July 11, 2019

JF1773: How To Secure Commitments From Your Passive Investors Part 8 of 8 | Syndication School with Theo Hicks

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Now that we’ve had the first conference call with our passive investors, we need to provide them with proper documentation. Theo will discuss that and a little more on today’s Syndication School episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.

Each week we air two podcast episodes, every Wednesday and Thursday, and now we’re doing videos as well, so you can watch these videos on YouTube, or you can listen to these episodes on iTunes, or any other podcast app that you’re using.

These two podcast episodes are typically a part of a larger podcast series that’ focused on a  specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, spreadsheet, a template, something for you to download for free. All of these free documents, as well as the past Syndication School series can be found at SyndicationSchool.com.

This episode is part eight of an eight-part series. Yes, we’ve reached the end of the process for securing commitments from your passive investors. If you haven’t done so already, I highly recommend listening to parts one through seven, because this part may not make much sense if you haven’t gotten that far yet.

As a refresher for those who have listened to it, or to know what you’re going to learn when you listen to those, in part one and two we discussed step one of the five-step process for securing commitments from your passive investors, and that is to create the investment summary. In part three we went to step two, which is to create the email to your investor database, introducing the deal.

In parts 4-7 we went over step three, which is the eight-step process to a successful conference call. Once you create your investment summary and you send that to your investors, you also want to have a conference call where you go over the deal in more detail, as well as answer any questions your investors have. So that’s step three.

In part four we went over parts 1-5 of that process. In part five we went through parts 6 and 7 of that process, and then in part 6 and 7 we went over the 8th and final step, which is that Q&A session.

In this episode we’re going to finish off the five-step process for how to secure commitments from your passive investors, and that is going to be the follow-up. So once you’ve finished your conference call, if it’s at 11 o’clock at night then maybe you can do it in the morning, but as soon as possible you want to prepare an email to send to all of your investors, that includes a link to the conference call recording.

I’ve mentioned this on other episodes, but I’ll say it again quickly… The email service we use is MailChimp; you can use whatever email service you want. You probably don’t want to just make individual emails in Gmail, because that’s gonna take a long time… But again, that’s really up to you.

And then the conference call software that we use is called FreeConferenceCall.com. It’s free. Just go to FreeConferenceCall.com and you can get a call-in number. It’s actually the same call-in number all the time, so your investors won’t have to remember a new number, and really neither do you… And it allows you to actually record the conference call, so you can download it after the call is over… And that’s what you’re gonna want to use to send to your investors.

Due to the scheduling issues, timezones, not every single investor is gonna be able to  attend the call, even if they are really interested in investing. So you don’t want them to either not have the proper information to invest… Obviously, if they don’t, then they’re probably not going to invest anyways, so a really good way is to send them the recording. Heck, you might have people who when you first sent them the deal were not interested or maybe didn’t have the capital, so they miss the conference call, but then a week later they won the lottery or something, they got money, or they changed their mind and decided that they want to invest – well, now they can just go back and listen to that recording, rather than sending you all 30 of those Q&A’s, plus maybe even more questions because they don’t really have access to anything but the investment summary.

So don’t just send out the email to those who attended. Make sure you send it out to your entire email list. That way you’re hitting all the people who couldn’t make it because of either scheduling issues and they are interested, or were interested but now aren’t interested, or might be interested in the future.

Also, in that email you might wanna go ahead and recap some of the main highlights from your initial email that you sent out in step number two. If you remember, in the initial email to your investor database you included a link to your investment summary, and then provided 3-5 main selling points of the deal… So you’ll want to reiterate those in the email to your investors that includes the link to the conference call.

Then you can also include any extra information about the deal that has come up between that first email and this email. Maybe you’ve gotten an inspection report back that came back clean, maybe you’ve renegotiated the sale price down, maybe you secured a low interest rate debt… If you don’t have anything new, maybe you should include something about the market, but you always want to include new pieces of information each time you’re contacting investors… Although technically the conference call link is new. But as much new information as possible. The more new information, the better.

Then you’re also gonna want to reiterate any process for funding the deal. Let investors who are interested know how they can actually invest. Typically that is if they want to invest a certain amount of money, to email you that number, as well as if they’re gonna be investing as an individual or an entity. Then you can let them know that you’re gonna reserve a spot for them, so that once you’re ready to actually finalize the investment with the private placement memorandum, that they are going to obviously have a spot in the deal. So that’s more of a first-come, first-serve basis, unless [unintelligible [00:08:54].29] whoever invests the most amount of money. That’s what we do. I guess technically you could do it based off of the money, but it’s probably better to do it on a first-come, first-serve basis.

After you’ve done a few deals, that email might be enough. You might just be able to send out the first email, notifying people about the deal, and get 40% of the equity of the equity required in verbal commitments, and then after the conference call, when you send out the email, you get the remaining 60%, and then you get an additional 50% on the waiting list.

If  you’re just starting out, it’s probably not gonna be that easy. It could, but it probably won’t be that easy, so you’re going to have to do a little bit more following up than someone who’s more experienced.

A few things you can do is after a few weeks after sending out that new investment offering conference call link (that email we’ve just discussed), then you can send out another email to all the investors who haven’t committed yet. Don’t send out an email to people who have committed, because it’s gonna be weird when you say “Hey, you haven’t committed yet. What’s going on?” Obviously, you’re not gonna say it exactly like that, but… MailChimp allows you to create segments, so you’re gonna segment out all the investors who have already committed, and focus on the ones who have not.

And then keep sending them emails with new pieces of information about how great of a deal it is, and how great the market is, and how great the team is. Providing them with a new piece of information will reinforce that you yourself are confident in the deal…

Examples are “The appraisal came back above the contract price. We’ve got all this free equity.” Maybe you went ahead and did a more detailed rent comp analysis and found out that you can actually demand higher rents, maybe the occupancy rate went up at the property over the past month, maybe you discovered that the income was higher than it should have been, or the expenses were lower than they first were… And also mention how much capital you got so far, to kind of promote scarcity. You can say that “Right now we’re 60% full, so get in while you still have the chance”, and then essentially just continue to repeat this process over and over again, until you’ve filled that up.

This is why you’re talking to investors beforehand. You should have an idea of how much money you can raise, and that number needs to be greater than the amount of money you need to close on the deal, so you’re not scrambling. Worst-case scenario, you can reach out to another syndicator or another money-raiser and have them help you, but ideally you do it all yourself… Or not ideally. It just depends on what you wanna do. If you wanna raise half the money yourself, so you can do bigger deals and have other people help you raise the money, then that’s perfectly fine as well. That’s step four, the follow-up.

Lastly, step five is to finalize these investments with your investors. All the ones who have committed verbally – they actually need to sign some things and then send you their money. So once they have verbally committed, then you’re gonna want to add them to a separate list; maybe your money-raising tracker that we’ve given away for free on Syndication School… And you’re going to want to send them these five or so documents in order to finalize the investment. You also need to make these documents, and I’ll explain what these documents are, and who makes these documents.

First – and I’m sure everyone knows what this is – the private placement memorandum (PPM). The PPM is a legal document that highlights all the legal disclaimers for how the investor could lose money in the deal. So the PPM is there to protect you as the syndicator and your personal assets from your investors in the event of them losing a portion or all of their capital invested. It also gives your investors all of the potential risk factors included in the deal, whether or not each of these is likely to happen. So it’s literally page after page after page of every single risk that can happen, every single potential thing that can happen that would make the investors lose their capital.

Generally, the PPM is broken down into two major components. First will be the introduction, which will include a summary of the offering, a description of the asset being purchased, the minimum and maximum amounts, key risks involved in the offering, and a disclosure on how the sponsor (the syndicator) makes their money.

Then the second component is where it covers all the risks and disclosures. It includes information about the sponsor, the offering description, and literally a list of all of the risks associated with the offering.

The PPM also has instructions for how they can fund the deal, whether that’s via check or via wiring. It has instructions on how they can actually submit their capital to make sure that they are indeed investing in that deal.

So your first PPM should be prepared by a securities and a real estate attorney, and then all of the future PPMs can probably just be created by your real estate attorney, and for each deal  you just review it.  So you don’t need to make a brand new PPM for each deal; you just need to use your existing template and then essentially fill in the blanks… Because obviously, it’s gonna be more expensive to make a new one each time, plus it’s gonna be time-consuming, hence why it’s more expensive. So that’s number one, the PPM, and that’s something you’re gonna send to your investors.

Next is the operating agreement. For each new apartment deal, Joe’s company will form a new LLC. Joe’s company is the general partner of the LLC, and then all of the passive investors buy shares of that LLC to become limited partners. So the operating agreement essentially just lists out the responsibilities, as well as the ownership percentages for the GP and for the LP. And usually, this will just be included as an addendum to the PPM, or it might be separate… It really depends on how your attorney makes these documents. But you’re gonna have your real estate attorney prepare a new operating agreement for each property; and it’s even better if you have your securities attorney review it at the end. So again, this could be a separate document, or it could be included on the private placement memorandum.

Number three is the subscription agreement. The subscription agreement is a promise by your LLC to sell a specified number of shares to your investors at a specified price, and it’s a  promise by your investors to pay that price. For example, you’ll most likely be selling $1 shares; so if you need to raise a million dollars, then you’re selling a million shares. Someone who’s investing $50,000 will be buying 50,000 shares, so the subscription agreement is saying “Hey, we will sell  you these $50,000 at one dollar, as long as you agree to pay $1 for each of those $50,000 shares.” Again, this is something that you’re gonna want to have your real estate attorney create for each deal, as well as have your securities attorney review as well. Again, this might be an addendum to the PPM. So it might just be one long document, that the PPM and all these other smaller documents are attached to, just so you don’t have to send your investors a bunch of different forms.

Next is the accredited investor qualifier form. This is required based on whether you’re doing the 506(b) or 506(c). There are other offerings – I believe we’ve gone over this already before – like Regulation A, I think… But these two are the most common. So most likely you’re gonna be selling private securities to your limited partners under rule 506(b) or 506(c), with the key difference being that 506(c) allows you to actually advertise or solicit your deals to the public, whereas 506(b) offerings do not, which means you have to rely on people that you already have a substantive pre-existing relationship.

So if you’re doing a 506(c) offering, then you must have a third-party service actually review the tax returns, and bank statements, and other financials of the investor in order to confirm their net worth… Or there needs to be some sort of written confirmation from that person’s broker or attorney or certified accountant. If you’re doing 506(b), a third-party is not required, so they can just self-verify that they’re accredited or sophisticated, and just say “Hey, I’m accredited” or “Hey, I’m sophisticated.” So if you want to have a form that your investors can fill out to self-verify if you’re doing the 506(b), then you can send them your own accredited investor qualifier form… But if you’re doing 506(c), then you need to do more than just that.

Again, this is a form that you can have created by your securities attorney, and unless the accredited investor qualifications change, you can just keep it the same.

And then lastly – again, this isn’t like a requirement, but if your investors don’t want to have a check sent to their house every month or every quarter, then you can set them up on direct deposit, and that’s something you wanna do before you close. So you can send them a document that essentially allows them to fill out all the information that you need from them in order to set them up on direct deposit.

So again, you’re gonna have your securities attorney and your real estate attorney create the PPM, the operating agreement, the subscription agreement, and then you’re gonna want to send those to your actual investors. This is when another email comes out, and this is, again, one when you’re gonna segment out people that have not committed or are not investing, and just send it to people that are investing. At this point is where you want to actually make a list for that specific deal.

Before you were most likely sending out the new investment offering email, your conference call recording email and any subsequent follow-up emails to your massive investor list, whereas now you get to the point where you’ve got your commitments, so people who are investing don’t really care about what’s going on with this deal, so you’ll want to create a specific list for this deal… And this will be your first email to that list.

Here’s a sample email that we send out to our investors… And again, don’t copy this exactly. Put it in your own words. Obviously, you’re not gonna use the emails and the deal name that we have in here, but again, these things are all supposed to be used as guides. Don’t just copy things verbatim… Although I guess I can’t stop you.

The title is “Legal docs timing + Next steps.” The body is: “You’re a confirmed investor in this deal. We are sending out the PPM today for this deal. If you do not see it in your inbox, please check your Spam folder and there is a good chance it is in there. Once completed, you’ll get an email that is from *your company name*.”

We use DocuSign. We include the email that should be the From. And the title of the email will be “Please DocuSign *deal name* Private Placement Memorandum”, and then the individual’s name or the entity name. “When you receive that email, please review, sign and complete via DocuSign. The funding instructions are in page one of that document. Once we receive your funds, you’ll receive a confirmation email approximately 24-48 hours after you send that email [unintelligible [00:19:20].05] will come from this email address. We are looking forward to a successful partnership on this deal with you. If you have any questions in the meantime, feel free to reply to this email or call me at *number for Joe & the Ashcroft team*.

Again, once the PPMs are done on your end and you know when you’re gonna be sending them out, then you want to — obviously, have this email drafted beforehand, and just click that Send button once you’re ready to go. Once the investor has actually signed and funded the deal, then they’re locked in. That’s the only point where actually they’re locked in. You might wanna have maybe a “Hey, please do this within seven days, or else you’re gonna lose your spot”, depending on if in the past you’ve had trouble with investors actually funding the deal. It really just kind of depends on what you’re comfortable with.

Then once you have the money in hand, then it’s time to close. So the three things you need to do between contract to close is 1) secure your debt from a mortgage broker or a lender; 2) perform your due diligence, and then 3) secure commitments from your investors. We have done all three of those on the Syndication School podcast.

That concludes this episode, as well as the series of how to secure commitments from your passive investors. Eight parts, we did it. To listen to parts one through seven, and to listen to the other Syndication School series about the how-to’s of apartment syndication, and to download the free documents for this series, as well as previous series, visit SyndicationSchool.com.

Thank you for listening, and I will be back next week to talk about closing.

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