and they're reporting to their investors frequently on what's happening. And so the investors know what's going on. And then you build from that base. 

You build goodwill with the people who are already entrusting you with their money, and you give them a great experience. We help with that, with the technology component, but investors who are happy about working with you are your best ally. And they're going to talk with people that they know about what you're doing. I think having a platform like Groundbreaker just helps people to be able to have a more accessible way of showing off to their friends that they're getting ... 

Like, everyone at family gatherings likes to talk about their investments. I don't know if this is common with you guys, but it just happens in my family. And it's easy to talk about investing with other people. And when you have something to point to in a successful, happy experience, you're more likely to bring people on board. I also think that going to meetups and just networking locally in your area is a great way to find investors as well, because you're most likely to find investors who are going to have crossover in networks, people you know, than going out and marketing on the internet. And I think that's that most, more effective way of doing it.

Kim Lisa Taylor:

And I want to tell you about a couple resources that we have, that can help you with that. First of all, if you haven't read my book, “How to Legally Raise Private Money,” I would highly recommend that you get that. You can get it for free at our website, or you can go and buy it on Amazon. So it's “How to Legally Raise Private Money.” There's entire chapters in that book that are devoted to developing investor relationships and how you should go about finding them, what kind of information you should be giving them at certain points of your relationship.

But in addition to that, we actually have a clients-only Facebook Group that we're going to start doing twice a month on the very topic of how to find and develop investor relationships. We're going to start with the training next month, so November. And in addition to that, if you sign up for our pre-syndication retainer, it's $1,000, it gives you up to three hours of one-on-one legal advice with our team. We can review your marketing materials, we can strategize your company's whatever, further advice you might from us than what you can get in an initial consultation.

And then we're also going to give you an investor marketing plan template. And then the whole purpose of this live training is to start walking you through that and helping you develop your own investor marketing plan. We're going to give you an investor marketing blueprint. And it's just a really fabulous way for you to start getting some development of your own plan. What are you going to do? What works for you? Maybe you're not the person that's going to get up in front of a group and teach group training, but you're great in a one-on-one setting, or vice versa. And so we're going to start helping you develop what's going to work for you. 

In addition to that, when you do your first syndication or your next syndication, then we are going to give you a discount off your first syndication that's either as much as or greater than the amount that you spent on that pre-syndication retainer. That's what we call it, a pre-syndication retainer. And if you want information about that, please email Charlene@SyndicationAttorneys.com, and ask about the pre-syndication retainer and she can send you over the information about that. So we're going to maybe take one or two more questions, and then we're going to wrap it up. So, Charlene?

Charlene Standridge:

Okay, one question is, "Do you see many syndications with smaller properties such as 10 to 25 units, or are those more suited for a joint venture?"

Kim Lisa Taylor:

Syndication starts to make sense when you're raising at least $300,000 to $500,000 or more. When you're raising less than that, then we're usually going to look for an alternative structure that's going to cost you a lot less in setup fees. So that's pretty much the answer to that question. Go ahead, Charlene.

Charlene Standridge:

One person wanted to know, "What about no fees?"

Kim Lisa Taylor:

I don't recommend it, especially the asset management fee. The reason we want asset management fees is that we want to preserve your profit splits. If something happens to you during the course of the syndication and you can't continue to be the active asset manager, we want to be able to give something to a new person that's going to have to come in in your place, but we want you to be able to preserve your profit splits. 

If you don't have any fees then the other members are going to take away what you have and you're going to end up losing your profit splits. So, not something that I recommend, for that reason and then for other reasons, tax purposes and things like that. It's best to distinguish your fees from your profit splits when you're dealing with the IRS, so we have some strategies for helping you do that. All right, next question.

Charlene Standridge:

"Does the software do the KYC accredited investor verification and AML?"

Kim Lisa Taylor:

That's a good question, Jake.

Jake Marmulstein:

Does our software handle that? Yes. Actually, if investors want to use the electronic payments feature that we have in Groundbreaker then they have to go through KYC and AML to be able to invest. Well, not to be able to invest, but to be able to use their bank account to send ACH transactions through the software, which go directly to your account on file. And then when they're going through the process of investing the deal, before they get to the subscription agreement they run through the accreditation questionnaire. And if it's a public deal, then they have to do the third-party verification, and that's handled in the software, as well.

Kim Lisa Taylor:

And so he is talking about, when he says public deal, a 506(c) offering. And actually, that's something that we're going to be able to start offering through an affiliation with another company off from our website, as well. So if you're not ready to start using the Groundbreaker software quite yet, then that is a service that we're going to be able to start offering you, hopefully in the next month or so.

All right, so I think we need to wrap up. I think we've picked Jake's brain enough. Jake, you've been an extremely valuable guest. I think that the information that you imparted today has been really great. I know I've learned some things, and I think that everybody on the call did too. So I just want to thank you so much for joining us today, and hope you end up getting some referrals from this. And we'll look forward to having you on as a guest again in the future.

Jake Marmulstein:

Thank you, Kim. I had a great time. And I really appreciate all the questions from you guys. I've already seen several different LinkedIn requests come through, so thank you all, and I'll be hearing from you all soon.

Kim Lisa Taylor:

And if any of you are still on the call and still had some questions that didn't get answered, make sure you email those to Jake. Jake, your email again?

Jake Marmulstein:

Jake@Groundbreaker.co, and also, other people, just feel free to look me up and connect with me.

Kim Lisa Taylor:

Or you can email Charlene, and she'll get that email to me if it's a question for me. So, Charlene@SyndicationAttorneys.com. Thanks a lot, everybody. Have a great day.

Charlene Standridge:

Thank you.