Real Estate Deal Structures That Stand the Test of Time, with Samuel Freshman

This episode features Samuel Freshman — acclaimed author, speaker, and icon in the Syndication world — in an encore appearance. In this presentation, “Real Estate Deal Structures That Stand the Test of Time,” Sam recounted experiences spanning more than 60 years in real estate investing. He also discussed Syndication models he has used in the past, what he’s using now, and what opportunities he sees for commercial real estate post-COVID-19.

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Transcript

Edited Transcript from the Webinar “Real Estate Structures That Stand the Test of Time”

With Special Guest Samuel Freshman

Kim Lisa Taylor:

Good morning! Welcome, everybody, to Syndication Attorneys PLLC’s free monthly webinar where we talk about topics of interest to real estate syndicators with the opportunity for live questions and answers at the end of the call. I'm attorney Kim Lisa Taylor.

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 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. You can do that at our website. Do that instead of asking questions during the live call.

Information discussed during this free webinar is of a general educational nature and should not be construed as legal advice. Today we do have a video and audio conference, but we will make this available so that you can listen to it just on audio if you want to.

Today our guest speaker is Samuel Freshman. We're just thrilled to have Sam. He's an acclaimed author, speaker, and icon in the syndication world. He's spoken with us before. I encourage everybody who's raising capital to listen to our last recording with Sam because he gave us some really wonderful tips on how he's been so successful raising money over the years of his syndication practice.

You can get that at syndicationattorneys.com in the library, if you select the webinars or teleseminars. All of these recordings — we've been doing this now for almost three years — all of our previously recorded teleseminars are there on the website for you to listen to. 

Today our topic is “Real Estate Structures That Stand the Test of Time.” So we're going to quiz Sam on what kind of real estate structures he's done in the past with his syndications, and the kind of things that he's doing now, and we're going to just tap into his wisdom on topics that we think would be of value to our syndication listeners.

Sam, welcome!

Samuel Freshman:

Yes, happy to be here and thank you for having me again.

Kim Lisa Taylor:

Yeah, we're so thrilled that you agreed to come. We just love the fact that you've been doing this for so long. You're probably one of the world's greatest experts on the topic of syndication, and our audience is just hungry for this kind of information. We just love that you're willing to impart your knowledge and share your wisdom with us.

Do you want to say anything more about yourself? Can you tell us how you got started in syndication?

Samuel Freshman:

I was practicing law at the time, having just graduated law school. I got some advice from my dad. I said, "You suggested I be a lawyer when I decided I didn't want to be a doctor, but you didn't tell me what kind of a lawyer." And he said, "Go into real estate; that's where all the money's made in California."

So that was how I got started, and I, in the beginning, just played around with real estate on the side and worked for real estate at their office and syndicators and that was around 1960. A little over 60 years ago.

Kim Lisa Taylor:

That was a while ago.

Samuel Freshman:

That continued until eventually I had a real estate deal where I made more money in one year than I made in 20 years of practicing law, and I said, "That's it." In 1982, I went to my partners and said, "Here, you guys can have the law firm; I can't afford it anymore." And just went on from there.

I was investing partners with two majors insurance companies, Northwestern Mutual and Kemper, and I learned a lot in that role as a full partner with them for about 30 years. And then about 20 years ago, the guys I was working with all retired and I was back on my own.

Kim Lisa Taylor:

What types of real estate have you purchased over the years?

Samuel Freshman:

Well as far as a broad survey, just about everything. I started out with 1920s high-rise bank buildings in downtown L.A. and then I went into apartments and shopping centers and then some industrial, just about everything there is to do.

I've cut two things out completely. I won't do hotels anymore, and of course that saved me from some problems recently.

Kim Lisa Taylor:

Yeah.

Samuel Freshman:

And I don't do gas stations because of the environmental problems.

Just about everything else... My main type of property, in the most recent years, I'd say the last 15-20, has been apartment buildings that I shifted from shopping centers. That turned out to be a good idea because shopping centers have dropped substantially, whereas apartments have continued to progress.

Kim Lisa Taylor:

Great, wow. So it sounds like you've done a little bit of everything. Have you ever done mobile home parks?

Samuel Freshman:

Yes.

Kim Lisa Taylor:

And what about self-storage?

Samuel Freshman:

Never done self-storage, I have some friends that have done that. I've looked at it a few times. Self-storage is one of the rapidly growing things at the moment. A lot of money is being made. But I personally have not owned any self-storage.

Kim Lisa Taylor:

So, I want to talk a little bit about the kind of syndication structures that you've done in the past and what you're doing now. A lot of our clients are doing 4- to 7-year holds and then they'll try to add some value to the property, pay down the loan a little bit during that time, and then sell it and share that appreciation with their investors. Have you ever done that model?

Samuel Freshman:

I did that a little bit in the beginning, maybe 30-40 years ago. But what happened was, the first 10 years I bought, fixed up, and sold and I'd make good money. 20-30-40 percent increase on the value. But when I looked back at the end of 10 years, I saw that everything that I sold was now worth a lot more. After that it just became buy and hold. I would say, unless the neighborhood is declining, we generally don't sell. Probably current average holding period is maybe 30-40 years. We have some properties that we've owned for over 50 years.

Kim Lisa Taylor:

So, with the 4- to 7-year model, kind of the flip model we were talking about, usually there's some kind of a capital event, either a refinance or a sale, that gets all the investors all their money back in a big chunk, plus some kind of a return. If it's a sale, of course, they're cashed out, but if it's a refinance, sometimes they're cashed out, that's not the preferred model. Sometimes they just stay in the deal, maybe at a reduced percentage and the deal is held longer.

But if you're doing these long-term buy and holds, is there ever a point in time where these investors are getting their money back as a chunk, or are you just returning capital until they got all their money back and then they stay in the deal forever?

Samuel Freshman:

I'd say it's more we're just returning it as a turn and then they stay in forever. People come to us, and we started to draw up this brand, I guess. We said, "You're not buying for yourself, you're buying for your grandchildren."

Kim Lisa Taylor:

Okay.

Samuel Freshman:

Because we determined that the profits average out much better, at least for us, in a buy and hold program. We do occasionally refinance, but generally we try to get the property to be free and clear of debt, which makes it rather easy to sleep at night.

Kim Lisa Taylor:

That's a really interesting model because I think every one of the clients that I have, unless they're doing single-family fix and flips, they all look at debt as kind of the ticket to leveraging their returns. I guess you're looking at it from a different perspective. It's like, "If we get rid of the debt, then there's more to distribute to the investors," right?

Samuel Freshman:

Right, yes. People will come in and they'll say, "What will happen in five years, or seven years, or sometimes three years." A lot of syndicators, I'd say the overwhelming majority, are looking to give a big chunk back because they consider it marketing.

Kim Lisa Taylor:

Mm-hmm (affirmative).

Samuel Freshman:

They said, "It's easier to sell the next deal," I have one partner that I'm with on several projects, so when they want to sell we'll usually buy them out so that we can continue to follow our form. They're selling because they're new, and I understand that because I did the same thing 40-50 years ago to establish a following.

After about 10-15 years we had enough investors to support us. Now it's, in many cases, the grandchildren of our original investors. We have never, ever done any advertising, by the way, for investment. It's all been personal.

Kim Lisa Taylor:

I want to explore that a little bit more about how you raised the money, but I still have some follow-up questions about the structures.

In your structures, do you do a split where your management team gets a portion of the proceeds and then the rest goes out to your investors?

Samuel Freshman:

Yeah, we have pretty much a standard formula that we've used almost from the very beginning. We first start out with a preference and it's been pretty well adopted here in California, anyway. I would say the majority of syndicators here use the same thing. The capital, including any capital we put in, gets the preference. That used to be about 10 percent then it dropped to 9 percent, 8 percent, 7 percent, we're currently at about a 6 percent preference. Then we get a return as well, a certain percentage, of the profits depending on the deal and what kind of a property it is and what kind of income growth we've had.

Usually we get, after the preference, a third of the cash flow. On a sale, the same thing, they'd get their money back, any delinquency in the preference, and then a 70/30 split.

We're in it both as investors — in which case we're treated the same on the preference like any other investor — and then ... sometimes it takes 4-5 years before we're making any substantial cash flow out of that because we put a lot back in as we go. We value add as much as we can because when we buy a property we're making maybe, today, a 4 percent cap rate, or 5 percent cap rate going in on apartments. Shopping centers, of course, would be maybe 8 percent.

It takes a little time to grow. But we found that's worked out very well. We probably made more money from the properties over time than if we'd sold them.

Kim Lisa Taylor:

Do you do any kind of a manager catchup? So you can go back and recoup maybe on a sale or something, some of the earnings that you may have not gotten while you were paying out the pref to your investors?

Samuel Freshman:

No, we just have that formula. The money gets to a certain level, then we just get out 30 percent and then the sale, of course, we also get our share of profit out of the capital, like all other investors.

Kim Lisa Taylor:

What about fees? Do you earn acquisition fees, asset management fees?

Samuel Freshman:

Yes, we charge 1 percent acquisition fee to cover all of our expenses of underwriting the property and, of course, to make up for all the properties we look at that we don't collect because we didn't buy it or something. So it's 1 percent acquisition fee.

All this, of course, is disclosed in the original PPM papers. Then we collect about a 3 percent management fee, which is generally competitive in the markets that we're working on. Sometimes a little more, a little less, depending on the size of the property. 

Kim Lisa Taylor:

Now is that an asset management fee or is that the property management fee?

Samuel Freshman:

It's a combination. It's usually 2 percent property management on the larger properties, pretty much the markup, and then a 1 percent asset management fee.

Kim Lisa Taylor:

And that's based on gross collected income?

Samuel Freshman:

Yes.

Kim Lisa Taylor:

Uh-huh (affirmative). Okay.

Samuel Freshman:

All of these are percentage basis.

Kim Lisa Taylor:

And any other kinds of fees that you collect?

Samuel Freshman:

No. It's the management fee, asset management fee, and the initial 1 percent.

Kim Lisa Taylor:

Mm-hmm (affirmative). Okay.

Samuel Freshman:

Some people also collect on the back-end, which we don't. They might get, just like a front-end fee, they might get a back-end fee. But we're doing all right, and we want to keep our investors. As I say, we have people that have been with us for 50-60 years. We tell them in the beginning, "Don't expect to be out in this 3- to 5-year thing.” You make what you think is a good profit.

What happened with the original properties that we bought, the 1920s bank buildings, I made what amounted to a good fee, maybe 50 percent or something, in that early 10-year period. So the property went from $2 million to $4 million, but today those buildings are over $100 million. Even though we had to wait a long time, we came out much better by holding on than selling.

Kim Lisa Taylor:

That's fantastic. Yeah, that would be a pretty big wake-up call to sell something for $10 million and then see later on, 20 years from now, it's worth $100 million.

Samuel Freshman:

It was more like 40 years.

What do they say about compound interest? It's magic in the long-term.

Kim Lisa Taylor:

Yeah, that's fantastic. All right, we'll give the audience a chance at the end to ask some questions, so they may have some more questions on your structure. I think that's a really great model. If you're looking for a legacy investment, and your investors aren't looking for a way to get a big chunk of their money back all at once and they're willing to leave it in for the long-term, then this is a nice viable alternative.

Maybe one follow-up question on that, so when you're giving cash flow distributions to your investors, are you initially just giving them back a return of capital until they've gotten all their money back and then everything after that is a return on investment?

Samuel Freshman:

Generally, they do get a return of capital when we sell, or we have some kind of recaptial item which you can refinance which we do sometimes... Right now is a very good time to refinance because if you've got a good strong property, you can get interest rates, long-term, rates of 2.5-3 percent. 

Kim Lisa Taylor:

But on the long-term hold projects, how is it that the investors would ever get their capital back?

Samuel Freshman:

They get their capital back if there's a sale or a refinance.

Kim Lisa Taylor:

Oh, so even if you held a property for 30-40 years, if you were to sell that property then you would give the current investor back the original capital that was invested.

Samuel Freshman:

Yeah, if we hadn't done it previously.

Kim Lisa Taylor:

Sure. Okay. Because when I was thinking about it after the last call that we had, I was thinking if you'd just treated it more like, say, a start-up company or something like that, where there's not usually an event where you get your capital back all at once … if you just offered it as a return of capital in the early years, and then in the later years everything after they'd received their full capital back from cash flow would just become part of their ... that would become their return on investment.

Surely there's several different ways to do this.

Samuel Freshman:

We don't generally go back and refinance. If you have a 10-year loan, a lot of syndicators will, at the end of 10 years, they'll put a new loan on it. They'll up the loan and return capital. All we borrow is whatever's necessary to pay off the existing 10-year loan, because one of our goals is often to get the property down to zero debt. There's some advantages to that.

Kim Lisa Taylor:

Let's talk about how much capital you think you have raised over the years. Do you have a number in your head of how much you've raised?

Samuel Freshman:

Oh, well if I include the Kemper and the Northwestern, probably over a billion dollars. But, of course, those deals were all big deals. At one point, I had maybe 6,000 apartment units with those insurance companies. So there was a lot of capital involved.

Kim Lisa Taylor:

Mm-hmm (affirmative).

Samuel Freshman:

I was very fortunate in those days. They put up 80-90 percent of the capital, which was a lot more than we'd get from private individuals. Usually we put in 20-30 percent of our own money now. But in those days, of course we didn't have it.

On my first deal with Northwestern, they put up 90 percent of the capital and we were to put up 10 percent. That was a great deal, and we were very excited about it, and I said, "That's fine, but I don't have the 10 percent."

The guy said, "Well, go down the stairs and see this guy and see what you can do." So I went downstairs and explained the situation. He said, "Okay, we'll give it to you on a personal note and you can pass back."

Kim Lisa Taylor:

Wow. Different times, I think.

Samuel Freshman:

Yeah, I was going to say, they don't do that anymore. Now they want — if you're a substantial property owner and have a good financial statement — they'll put up about 80 percent of the capital and you have to put up 20 percent.

Kim Lisa Taylor:

A lot of our clients will put up to 10 percent of their own money, out of the money that's being raised. But I do have a lot of clients that don't put up that kind of money. Their stake in the game is what it takes to get the deal to the closing table, so that's all their preclosing expenses, legal fees, and due diligence fees and things like that. Then they get reimbursed from the closing. The amount that they raised, 100 percent of the money is from the investors. Or some of them will leave in their acquisition fees for their share or things like that.

It's not absolutely necessary at this moment in time that you do put up the 10 percent. There are some lenders that require it; Arbor is one of them. So if any of you have done deals with Arbor or are looking to do deals with Arbor as the lender, then they usually want the management team to put up 10 percent of the raise so if you don't have that, you might need to bring someone into your management team that does.

Samuel Freshman:

Yeah. We had done some gap and bridge loans, our money lending, that do require that the borrower have... We often ask 20 percent capital from the developers. Because we want them to have skin in the deal.

Kim Lisa Taylor:

Mm-hmm (affirmative). Do you do development projects or are you just doing value-add projects?

Samuel Freshman:

I only deal with value-add. We do very little ground-up. Mainly we found that we can often buy cheaper than we can build.

Kim Lisa Taylor:

Interesting.

Samuel Freshman:

Just depends on the times. There are times when it's better to buy than build, and times when it's better to build than buy. Depends on market for each side.

Kim Lisa Taylor:

Sure.

Samuel Freshman:

And the deal itself.

Kim Lisa Taylor:

So let's talk about how you've raised money. I know you said early on that you had some relationships with some insurance companies that funded your deals, but you've also raised money from private individuals, right?

Samuel Freshman:

Oh, yes. That's what we've done pretty much for the last 13 years. The insurance companies ended about 15 years ago.

Kim Lisa Taylor:

What have you found to be the most effective way to develop relationships with investors and meet investors?

Samuel Freshman:

When I started out, of course, as a lawyer to develop clients I joined a lot of organizations. They had Junior Chambers of Commerce, my local religious... synagogues, men's club, churches... Just join a lot of organizations, but you've got to be active in them. I would say that was the main thing. I'd go to Bar meetings, things like that. I did a lot of speaking. I did a lot of speaking in the beginning, and I wrote articles for the Bar journals and just promoted myself. Never did any advertising of any particular project. I'd return to my client base and the members of various groups I'd joined and just let them know what I was doing, and then they'd come and ask me.

I never, I think, asked a stranger for money, but I would tell them what I was doing and how much money people were making in social conversation.

Kim Lisa Taylor:

So what kind of things did you speak about?

Samuel Freshman:

I spoke about making money in real estate, real estate problems .... I would lecture to CPA society groups. Groups that would have possible investors and sales they needed to find deals for.

I guess I was very social in those days. Then develop a base, and I think we had maybe 30-40 active investors at this time. We had maybe 100 names in the base. That seems to be okay. Sometimes we'd partner with other people. Let's say the deal is going to be $20 million and somebody would come along while I was at a real estate meeting and I'd say, "Can you help?"

"We'd go up to $10 million," and I'd say, "What do you do if you've got a fantastic deal at 20?"

"We'll partner with you."

We had one active partner where I'd say, we've done three or four deals, we've invested in their properties, and they've done 3-4 with us. 

Kim Lisa Taylor:

Would you be interested in finding additional partners? I'm sure there's some people in the audience who would like to know about what you're looking for, if that's the case.

Samuel Freshman:

Yes, we're constantly adding. I'm 88 years old and people don't stay around forever so we have room occasionally to take some outsiders. We don't turn away money. We do check them out pretty thoroughly because a lot of this is personal, and the banks are always concerned about who you're dealing with.

We'd consider taking in some new investors.

Kim Lisa Taylor:

What kind of things are you investing in right now?

Samuel Freshman:

Well, primarily we're investing in apartments at this time. About 15 years ago, in earlier days you could make more money on shopping centers, but we sold most of the shopping centers and switched to apartments. That's turned out good because the apartments now have values, let's say, 20 percent return on anything we can put into them, whereas shopping centers are getting smaller, dropping in value. They've reversed themselves … it used to be the hot product was a nice neighborhood shopping center or community center, and apartments were sort of a struggle. Now it's the other way around.

Kim Lisa Taylor:

Funny how things change that way. Let's talk a little bit about real estate cycles. You've been through a few of them, right?

Samuel Freshman:

Six.

Kim Lisa Taylor:

Wow. So, where do you think we are in the cycle right now?

Samuel Freshman:

Well, the first thing I'd say, and I said it in our last talk was, your guess is as good as mine. I really am acting very cautiously because I find it's a little hard to... I think some of it will depend on what happens with the election. For real estate people, they should be for Trump because we're seeing a lot of rent control, a lot of other things that are affecting real estate values that might hold them down on the Democratic side.

I think a lot is going to depend on how the election turns out. If Trump wins, which is supposedly not likely — but I was surprised last time — things'll be all right for real estate. If Biden wins then it's going to be a little bad. That's my feeling. I can't tell you how the election is going to turn out.

Kim Lisa Taylor:

I don't think anybody can.

Samuel Freshman:

There's going to be issues.

Kim Lisa Taylor:

Right, right.

Samuel Freshman:

In areas like California and New York, values are going to be held down so much by all the rent control and other issues. So the blue states are not as good as the red states. I buy in some of the growing, more-active red states unless something very unusual was involved in the transaction.

Kim Lisa Taylor:

That's some pretty interesting insight. Most of the people, I ask a lot of the people that I talk to on a daily basis what they see happening, and the consensus seems to be that even if Trump wins that there's probably going to be some market correction after the election. I guess, depending on who wins will determine how long that lasts. That's kind of the consensus I'm hearing.

Samuel Freshman:

I guess it depends on who wins, and then what they do when they do win. Somewhat hard to guess at this moment, which way things are going.

Kim Lisa Taylor:

That's exactly right.

Samuel Freshman:

There is one thing, though, that is driving the real estate market in the larger properties and more sophisticated deals, and that's fear of inflation. There's only two places to go, and that's either gold and silver or real estate. Because the dollar is continuing to drop, I think it dropped quite a large amount in the last 12 months, in value as they keep printing money to hold the economy up. I'd say that's the biggest danger to major capital.

The family offices are shifting quite strongly from stocks to real estate at this time.

Kim Lisa Taylor:

That's interesting to know. So what kind of asset classes do you think hold promise for the near future?

Samuel Freshman:

I think apartments still are going to be very strong. One of the big things, which you mentioned earlier, is storage. When I was looking at storage 20 years ago, the returns were 12 percent, now they're down to probably 5-6 percent on the good projects. Storage is a possibility. I think they talk about the unemployment and all those things, which sort of lower price ... Living quarters like mobile home parks, recreational vehicle parks, things of that nature have picked up a lot in value in the last few years and I think the direction is going to continue because it's just getting too expensive to provide housing for unemployed and that sort of thing. That will continue to grow.

Again, got to watch out for rent control.

Kim Lisa Taylor:

Yeah. I guess it could even touch those places. I hadn't thought about that.

Samuel Freshman:

Yeah.

Kim Lisa Taylor:

What about industrial? Have you ever done anything with industrial?

Samuel Freshman:

Oh yeah, we have industrial. We have a couple industrial properties that we've owned for probably over 60 years. Industrial is good at the moment. It's was having its 5-6 periods of downturn, but at the moment industrial is very good because of the tremendous — with the people buying online, so to speak — there’s becoming a strong need for more warehousing close in to the market. That will probably continue for a short time. I don't know how long, but it looks like online marketing is going to continue to grow.

Kim Lisa Taylor:

I think it is. If somebody looked at a graph of the growth of Amazon and online purchasing opportunities you could probably match that to the growth of self-storage because we've become a consumer society where we buy too much stuff and then we have to put it in storage.

Samuel Freshman:

There was a trend where younger people moved back home when they’d lose their jobs and that sort of thing. Then there's all the furniture from the apartment or wherever they were living. Storage looks like it will grow for a while.

But again, this depends on what happens with the economy. If the economy turns back to where we were, say, last year, or up to January where everybody was working, there probably wasn't as much demand for storage as there is now, and if it recovers, and they start moving out of mom and dad's and back into their own places, that’ll probably have an adverse effect on storage.

Kim Lisa Taylor:

Right, right, because then everybody can afford to go out and get their own place and put their stuff in it again.

Samuel Freshman:

Yeah, if they have a choice, most Millennials would prefer to be out on their own.

Kim Lisa Taylor:

When you do industrial, is there a particular type of industrial that you like or, perhaps, something that you avoid?

Samuel Freshman:

No, we don't do enough to be a real expert in that. Most of ours are light manufacturing and warehousing. Warehousing is of course very big at the moment. There's no particular property... We avoid anything that would be a real heavy manufacturing type of thing.

Kim Lisa Taylor:

The environmental issues?

Samuel Freshman:

Environmental issues, yeah, and capital equipment issues. I'd say just general warehousing and light manufacturing.

Kim Lisa Taylor:

Do you think that because of what's happened with COVID and everybody working from home that that's going to have an adverse effect on the office commercial space?

Samuel Freshman:

Definitely. There's going to be a lot of surplus of office. Because even the major corporations are predicting a certain percentage of their staff to be working at home after all this is over. Some people like it, some people don't. I like going to the office, I miss it. 

My office is in a 300,000-square-foot office building which, at the moment, only maybe 10 percent of the space is being occupied. The rest of the people have been sent home. The building is open to a limited number of people.

The restrictions and so on with COVID-19 are making it very difficult for the office market. We had 20 people in the office, now with COVID-19, they've cut us back... Of course, the building itself was closed, you can only get in to maybe have access to mail and things like that. There's a lot of concerns...

Until COVID-19 is settled, the office market is just not going to exist at all. We'll see a change when that's solved, which direction it goes from there. I would think that it's going to take many years to get back to the number of workers working in an office versus working at home.

Kim Lisa Taylor:

Yeah, I could see that. I could also see people finding a way to repurpose office buildings.

Samuel Freshman:

Yeah, that's one thing that's going to happen. The same thing that they're doing with malls. Repurposing the type of tenancy... Medical, of course, is, because of the virus, there's a lot of attention for medical in general. And a lot of medical is going into malls, in a much larger way than it has been in the past. But not enough to make a major change in the market, I don't think.

Kim Lisa Taylor:

Let's talk about your book. You wrote a book called "Principles of Real Estate Syndication" that I read early on when I was learning how to be a securities attorney so that's been, I don't know, 12-13 years now. It helped me a lot. Do you have any idea how many books you've sold over the years?

Samuel Freshman:

Maybe 50,000.

Kim Lisa Taylor:

That's amazing. That's fantastic.

Samuel Freshman:

That book originally came out 1971. I've updated it maybe three times. It appeals to a lot of people.

Kim Lisa Taylor:

Yeah, so that's available on Amazon. I highly recommend it, if anybody is doing real estate syndication, they call it "The Red Book;" it's got a red cover.

Samuel Freshman:

They also call it "The Bible of Syndication."

Kim Lisa Taylor:

All right, okay. I highly recommend everybody who's doing syndication should read that book. It really helped me understand the process. It talks a lot about different types of deal structures and things. I haven't read it in a while, I probably should re-read it.

Samuel Freshman:

It's still pretty current.

Kim Lisa Taylor:

"Principles of Real Estate Syndication" by Sam Freshman is available on Amazon. And we'll put a link to it on our website also, when we post this interview.

How can our audience reach you and/or reach your company if they want to talk to you about some potential opportunities for partnering or things like that?

Samuel Freshman:

Well, there's email. I can give you my email which is: sfreshman@standardmanagement.com.  You can call me at 310-271-7391. I'd be happy to talk to them, I probably get 2-3 calls a day, but that's all right. I'm working at home so...

Kim Lisa Taylor:

Sam, thank you so much. I just want to let everybody know that we are going to go to live questions and answers now. There are some questions in the Q&A if you'd like to add some additional questions to the Q&A or the chat, then we're happy to do that. We do encourage people in the chat, if you would like to share your contact information with each other, you are more than welcome to do that. I will put Sam's contact info in there in case anybody didn't get that.

If you want to reach us, you can go to syndicationattorneys.com. We have a lot of educational information there, you can purchase my book or you can actually access a free digital copy of it from our website. My book is "How to Legally Raise Private Money." It's been out since last August and it's done really well. It's gotten a lot of great reviews, it's helped people. I think if you read Sam's book and my book you're going to have a pretty good basis for your syndication practice.

You can also access our affiliate company called investormarketingmaterials.com where we have professional editors and graphic designers that can design marketing materials for you to share with your investors and to let them know that you're serious about your business. We encourage you to check that out.

We also have an affiliation with an investor management platform, it's called Agora. You can get information about that and do a demo at our website. We are adding partnerships with other companies all the time because we want to give our clients the best possible experience where they can go one place and get all the things they need for their syndications.

Another thing you can do at our website is, we do have an affiliation with a company that does investor verifications … if you need to check out some people to make sure that they're legit, and then also for accredited investor verifications. And if you're bringing people into your management team and you want to do background checks on them to see if they have any “bad actor” issues that would prevent them from being in business with you, you can do that also through our website.

There's a lot there, if you haven't been there in a while, we encourage you to go. Then we have an extensive library there with over 40 different articles on all different aspects of syndication. All of our prerecorded teleseminars that we've ever done are there as well as a lot of frequently asked questions. Whenever people ask me questions we'll post it there, and you can find a lot of information in those places. There's a couple of white papers, other podcasts I've done.

Just do check out our website, we want to help you. We want to be your syndication resource so that you feel confident to go out and raise all the money that you can without fear.

Anyway, I'm going to look at the questions in the questions and answer....

Oh, one more thing is, syndicationattorneys.com if you want to schedule an appointment. We do have a free initial 30-minute consultations and you can do that right at our website.

All right. So, we have a question. "If you were to make a criteria or checklist for managing a forever fund, what would be on the list?" Sam I think that's directed to you.

Samuel Freshman:

Well, I think, explaining the differences between being an investor and speculator ... Buying and short-term selling is more like speculation. There are arguments for both sides, there are people who have become very wealthy being speculators, so now they're sort of becoming very wealthy being investors. I think, it's a little safer on the investor side. 

Today, if you take a 60-65 percent loan you can borrow probably at as low as 2.5 percent, but you have to put in more capital. This is always a big question when you're starting with a new deal, so I think an exploration on that... versus borrowing 75 percent which means you have less capital to put in, but you're going to have to pay maybe 3.5 percent on that loan. I think it's another issue that people have to sort of work out, depending on their circumstances.

Those would be the two biggest things. And what we said already about holding versus settlement.

Kim Lisa Taylor:

I think that's a really good point. Keeping your leverage low, as you point out, to minimize your interest rate, but also to minimize your risk. If you truly believe there is going to be some economic downturn in the next 3-5 years, then if you keep your leverage low, you're going to be able to continue to get enough income from your investment to pay off your loan so that you're not in risk of foreclosure. As long as you make sure that you loan has long enough terms on it so that you don't end up with a balloon payment somewhere in the middle of that that you can't cover.

But even so, if your leverage is low, you could still possibly get some financing to refinance that property during an economic downturn as long as the reduction in property value doesn't go further down than what your leverage is.

Samuel Freshman:

We had what we called an asset test, we won't borrow any more than... So the same thing they do with banks. We wanted to be sure that if the rest go down as much as 30 percent, we can still pay the mortgage. We may not have much cash flow, but we won't get wiped out.

I have friends that are worth literally hundreds of millions of dollars and they get wiped out in the depression. We've been through several of those. That's another thing that might go on that checklist: make sure that you haven't borrowed too much.

Kim Lisa Taylor:

Well, especially if we're in an atmosphere where we are at risk of seeing some nationwide rent control come into play, then that's going to be very important that you keep your leverage low enough that you're still able to pay the rent, or pay the mortgage.

All right, so let's go on to the next question. Let's see.

One of the questions was about a 1031, and we're not really discussing 1031s here, so I'm going to bypass this question, but I will suggest that you read an article on our website that's called "The 1031 Dilemma," because if you really want to be a syndicator then 1031 exchange investors aren't going to help you further that practice because you cannot get a promote off from the 1031 exchange investors like you can if you do a syndicate. That's an IRS rule that prevents that, so I'll encourage you to read that article called "The 1031 Dilemma" at syndicationattorneys.com in the library.

The next question: "Seems today's investors want their money back, and not to leave it in there forever. Everyone worries about Madoff in others."

Have you had those kinds of objections Sam?

Samuel Freshman:

Well, we have people that come in and they say they want to be in for three years, four years, five years, and we tell them, "You should go somewhere else."

I don't consider it a problem. We're looking for people that are more concerned about how much risk is there... We do a few reputational things, we had maybe 2-3 projects out of the 100 and some that we've done that didn't do well and we made it up so that nobody lost anything. That got around town and strengthened our marketing quite dramatically.

I would say if you have a property that turns out really bad, and you can afford to do it, it's not a bad idea to make sure that nobody ever loses money.

Kim Lisa Taylor:

That's one of the number one rules of real estate, right? "Don't lose money."

Samuel Freshman:

Right.

Kim Lisa Taylor:

Yeah, and that is true, if you have a bad experience, if there's any way to make your investors whole, even at your own sacrifice, you should do that for your reputation. Then that becomes your story and you can start telling people, "Hey, we've had deals that have gone bad before, but we've never had any investors that lost money," and that actually goes a long way to helping you build relationships with new investors.

Okay. Let's see what this one is. 

"In my experience the GP or sweat equity is motivated to execute a value-add business plan by a carried interest or promote that's typically paid out through a near-term capital event, like a sale or a cash-out refi. In a 40-year hold with deleveraging, how, Sam, do you keep your sweat equity management team motivated to perform and committed to the deal if there's not a liquidity event on the horizon?"

Samuel Freshman:

We pay them well. As I said, we're sort of a buy and hold so we're looking for people that feel the same way we do. We have employees that have been with us for 30-40 years. My key commercial manager has been with us about 40 years. Our office manager has been with us about 35 years. I would say, we have 20 key central employees between property management and other functions. I would say that we probably don't have anybody in there that's been with us less than 10-15 years, out of those 20 managers.

We have about 80 employees and of course we do have a turnover on the properties themselves. That's to be expected.

But as far as the base of the company, which is about 20 people, I would say the average employment with us is over 20 years. Some of them are more, some of them are less.

Kim Lisa Taylor:

Great. Okay. I guess you have sufficient deals, that you're getting enough cash flow to be able to sustain that kind of an infrastructure, right?

Samuel Freshman:

Yes. We, for example, with the virus right now we probably have, and everybody working at home, we're probably getting maybe 40-50 percent of the actual work done that we were doing prior to the virus, because everyone has to work from home at the moment.

We know we're going to come out of the virus at some point. These people's experience with the company is more valuable than what little money we might save by letting them go, so to speak.

Kim Lisa Taylor:

One of the things I'd also like to add is that because you've paid off the loans, then there's a much higher amount to split between the management team and your investors because you're getting all of the rent from the property versus rent minus mortgage. That's going to significantly increase your cash flow.

Samuel Freshman:

Yeah. For the 60 years, there wasn't a year that we didn't give people a small raise, at least, and of course bonuses to those people that deserved it. Right now we're not giving any bonuses or raises, but we're paying them their full payroll that they had last year. We're paying for their insurance and all the other items that we covered... Just the cost of doing business when we have a recession, like what we've got right now.

Kim Lisa Taylor:

Okay. So, Ryan asks, "How do you get your first few deals financed before having an established track record?"

Samuel Freshman:

We talked about this, I think, last time. If you want to go into this, the first thing to do is to go work for somebody first, that's already in it, so you learn from them. Or get yourself a very strong financial partner. Almost everybody I know that's successful in this business in the long-term started out working for somebody else and then worked with them for 2-3 years, and then they'll go in partners with their boss or something.

We have people that have been with us maybe 5-6 years and they're outstanding... "It's time for you to go out on your own now, because you can do it yourself." Of course, they can make more money doing that than they could just working for an employee in a particular area.

Most people don't have a lot of capital when they start out, but there's always a lot of very wealthy people that are looking for deals. Find one, and maybe you have to give up half the property, or maybe even a larger amount of the property to somebody who has the capital to get you going... and the financial statements. Sometimes it's not even putting up any money, it's just putting up their signature to help you get the loan.

Kim Lisa Taylor:

Yeah, proof of funds, that's one I hear a lot. 

Samuel Freshman:

They have the proof of funds. Find someone who has a line of credit. A line of credit means that they can go into the bank and borrow the money the same day or the next day without going through the whole process.

There's a lot of people around, wealthy people, that can get or have lines of credit and you go and you partner with them. Maybe you only make half the deal or 25 percent or whatever it is that goes through the devolvement in the beginning, but you develop a reputation and pretty soon you've got some capital and eventually you go out on your own.

I've had, I would say, maybe 8-10 very successful, multi-millionaires out there in Los Angeles area that started out with us, not having a penny.

Kim Lisa Taylor:

Well, that's really great advice. I love that advice, and that's what I always say, "You got to partner with the right people. If you don't have the experience, partner with someone who does. If you don't have the net worth, partner with somebody who does. These are the people that should be the partners with you and your management level."

Just like Sam said, you might have to do 2-3 deals with them before you get to a point where you have enough credibility or net worth to be able to do that on your own. But in the meantime you’ve got to get started somehow. And if you can't do it on your own, you can always add value to someone else's deal by helping them raise money and helping them find deals.

I do just want to mention that there is a proposal out from the SEC right now to loosen the restriction on capital raisers, so that certain people would be able to go out and raise money and earn a commission on behalf of others without having a securities license. I will be writing an article about that tomorrow. Stay tuned for that, we'll post it and we'll make sure everybody knows that that's out. That could be big. Right now, it's within the 30-day comment period so I'm sure that the SEC is accepting comments, and then they'll decide what the final rule is going to be.

This is good news for us. It's been proposed many times in the past, but this is the first time that I'm aware that it's actually been proposed by the SEC so maybe this one's going to get some traction.

We do have a few other questions. Dylan asks, "What are your target returns? Do you target a certain cash on cash return over 10 years?"

Samuel Freshman:

Every project is different, and the cash returns usually are related somewhat to the market conditions at the time. As I said, we went from a 10 percent pref all the way down to a 6 percent pref. A lot of our competition still does 7-8 percent prefs. So it depends on your position in the market, what's happening, the direction that you think is going to happen. We do have a goal in mind, but it fluctuates from time to time.

Like today, if we could find a deal that pays 5 percent, and it's our kind of a deal, B+ deal or something... in an area with a great school system and all that, we'd be very excited and we'd make fine. We can't get that very often, we have to do some value-add and other things. Generally we'd be looking for a good, solid property. 4.5-5 percent is what the market is at the moment in apartments, the cap rates that are existent at the time. 

We stay away from a lot of things right now simply because the cap rates are too low. We're not going to buy a building at a 3.5 percent cap rate unless I can bring it to a 6 percent cap in a pretty short period of time. You have to roll with the market.

Many times there's a difference between what the investor wants to get and what you can perform on. You don't want to have a deal go bad because you took something that looked good, but really had a lot of risk involved, just to make the deal.

We're making maybe one deal every year and a half, at the most, whereas we used to do 2-3 deals at a time because that's just the way the market is right now.

Kim Lisa Taylor:

Mm-hmm (affirmative). Let's see. So, here's just a comment, "Love Sam's model. It's all about finding investors who align with your long-term outlook, very similar to how Buffet describes how Berkshire attracts their long-term shareholders and team members. Inspiring, thank you for sharing, Sam."

Some other comments are, "Well said," "I agree," and somebody else said, "Thank you so much for sharing, this is really valuable information."

So, that's all the questions that we had today, Sam. This has been a really great interview. We love having you as a guest. I highly recommend Sam's book "The Principles of Real Estate Syndication." I also recommend my book, "How to Legally Raise Private Money."

Samuel Freshman:

It's a great book, by the way. It'll save you from getting into a lot of trouble.

Kim Lisa Taylor:

There you go. All right, well, Sam, thank you so much for spending time with us today. Everybody else, you too, thank you for coming on and listening to the call. We're really glad that you're all here, we'd love to have all of you as clients.

We have opportunities for you to participate in our Syndication Masterminds. We're currently having those weekly. All you have to do is become a client and we have ways that you can do that for as little as $1,000 with our pre-syndication retainer. So just keep that in mind, we'd love to talk to you. Please schedule an appointment at our website if you'd like to have a conversation and we'll look forward to seeing you on our next call.

Thanks so much, Sam.

Samuel Freshman:

Thank you. Enjoyed it.