November 12, 2018

JF1532: Legal Apartment Syndication Jargon From A Boring Corporate & Securities Lawyer with Mark Roderick

Mark has been  guest before, but we did our shows backwards. Usually, we’ll have a guest on to give their Best Ever Advice and then come back for a weekend show after that. Well, we’ve heard Mark’s Skill Set Sunday Episode already, now let’s hear his real estate investing story and Best Ever real estate investing advice. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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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, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Mark Roderick. How are you doing, Mark?

Mark Roderick: Pretty well, thank you. How are you?

Joe Fairless: I’m doing pretty well as well, and Best Ever listeners, you recognize Mark’s name because — well, one of the reasons might be because you’re a loyal listener; episode 614, titled “How to avoid securities fraud and properly raise capital” – that sounds important. So episode 614, if you’re raising money, then go listen to that one. But we never got his best ever advice and never did a regular episode; that was a Skillset Sunday episode. So today we’re gonna do a regular episode.

A little bit about Mark, as a refresher… His words, not mine – he’s a very boring corporate and securities lawyer. I think those are your words, not mine…

Mark Roderick: They are, yeah.

Joe Fairless: Okay, alright… Unless…

Mark Roderick: Yeah, and very accurate.

Joe Fairless: …my team member might have slipped them in, just to play a trick on me… But okay, they’re yours. Also, since the Jobs Act of 2012, he has spent all this time in the crowdfunding space. He writes the widely-read blog, which provides legal and practical information for portals and issuers… And you can say hi to him at his company website, which is in the show notes. Based in Philly. With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mark Roderick: Well, it was a clear blue day when I was born, Joe… [laughter] Do you want me to start there?

Joe Fairless: We could fast-forward a little bit…

Mark Roderick: Yeah, fast-forward a little bit, like to today… So I have always represented entrepreneurs and their businesses, including tons of real estate developers, and in that regard, of course, real estate developers are always looking for money, so that’s one of the things, that I’ve always represented folks raising capital. So when I saw the crowdfunding act on the horizon, I realized this was gonna be the most consequential law of my career, and indeed it has turned out to be. So every since then, for the last five years, I’ve spent all of my time in the crowdfunding space. Crowdfunding is still probably 90+ percent real estate, so I spend 90+ percent of my time doing real estate crowdfunding of various kinds. So that’s my background.

Joe Fairless: I’m gonna take it from a direction a little bit different… So instead of thinking about it from — you call it “real estate developer”, so I believe you’re referring to the general partner, the syndicator who’s putting the deal together… That’s who you usually work with. But what I wanna do is I wanna look at it from the passive investor’s standpoint. So from a passive investor standpoint, when a sponsor reaches out to me about an opportunity, from a passive investor’s standpoint what should I make sure that he/she has in place, so that everything’s on the up and up?

Mark Roderick: Well, probably the most important thing is a successful track record. A person, and I wanna say a guy – even though real estate is a very male-dominated industry, but a person with a successful track record would be the place to start, for sure. A new person on the block, who’s never done a real estate development before, if he’s your brother maybe, or if you have some reason to believe that that development is gonna be successful… But if we’re talking in generality, someone with a track record who is doing a deal that is consistent with his/her track record. So if you have a person who’s spent 20 years doing successful multifamily projects and he’s doing another multifamily project, that’s certainly the place where I would start… And then you wanna make sure, of course, that the project has financing, and all that kind of stuff. But a track record – you invest in people.

Joe Fairless: Track record, got it. I asked a poor question, based on what I was intending to ask. What I intended to ask is from a regulatory standpoint, what should the passive investor look for to make sure that the sponsor is adhering to whatever they need to adhere to, so that it’s actually a security and they’re not getting bamboozled?

Mark Roderick: Well, that’s an interesting question, because from the most cynical perspective, the investor doesn’t care. So if we’re talking about securities laws – and your question is “How does an investor know that the sponsor is complying with the securities laws?”, if the sponsor is not complying with the securities laws, there’s no downside to the investor. In fact, there’s a potential upside, which is if the investor loses money, then he/she has the right to sue the sponsor if the sponsor didn’t comply with the applicable securities laws. The investor doesn’t get in trouble, only the sponsor gets in trouble.

Now, that is a cynical and short-sighted view of the situation, because my experience is that if a sponsor isn’t complying with the securities laws, then he/she probably isn’t doing a lot of other stuff right either… So to now actually try to answer your question, the sponsor should be able to show me as an investor, should be able to explain to me how the offering is being conducted, which securities law cubbyhole the sponsor is relying on. Certainly, I wouldn’t expect the sponsor to be an expert on securities laws. I would expect the sponsor to have a lawyer who knows something about securities laws, and I would expect the sponsor to be able to give me some good-looking, profesionally-prepared documents that illustrate that the sponsor knows what he’s doing from a legal perspective… Because again, if he/she doesn’t, that’s not a good sign overall.

The sponsor should be able to say “Yeah, we’re doing this offering under Reg. D”, for example; that would be a typical thing. Or “This is a Reg. A offering” and the sponsor is not gonna know all the details of what that means, but at least it allows the investor to probe further.

Joe Fairless: Got it. Okay. That’s helpful. So in terms of the good-looking, professionally-prepared documents, what specifically – and I’m sure it depends, but maybe you can go through a couple scenarios – should those documents be?

Mark Roderick: Well, in a typical, professionally well-done offering, there are three documents. One is an operating agreement or an LLC agreement for the deal, if it’s an equity investment, or a promissory note if it’s a loan. And you know, it should be more than two pages long. The second document is a so-called subscription agreement, or I refer to them as investment agreements. It’s a document that the investor signs to actually make the investment. Then the third document – you don’t always see it, but you usually see it certainly in a larger kind of deal – is a disclosure document. That’s the generic term. It’s also called the PPM (private placement memo). That’s the document that describes the deal, hopefully using plain English and without a huge amount of legal boilerplate, and includes all the bad stuff, the underside of the deal.

When the sponsor first pitched you the deal, and they showed you this PowerPoint with how the new building is gonna look when it’s done, and all the beautiful people walking around and so forth – that’s all the good stuff. The disclosure document tells you all the real stuff and all the risks. “Well, we don’t have our approvals yet. Well, we don’t have financing in place yet. Well, all these things…” So the disclosure document, if done properly, is a very important document.

Those three documents are what you would expect to get. If the sponsor says “Well, we didn’t do a disclosure document”, that wouldn’t necessarily be a deal-breaker; it’s sort of an alarm bell, “Hm, why didn’t you?” It’s not necessarily a deal breaker, but in most professionally-done deals, that’s what you would see.

Joe Fairless: What would be the reason why – and you might have to speculate here – the sponsor wouldn’t do a disclosure document, but people do invest in the deal because of the reason given? I guess my question is “What would be the reason given by the sponsor that’s somewhat logical for not doing a disclosure document?”

Mark Roderick: And it is done. Lots of times a deal will get done by a sponsor without a disclosure document if indeed it is the same kind of deal the sponsor has done two dozen times before, and the investors have invested with the sponsor two dozen times before. So there’s a level of trust; this is another not cookie-cutter, because no real estate deal is cookie-cutter. But if there has been a level of trust established in the relationship between sponsor and investor, then that is okay; that doesn’t say anything bad.

Lots of times, as you and your listeners certainly know, in very small deals, the developer 1) may not have knowledge of what the securities laws require, may not have a lawyer; he has a real estate lawyer, but not someone who knows about securities… And/or either can’t afford it, because the disclosure document is the most expensive part of the documentation, or just doesn’t wanna do it. If you’re the investor and you say “Well, it really makes me uncomfortable that you don’t have a disclosure document” and the sponsor says “Okay, I’m gonna go over to Gale over here, because she’ll invest without one.” My response is, “Okay, be my guest. Go talk with Gale.”

So it is usually some combination of those things. On the good side, there’s a relationship, there’s a trust, there’s a track record; on the bad side, we don’t know about the requirement, or we know about it and we just don’t care.

Joe Fairless: Does that open up more liability for the sponsor, if they don’t have the PPM but they have the operating and the subscription agreement?

Mark Roderick: Yes. It opens up hugely more liability. Without going into a whole thing about all the ways that sponsors can be liable to investors, the most likely way that they can be liable is if they lied to investors. “Oh, you told me you already had your approvals.” Now, of course, this only happens if the investors lose money. If we have the kind of real estate market we’ve had for the last eight years, where it just goes up, then all this becomes academic. So an investor loses money, and suddenly his memory conflicts with the memory of the sponsor. The investor says “You didn’t tell me that. You told me you already had approvals. You told me that retail space had already been leased”, and all kinds of things.

The purpose of a disclosure document is so that when the investor says “Oh, you didn’t tell me you didn’t have zoning yet”, you can pull it out and go “Well, actually, Joe, here, on page 21, it actually says we don’t have zoning yet.” That’s the whole purpose of the disclosure document – to protect the sponsor from claims like that. If you don’t have a disclosure document as a sponsor, you are leaving yourself wide open to all kinds of claims by investors… Of course, with the benefit of hindsight at that point, that you were untruthful with them. And if you were untruthful, you’re liable. You’re personally liable to give the investors all their money back. So that’s a big risk. That’s what the disclosure document is all about.

Joe Fairless: When passive investors receive the prepared documents – an operating agreement, a subscription agreement and a private placement memorandum – should they forward that to their attorney to look at? And if so, what should they advise that attorney to comment on?

Mark Roderick: Ideally, yes, they should. But the second part of the question is super-important – what should they advise the attorney? The individual passive investor should not expect that their own attorney is gonna rewrite all those documents, or is he even gonna renegotiate significant parts of the deal. Let’s say the deal has a 7% pref with a 30% promote. The investor’s lawyers should not, in my opinion, be trying to say “Well, you know, it really should be a 7,5% pref, and a 20% promote.” That’s not the purpose of the review.

There are two things that the investor’s lawyers should be looking at. 1) Do the documents accurately reflect what the investor thinks the deal is? So if I’m the lawyer in that position, that’s my question to my client, “What do you think this deal is? You tell me what the deal is, and then I’m gonna tell you whether the documents do that.” And second – and I probably should have put it first in terms of importance – the absolutely most important thing is that the investor does not have personal liability. Let’s say the investor goes to the lawyer and says “I wanna invest $25,000 in this deal.” The absolutely most important role of the lawyer is to ensure that the investor’s liability is limited to losing his $25,000, and that there’s nothing in the documents that in any way — there’s no capital calls, for example; “Well, you put in 25k now, but we can ask you for more money later.” Or the structure of the deal is such that the investor could have personal liability for a bank loan, or anything like that. Those are the two hugely important things, and that’s what the lawyer’s role should be limited to, in my opinion.

Joe Fairless: Is that a real estate lawyer, or should they hire a securities attorney?

Mark Roderick: It doesn’t have to be a securities lawyer; probably not a real estate lawyer. Just a regular, boring, corporate lawyer, really.

Joe Fairless: Another boring lawyer… [laughs]

Mark Roderick: Another boring lawyer. Just someone who knows how to read contracts, basically, and in particular knows how to read operating agreements or limited partnership agreements, but it’s not a super-strange specialty. Any business lawyer should be able to review the documents with those two things in mind.

Joe Fairless: When you speak in seminars or you speak in front of a group, what’s a couple typical questions that you get asked?

Mark Roderick: Well, I have some funny responses to that, but it depends on what the group is. I often speak to groups that include real estate developers, or the owners of crowdfunding portals. Certainly, a question that I get asked a lot by real estate sponsors – there are always two questions in the first conversation. One is “Does this work? Can I really raise money online, in the crowdfunding space?” and the answer is yes. The second is “Is there any special liability that I am taking on by raising money online versus offline?” and the answer is no. So those are the two main questions.

There’s always questions about the technicalities of verifying that investors are accredited, and how much of a pain in the neck it is… And dealing with lots of individual investors, I get asked by investors and reporters “What are the rules for investing online?” and “What things should you be careful for?” and I always say if you’re investing online, only invest through a reputable portal; don’t make your first investment just with some stranger on some website that you found… So those are the questions that I’m asked most frequently.

Joe Fairless: And you gave the answers, too…

Mark Roderick: I did. And that was for free, yeah.

Joe Fairless: Yeah. [laughs] We all appreciate that. Based on your experience in securities law, what is your best advice ever for (we’ll say) passive investors who are looking at opportunities?

Mark Roderick: Well, I will first give the advice that I just gave – go to the best real estate crowdfunding sites, and only invest there. The second thing I would say is unless you’re really a real estate expert yourself and know how to distinguish a good multifamily deal from a not as good multifamily deal – and I’m not that expert; I’ve been representing developers my whole career… But the point is build your own mutual fund of deals. If you start out saying “I wanna invest $100,000 in online real estate” don’t invest $100,000 in one deal. Pick five. And/or buy one of the very high-quality real estate investment trust REIT products that are being offered, again, on the best portals. Don’t buy one with a 12% loan from a broker. Go online and buy one of these very high-quality REITs, which consist, of course, of pools of assets, so you’re not limited to a single asset. So go with quality, and diversify. I think that’s pretty good advice.

Joe Fairless: I think that’s pretty good advice, too. On that note, we’ll go into the lightning round. Are you ready for the Best Ever Lightning Round?

Mark Roderick: Well, I guess I am.

Joe Fairless: I know you are! First though, a quick word from our Best Ever partners.

Break: [00:21:53].23] to [00:22:40].08]

Joe Fairless: Alright, best ever book you’ve recently read?

Mark Roderick: Best ever book I’ve recently read?

Joe Fairless: Yeah.

Mark Roderick: Oh, my gosh… It wasn’t a real estate book. I’m reading a great biography of Joseph Stalin right now. Does that qualify?

Joe Fairless: Absolutely, if it’s the best one you’ve recently read… What’s the best ever challenge you’ve solved as a securities attorney?

Mark Roderick: Boy, that is a great question… What is the best challenge that I’ve solved…? I think I’ve solved or gone a large way towards solving – making securities offerings easier to understand and less expensive. That has been my goal since the beginning of this industry. It will never be completely solved, but I think I’ve taken really big steps in that direction. It is less expensive now than it used to be, and the way I do them – I hope that ordinary investors can understand what they’re getting into. I think that’s very important.

Joe Fairless: How do you walk the fine line of removing some of the boilerplate words in order to make it more common sense and easy to read, versus increasing liability as a result of that?

Mark Roderick: Great question. You should do a show, Joe; you ask good questions. So the two actually go together. The way I do it is typically I just rip out everything that’s there, and start fresh. Legal boilerplate is like barnacles on ships; they never get smaller, it just grows and grows and grows, so you get these ridiculous legal documents that no lawyer ever subtracts, they only add (“Well, what about this…?”) and you end up with things that are so unreadable that I believe they increase liability, because no one could possibly understand them.

Typically, with all my documents, I have just started fresh; I’ve been doing this a long time, I know what’s important, I know the kinds of things that actually happen out there in the real world… So the answer is use plain English, try to write it the way an eighth grader could understand it, and make sure you capture everything important. That’s why I call myself a boring corporate lawyer, because I just take great pleasure in doing that, and writing things that are understandable and clear, but also legally effective… And it really does usually start with just ripping out what’s there.

Joe Fairless: Best ever way you like to give back?

Mark Roderick: One, on a day-to-day basis people call me. I have a very visible internet presence, and someone called me today, for example. A lawyer called me; he represents a broker-dealer getting into the crowdfunding space, and just needed advice. That happens all the time, and I just give the free advice. I somehow feel as if that is part of my role in this industry which has been so good to me, that I give back; I just provide free advice to hundreds and hundreds of people, and I feel good about that. I do feel that in the scheme of things I’ve sort of drunk the kool-aid about the social benefits of crowdfunding and democratizing capital, and bringing capital to the masses, and great deals to the masses, and I think it’s really valuable. I hope when we look back a few years from now and we say “Wow, that was really a good thing”, and I can say I helped, in some small way, I helped build that. That makes me feel good.

Joe Fairless: I love it. How can the Best Ever listeners get in touch with you?

Mark Roderick: Well, lots of different ways. They can go to my blog, which I guess — can people see a link on the screen?

Joe Fairless: Yeah, we’ll have a link in the show notes, but you can mention the URL too, again.

Mark Roderick: Yeah, it’s Or they can type my name in Google, “Mark Roderick crowdfunding lawyer” and they will easily find me, and shoot me an e-mail.

Joe Fairless: Awesome. Mark, this was a fun conversation, and educational… And those are the best kinds, where you learn and you also have fun. I love how we talked about the perspective of the passive investor and what to look for. We took a different slant on things… Three things that it should have in place — well, actually higher-level you want to make sure that the sponsor knows what security law is being used, maybe ask for their lawyer reference… Although if you have the legal documents, which should at least include the operating agreement, the subscription agreement and the PPM, it will have their attorney’s information in there, so you’ll be able to see that… And you talked about many other things from a passive investor’s standpoint, as well as we touched on some from the sponsor’s standpoint.

Thanks for being on the show. I hope you have a best ever day, I enjoyed it, and we’ll talk to you soon.

Mark Roderick: Thank you so much, Joe. Nice talking to, as always.

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