July 6, 2022

JF2864: The 4 Components of Structuring Funds ft. Joel Block

Joel Block is the CEO and chief deal maker at Bullseye Capital, which focuses on distressed residential multifamily projects. He has been in the syndication and fund businesses since 1987, and he also assists attorneys in complex litigation cases involving real estate, securities, and alternate investments. 

In this episode, Joel dives into the four categories of structuring funds that he helps his clients with: control, how LPs get paid, how GPs get paid, and a fourth miscellaneous category that includes elements such as marketing.


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Joel Block | Real Estate Background

  • CEO and chief deal maker at Bullseye Capital, which focuses on distressed residential and multifamily projects.
  • Portfolio: Their fund owned close to 50 assets, but they have liquidated most of them as they look to wind down this fund.
  • Based in: Los Angeles, CA
  • Say hi to him at:
  • Greatest lesson: One of the great mistakes that syndicators make (especially newer ones) is that they make their deals unfriendly to investors. Some terms are easy to structure in a way that encourages investors to say "yes" to the investment. These are critical to get right to maximize capital raising.


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever show. I'm Joe Fairless. This is the world's longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don't get into any of the fluffy stuff. We are strictly focused now on commercial real estate. And today with us, we've got a commercial real estate expert, Joel Block. How are you doing, Joel?

Joel Block: Hey, Joe. How are you, man? Nice to be here with you.

Joe Fairless: Yeah. Nice to have you on the show. Joel has been in the syndication and fund business since 1987. I told you, we've got an expert in commercial real estate and in syndication. He assists attorneys in litigation cases sometimes as an expert witness, but then professionally, he has a fund that has owned close to 50 assets, but then they've been liquidating and winding down the fund as of recently. He's a CEO and chief deal maker at Bullseye Capital, which focuses on distressed residential and multifamily projects, based in Los Angeles, California. So with that being said, Joel, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Joel Block: Yeah. I came to this business as a CPA. I was doing the tax work for a giant syndicator at Pricewaterhouse as a youngster, and I just hated doing the tax work and thought, "You know what? I want to be a deal maker like these guys." So I left Pricewaterhouse and started a little firm, met a guy, the two of us raised $165,000 from a bunch of doctors, bought our first little building in 1987... And then we bought a shopping center, and a piece of land and we've just been going ever since. And then I fell into a venture capital transaction where I built a publishing company, actually, but used the same capital raising skills that I'd acquired from before, and raised $10 million to launch this venture, which later got sold to a Fortune 500 company.

So I've been around the block. I've done what a lot of entrepreneurs are trying to do, and now we're winding our fund down. I'm kind of retiring from the fund, but as we do that, we advise entrepreneurs and early-stage fund guys, people that are looking to be in the fund business transition, maybe from syndications into funds or otherwise, on how to best set up those structures and how to be successful at this.

Joe Fairless: So let's talk about that, how to best set up a fund or a syndication. And just so I'm clear, what do you help them with exactly, as it relates to setting up funds or syndications?

Joel Block: Most people go to their attorney and they ask them to do this. And you've got to have an attorney involved. That's mandatory, because this is a securities transaction, and you have to do that. But what most people forget is that this is really a business transaction first, and attorneys are not in the business of giving business advice. So first, we have a symposium that we do every year. We just did it recently, a couple of months ago, or whatever it is; we did it recently. So once a year, we kind of take a deep dive on how this works, we bring all these people, even guys that have done it 5 or 10 times who come, because we have formulas that are a little more advanced or a little more sophisticated than what some other people use. So I work with the attorney, I do all the business structuring, set up the executive overviews, set up the waterfalls, the hurdles, how to deal with the investors, all the really kind of the big deal points - I help set that stuff up for the quarterback, the syndicator or the fund manager, and then we pass those files to the attorney to write them down so they can go out and raise their money.

And we've had probably 1000 people come to our symposium, and we've probably spawned 100 funds and 200 syndications. I think that capital raising out of our symposium is getting close to a billion dollars. And that's not me raising the money, that's the people that we've taught how to do this. And we're not dealing with the wannabes and the phony-baloneys. I mean, we're dealing with people that are really out there doing stuff that's more serious. So they could be early in their career, but they're more serious.

Joe Fairless: So let's talk about those components - the business structuring, the waterfalls, and the hurdles, and the items that are most relevant to you as you help structure that for your clients. What are the categories of things you work on for your clients? And I know we're kind of just talking about a couple, but can you just tell us all the categories?

Joel Block: No, I'd probably put them in a couple buckets. One is control. The syndicator has to have absolute control over the transaction. That's imperative. The second thing is probably the relationship with the investor, which is a way that the investors are going to get paid, the way that the syndicator or the fund manager is going to get paid, the fees that the syndicator might take... And here's what people don't realize. Most people use a two-class structure. Here's a good example of something. They use a two-class structure. That's what most attorneys set up. And when you are a young married couple and you don't have any kids, do you buy a one-bedroom house because there's only two of you going to live in one room? No, you probably buy a three-bedroom house. You buy what you're going to grow into.

And most people who are kind of early in this business, they don't realize what's possible when they're setting up their deal. They only realize what they're told at the early stage level, the elementary school level. But as they progress through school and they get into the higher levels, there's more opportunities, and then they end up getting stuck with their set of documents because they set them up not really understanding everything that was happening around them. And that's just one of the really big goals that we have, is to help people not find themselves in a situation where they get stuck with a set of documents that are really just below their skill level as they progress. So the documents are a little bit more sophisticated than they may need now, but as you grow into them, there's a lot of buttons in the cockpit in an airplane. And you may not know all of them are right now, but when you become a sophisticated pilot, you kind of get what that is, and that's how it is with this.

And I'll tell you one other really important thing that never, ever gets talked about.

Joe Fairless: Well, real quick before you start - so control, relationship with investors... Are those the two buckets, or is this third thing you're about to say?

Joel Block: Well, there are a couple other buckets. So there--

Joe Fairless: Let's just go over the buckets first, and then let's get into some details.

Joel Block: Okay. So there was control. Control is things like voting, and it's things like transfers of shares, and you want to have some control over those kinds of things... One of the things that I always suggest to people, if you're doing a 506(b), kind of an inside offering to people that you know, referrals, you're going to be on the team with these people for a long time. You kind of want to know who they are. They need to know who you are. You need to like them. They need to like you. And you want to make sure that you have a little bit of control over who's going to be on this team. So the way that we do this is that we tell people, "You may not transfer your shares or sell your shares to anybody else without our approval, and that's a hard and fast rule, except if grandma and grandpa want to do some estate planning and pass shares to their grandchildren or whoever it is." That's an exception. So we let them do that. We don't always let them transfer the voting rights, but we certainly let them transfer the economic rights. And that's also something that people may not understand is that you can bifurcate rights. There are things that you can do. Just because somebody buys the shares doesn't mean that they get to participate alongside the other investors who've been there, that know each other, or otherwise. So these are some complicated things that few people really understand.

Joe Fairless: High-level, let's just talk about the buckets, and then let's go into each of them. And you talked about control already, so we can skip that one; but control, relationship with the investor... What, if any, are other buckets that you work with?

Joel Block: Well, I would say that the syndicator getting paid is another bucket, how the syndicator gets paid. So how the investor gets paid is a bucket, and how the syndicator gets paid is another bucket.

Joe Fairless: Okay. Anything else?

Joel Block: Then it's probably all the other ancillary stuff, the marketing, and some of the other stuff is probably most important.

Joe Fairless: Okay. So now I'd like to go back to something that you mentioned - growing into the documents, and you used the metaphor of a couple with no kid, they don't buy one-bedroom house or a two-bedroom house. They likely buy a three-bedroom house [inaudible 00:10:20]--

Joel Block: You're right, there you go.

Joe Fairless: ...have some kids. And one thing that makes me think of this - I believe in this case, you're talking about creating fund documents. So I know with our fund - I'll just speak specifically, because that's where this question is coming from; with our fund, we keep it open for about 12 months or so and, then we close it out prior to the beginning of the next year for tax reasons for our investors. So my assumption is it wouldn't matter about growing into it as much, because we're closing out the equity raise within 12 months. Is that not the case, typically, where people usually are raising a 12-month mark?

Joel Block: Here's what I would tell you, is that the best-laid plans don't always go the way you expect.

Joe Fairless: [laughs] Right.

Joel Block: [laughs] So it's your plan to close out in 12 months. And listen, the way we write our docs too, we give our people a year or so to raise their money, with an automatic six months extension--

Joe Fairless: Yeah.

Joel Block: ...to raise their capital. So that's what we do. Well, let's say that you're marching along and you need more money in the future for some reason, and really the way you get more money is you do a capital call; well, there's nothing that's more unfriendly to an investor than a capital call. There's nothing that's more unwelcome. So we don't have mandatory capital calls. But if you're not going to be mandatory on capital calls and you need more money and the syndicator is not in a position to put up the money, the money's got to come from somewhere. So you may want to do another round. So if you want to bolt on another round of financing, then the syndicator or the promoter has to have authority to do that in the documents.

And we always expect somebody's going to do another round. You may not be planning to do another round, but we always anticipate that somebody's going to do another round, because... Listen, you could find yourself in a world of hurt, you could find yourself just wanting to keep the same fund going and expand it, because funds tend to work on asset class basis... In other words, this fund is going to be multifamily assets in this part of the country. And you may just want to grow your fund larger, and not have 20 little funds; you may want to have one big one. So we just kind of assume that.

And when we talk about growing into it, that's what we're talking about - the ability to raise more money, the ability to take more investors, the ability to have some flexibility about the asset classes as the fund matures. All these kinds of things are decisions that you have to plan for now, or else you're not going to be able to have the opportunity to make those decisions in the future.

Joe Fairless: So the buckets I've got written down that you mentioned: control, number one, two, relationship with investor, three, how LP gets paid, four, how GP gets paid, and then five, miscellaneous.

Joel Block: I kind of was thinking of two and three as together, but they can be separate. It doesn't matter. That's fine.

Joe Fairless: Two and three. So relationship with investor and how LP gets paid?

Joel Block: Yeah, I kind of [crosstalk 00:13:13]

Joe Fairless: Okay, let's talk-- good. Easy. Alright, so even better. We removed one, so a nice and simple four. So there's four: control, how LP gets paid, how GP gets paid, and then miscellaneous. You talked about control, now let's talk about the second bucket, how LP gets paid. What are some wacky things that you've seen, you're like, "Oh, no. I'm glad you hired me. Here I am to the rescue"?

Joel Block: Yeah.

Joe Fairless: "You better not do that."

Joel Block: Whenever somebody presents me with their crazy idea, I always push back. And here's what I tell people -- listen, I've raised about $100 billion personally from high net worth people in my career, and there's something that I know, and that is that if investors don't understand what's going on, they're confused, if they're uncomfortable, they say no. If they have to send it to their attorney for review, which most of them do not because it's expensive to do that, but if the attorney looks at it and says, "This is a strange looking deal. Are you sure you want me to read it?" the investor is going to say no. So investors want to see an industry standard kind of deal.

Every accountant in America learned about these kinds of deals. Every attorney in America, when they went to law school, learned about these kind of deals. Anybody who gets a K-1 is in one of these kind of deals. And these deals, which are called private securities-- and by the way, Joe, you may or may not know this, but the private securities business, a lot of people will say, "Well, have people heard of this before?" the private securities business is bigger than the entire United States stock market, because guess what asset is held in private securities? Iit's all real estate. All real estate in the country is almost all held this way. So it's bigger than the whole stock market, and all more substantial people own these types of deals. So everybody understands how it works. The Congress - they voted for this to work. The IRS - they don't like it but the Supreme Court said that these are legal, and that's how these deals work. So I would tell people to stick with something that's industry standard, because industry standard is-- listen, the Wall Street guys invented this business 60 or 50 years ago, it's working.

Joe Fairless: What would be the examples of how an LP gets paid the industry standard?

Joel Block: Alright. Well, industry standard means that there's a preferred payment made to the investor, and then there's going to be some kind of a split. That's industry standard. That's the waterfall and the hurdle. The waterfall is there's priority of payments, and the hurdle is that there's going to be some kind of a preferred payment made to the person. It's that simple. Now, it can be a little bit more complicated, and there are things that we've done to kind of tweak those formulas just a little bit to fine-tune them, but by and large, we try to stay right in line with what's industry standard.

Joe Fairless: And what's an industry standard preferred return and split?

Joel Block: Well, let's put it like this. That would be the kind of thing that a court of law, like somebody if they asked me for an expert opinion, there is no standard. But what I would tell people who listen to this show and guys like you and me who are in the business like we are, around 8% is a really good preferred return. Now, it could be 7%, it could be 6%, it could be 9%; it doesn't make any difference. The better seller you are, the lower the preferred can be, because you don't have to lean on the preferred as much to get somebody to say yes. But also remember that the lower the preferred, the more likely it is that somebody can get a lower risk investment somewhere else. We don't bring a great amount of risk, but real estate carries certain kinds of risks. For example, it's illiquid. For example, these are small private deals, and small private deals are less safe than going into a stock market transaction, for example.

So you kind of have to balance your preferred against what's possible for people in other environments. If they can get six on a bond, then maybe six on a bond or something like that's going to be preferable for them than a dealing with us. So you just have to kind of balance that. So I usually recommend in the neighborhood of eight.

Joe Fairless: Okay. And then what about the split?

Joel Block: The split - the same thing, it depends on how much work you're doing. So for example, in a development deal, it's very common for the developer to take 50% of all the profits on the back end, 50-50. Now, why? Because if it weren't for that developer, the deal wouldn't happen at all. It just wouldn't happen. In a rehab deal, I would say it would probably be reasonable to take something between 30% and 40% to the promoter and then give 60% or 70% to the limiteds. If it's a AAA apartment building and all you're doing is collecting rent, which happens with a lot of family office deals, then it's not uncommon for the promoter to get 5 or 10 points, and that's it, because they're not really contributing a lot of value to the deal.

So the backend is directly related to how much value you're bringing to the deal. And you have to be able to articulate. If you were brought into a court of law and somebody says, "This is an abusive situation," you have to be able to say, "Well, we're bringing a lot of value, and here's what it is.", and so you have to really think through. And depending on the kind of deal people bring to me, I kind of recommend the kind of ranges that they should be in, but they're kind of line up with what I just told you.

Break: [00:18:18] to [00:20:04]

Joe Fairless: Anything else as it relates to how LPs get paid, before we move on to how GPs get paid, that you want to mention?

Joel Block: Well, one of the things that I would just encourage people to take a look at - and I don't want to go deep into our formula here, but a lot of people think of the preferred as a payment for the use of the capital, and then they split the profits after they pay the preferred, and then they split the profits. The problem with that is there's no--

Joe Fairless: Catch up.

Joel Block: Well, exactly. The preferred is not an interest payment. The preferred is you get paid before I get paid in case there's not enough money to go around, but if there is, then you would catch up and then you would split after that. So if you give somebody a preferred of 8% and then you split 60%-40%, you're getting 30% and they're getting 70%, and that's not what you promised them. You promised them 60%-40%. So I would just tell people to be careful not to treat the preferred as an interest payment, because it's very different from that.

Joe Fairless: How GPS get paid. What are some things that were presented to you that you thought were egregious, either--?

Joel Block: Well, too much or too little. Sometimes people do ask for too little, and I tell them that they're not going to make money. Here's an important thing to remember. In a hard money transaction, when somebody's loaning you 55% or 60% of value, that hard money lender, who's probably a semi-professional or professional investor, they hope you go broke so that they can steal your equity away from you. They oftentimes hope that the deal doesn't work out because they want the property. But when a doctor or somebody invests in one of these deals and they have a fractional interest and they're busy running their law practice or their doctor practice, they don't want you to fail. They want you to succeed. And for that reason, they understand that you need to take some fees along the way. If you're not taking a salary - and I never encourage people to, because that's overhead and that's burdensome on the deal - I don't encourage people to do that, but I do encourage them to take whatever fees would be paid to third-party vendors if they're properly licensed to take those fees.

So if somebody is licensed to, let's say, be a real estate broker and take brokerage fees on the front end and the back end, they should take those fees. If they can take property management fees, if they can take construction management or general construction, general contracting kind of fees, whatever those things are, if they want to set up a maintenance company because they service many properties in a certain community, those are all things that are good ways for them to do that. And what I really tell people is that there are two different ways that we get paid on these deals. One, we get paid for our time. And time is things like brokerages, property management, so all the energy that we have to put into the deal. On the back end, we get paid for being smart. And being smart means picking a good deal and making it work out. But the smart money is kind of where the wealth comes from in this business. Getting paid for time is what allows you to get into the long run, so you can collect on your smart money. And most people really collect either one or the other. People who are in the brokerage business, only collect for time. A lot of fix and flippers only collect for being smart. And by the time these fix and flippers get their payday, a lot of times they've run up so much credit card debt, they've got to pay off their credit cards that there's nothing left over and they start to cycle over again. So it's really important that you combine the time payments with the smart payments, and you get these fees and everything done just right.

Joe Fairless: So what's a typical fee structure?

Joel Block: Well, you've kind of got a chart of 20 different things that people pick from, and that might be a brokerage commissions, and if you're not licensed, it would be an acquisition or disposition fee. Property management fees, setting up a maintenance company, it could be general contracting... If you're not a general contractor, that requires a license, and then you can take a construction management fee instead. So there's all different ways that -- you're licensed for something or you're not licensed. There's different ways to lay that out and make that happen, and we just kind of go through and make sure that people don't forget the things that are important for them to take. We don't encourage people to take too much. And just because you specify a fee doesn't mean that you're going to take the fee. The one fee that is somewhat, in my opinion, controversial, would be an asset management fee.

Asset management means let's say you've got $5 million in your fund, that means you're going to take, let's say, 1% or 2% on January 1st. That would be 50 or 100 grand on the first day. The problem with that is that's pure overhead. The only reason that anybody is getting paid that fee is because you, the syndicator, are taking it. The difference between that and let's say a brokerage fee or a property management fee or a general contractor fee - those fees, somebody's going to get paid, whether or not it's you. It doesn't matter if it's you or not, somebody's going to get paid those things because somebody has to do that service. And I kind of believe that if you're qualified to do the service, then the dealer should pay you, and they would probably prefer to pay you, instead of paying a third party. So that's kind of how I look at those things.

Joe Fairless: What's the acquisition fee? A percentage. How do you charge that?

Joel Block: The way that we typically do this-- and let's say that a brokerage is probably a better way to think about it. We typically state it as 6% minus whatever you pay other people. So let's say you're a licensed broker in some state, and let's say you're representing your LLC in some transaction, and you list the property, so you're the listing broker and you might take your three points or whatever is reasonable in your marketplace, and another broker sells it and they get three points, and that's the six points. Now, if you have to contract with two brokers, a listing broker, and there's a selling broker and they're both in a different city, and they each get two and a half points, there might be one point left for you to take for an oversight fee. But if they take three points a piece, there would be nothing left for you, and that's just how it goes sometimes. So that's kind of how we set those things up, is we set them up with a cap, minus whatever you pay other people.

Joe Fairless: And then let's move on to the miscellaneous category, and then we'll wrap up. You said marketing is one component under miscellaneous.

Joel Block: Yeah. Whenever we build these documents, we always start by building an executive overview, which kind of describes the deal. And one of the things that I find is that the document is not only for the investor's benefit. The document really is for the promoter's benefit to really clarify exactly what they're going to do, to really focus their sights on the right property, so they get it right. Because by the time they produce a really good executive overview, then they go into the marketplace and they know exactly what they're doing, they know exactly what they're looking for. And what I'm talking about is not the real estate, I'm talking about the investors. They know exactly how to approach investors and how to talk to them about what they're doing. They've really been prepared. And that's why people have been raising so much money, is because when you go into the marketplace and you're really prepared, it goes a long way.

Joe Fairless: Before we wrap up, anything that we haven't talked about that you think we should quickly, because I want to make sure if something's top of mind that I didn't ask you about, that we talk about it?

Joel Block: We can go on for two hours here, so it's hard to say exactly what we might have missed... But all I can tell you, Joe, you know this is a great business. If you do it right, it's an awesome business. If you don't do it right, not so much.

There is one thing that I wanted to bring up before. This is something that I didn't understand until I got involved in some litigation. Attorneys write these documents, and we, consumers-- I'm not an attorney, by the way. I'm a CPA, but not an attorney. So we, consumers, rely on attorneys to write good documents, so we assume that all documents they write are good documents. But that turns out not to be so. Because when an attorney writes a document and another attorney sues, that other attorney is going to try and punch holes in the document, and us consumers could never possibly see that. So attorneys try to punch holes in other attorneys' documents, and on top of that, a judge is going to weigh in and kind of balance out the scales.

So you want to make sure that whatever documents you're using have been through the litigation process. You don't want something that's never been tested in a litigation situation, because there are going to be errors in those documents, 100% guaranteed. No matter how many firms or no matter how many people look at it, there will be errors, there will be oversights, there will be mistakes. So going through a litigation process really forces these documents to get tightened up in a good way. So you want to make sure that whatever attorney you deal with, these documents have been litigated.

Joe Fairless: How can the Best Ever listeners learn more about what you're doing?

Joel Block: Probably the best thing to do is go to our website. We produce probably the world's largest library of syndication and fund-related videos. People writing questions, we just answer them. Go to syndicatefast.com, syndicatefast.com. The library is free. Everything is free. You don't have to do any business with us. We just want people who want to be successful at this business to be as successful as they can. This business has been good to me and I'd like to see it be good to other people. If they think that they're ready to go to the next step, then certainly they're welcome to be in touch with this us either for our symposium or for us to build something that will last them a long time.

Joe Fairless: Joel, it has been a pleasure getting to hear the four categories of structuring funds: one, control, two, how LP gets paid, three, how GP gets paid, and four, miscellaneous and some sub bolts underneath that. Thanks for being on the show. Thanks for talking through some lessons learned that you've come across and that you share with others. Hope you have the best every day and talked to you again soon.

Joel Block: Hey, thanks for having me on the show.

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