December 11, 2022

JF3020: Securities Law & Common Mistakes to Avoid ft. Tilden Moschetti



Tilden Moschetti is the managing partner of Moschetti Syndication Law Group, a boutique syndication law firm. In this episode, he shares his expertise on securities law, the different deal structures he’s seen, and some of the common mistakes he’s seen clients make. 

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Tilden Moschetti | Real Estate Background

  • Managing partner of Moschetti Syndication Law Group, a boutique syndication law firm. 
  • Based in: Raleigh, NC, and Los Angeles, CA
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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, where we only talk about the best advice ever, we don't get into any of that fluffy stuff. With us today, Tilden Moschetti. How are you doing, Tilden?

Tilden Moschetti: I'm doing great. I'm glad to be here and talking to you and your listeners.

Joe Fairless: Well, I'm glad to hear it. And a little bit about Tilden and then we'll get into it... Tilden is the managing partner of Moschetti Syndication Law Group, which is a boutique syndication law firm. They've got two offices, one in Raleigh, North Carolina, and one in sunny Los Angeles, California. They have been focusing on syndication for eight years, and been a law firm for 19 years. So the first question I have for you, Tilden, is why the double down on the focus with syndication eight years ago?

Tilden Moschetti: Sure. So before that, I was practicing primarily in real estate litigation. So litigation is a world that's very unhappy, it's a world where there's a lot of fighting, and it was always taking things down and breaking things apart and destroying the other side... And it did not make for a lot of sleepful nights... So that was my practice. And I didn't even know what really real estate syndication was until a partner of mine said, "Hey, look at this deal here." And I was like, "Oh, yeah, that's a pretty good deal." And he said, "Well, let's syndicate it." I didn't really know exactly what he meant, other than I'd heard about it... So we proceeded to put that together.

Joe Fairless: So are you a securities attorney?

Tilden Moschetti: I am. I fashion myself as an ex real estate attorney. I don't really practice in the real estate law side anymore. It's primarily in securities, and really just in Regulation D is where my practice is.

Joe Fairless: And we'll get into Regulation D in a moment, so that everyone's aware of what that entails. Is it less exciting now, over the last eight years, than the first 11?

Tilden Moschetti: Oh, it's a lot more exciting. I love looking at deals. It's not only real estate we do; we also do businesses, even sometimes cryptocurrencies... And I get to hear a ton of new ideas. And just about when you've heard every way to structure a real estate deal, and someone will come in and be like, "I'm gonna do this." "Okay, that's pretty neat... So you can do that." And so to be a part of that is really exciting.

Joe Fairless: Regulation D, you said you focus on it... Will you elaborate on what that is for, non legal people?

Tilden Moschetti: Sure. The shortest summary is everything that's a security needs to be registered with the SEC, unless there's an exemption. One of those exemptions is Regulation D, which says you can raise an unlimited number of dollars from these kinds of investors, as long as you follow these kinds of rules. If you follow those rules, then it's not deemed to be a public offering, it's deemed to be a private offering, which means you do not need to register it with the SEC. So it's much more abbreviated, and it makes access to capital much easier.

Joe Fairless: And there's 506(b) and 506(c) offerings [00:04:39.13]

Tilden Moschetti: Yeah, they're part of Regulation D, and everything falls really under those two, and the other rules that are within Regulation D really are adjuncts. There's also rule 504, but nobody really does those anymore, because regulation C and B are so good.

Joe Fairless: Okay. You said often you get surprised. What about if we structured a deal this way? ...and it's a dynamic situation. Will you talk about some interesting structures that you've seen for how real estate deals have been set up?

Tilden Moschetti: Sure, and a lot of it comes from both the increase of technology and these things, as well as some of the newer ideas. Like, we now have short-term rentals as a major topic. A lot of my clients are doing short-term rentals and different ways that they're thinking of packaging them. I can't really go into too many specifics on how they're packaging them, but there have been some really creative ideas that really have been eye-opening. I was like, "Oh, yeah..." Or some ideas of just -- something that a lot of people are doing now is they're taking old hotels and converting them into multifamily; or they're taking large houses and converting those into shared housing, and then turning those into syndicated deals. Those are pretty exciting new ways to fund these things, to change the way that people are living, working and shopping.

Joe Fairless: Okay, so that's interesting... Whenever I heard you mention the structuring the deals, I was thinking from a legal standpoint, but you were talking about more of a business model, where maybe you're renovating hotels and converting it into multifamily, or renovating the office and converting to multifamily, or...

Tilden Moschetti: Yeah, exactly. [unintelligible 00:06:27.11] a lot. So a lot of people get really latched on to the legal side of it... And it's interesting, and "We're going to do an LLC versus an S-corp", or whatever it is... But at the end of the day, what everybody who's putting these deals together wants is they want to put together a deal that makes them money, that makes their investors money, so they can do the next deal, and to let the process work itself out. So we'll make sure that you're structured right, and if it's LLCs that's appropriate, then we'll do that. All those little nuances is really why you hire a lawyer in the first place, to take care of those details... And you definitely need to be involved, but they're not really the important thing to work on, which is working with investors, finding good deals.

Joe Fairless: Well, let's talk about from a legal standpoint, some mistakes or some misconceptions that clients of yours come to you with for what they think they can do, or what maybe they think they can't do, but they can.

Tilden Moschetti: The biggest one I hear almost every day, "Well, this is our first syndication. We've done this before with singl family, so we didn't need to --"

Joe Fairless: ...illegally.

Tilden Moschetti: It's like, "Well, you do. It's still a security." And it's really hard to go back and unwind that clock... So that's a big one. The other is, "Well, I can just get a template and put things together that way."

Joe Fairless: Let's talk about that first one, and then we'll continue with the second one. So the first one - if memory serves me correct, it is a security if others are expecting a return based on your expertise and they are passive. Is that it?

Tilden Moschetti: Yeah, those are the two key elements for syndicators of the Howey Test, which was the big Supreme Court case... So these are the four elements to be a security. And that's expectation of profit - if you're doing a nonprofit, you're not expecting to get your money back; not a security, SEC is not concerned. And you're relying on the work product of another. So the syndicators is the one putting the deal together, making the decisions. Most of the time, those investors are all passive; that immediately makes it a security.

Joe Fairless: What are the other two?

Tilden Moschetti: I don't know, I've never --

Joe Fairless: You've never talked about them?

Tilden Moschetti: I never have to worry about them, because they're always [unintelligible 00:08:57.00]

Joe Fairless: Fair enough. Let's see... Investment of money, common enterprise, expectation of profit... Well, we kind of combine those...

Tilden Moschetti: A common enterprise, so they're putting it into the same thing, and it's an investment of cash. Like, if you're investing something that's not cashe, it probably doesn't apply... Except if it has some sort of overwhelming value. Like, if occasionally somebody will do some sort of 1031 operation where they're getting the 1031 in an exchange, but really, that's cash that we're talking about, and it's still going in. Or they're dedicating the property to it, but it's still probably a security there; it's probably close enough to cash.

Joe Fairless: Why can't we use a template?

Tilden Moschetti: You can... What you're getting when you hire a lawyer is you're getting the insurance policy that you're going to be compliant. So using a template is like going out there without that insurance policy, and basically hoping that everything works right. We spend a lot of time go going through all the things that need to be disclosed, all the conflicts, all those things that are necessary, that an investor really needs to know, and then we back that up with our expertise, and not underwriting, but sort of a sign-up, which gives the syndicator confidence that they're going to be compliant.

So using a template, you don't get any of that. You're just basically putting in what worked for somebody else, and it might be okay, but chances are there's going to be something that isn't there, that shouldn't be, and possibly that thing will be very important. Perhaps you should have disclosed this thing and you didn't know to, or perhaps you needed to describe this use of funds better about how we're going to be spending it, or about how marketing fees work, or... All those things could suddenly be missed, and that could change everything from "Okay, we're going to be fine even if we were to get sued" to "Nothing's going to be fine, and everything will fall apart."

Break: [00:11:04.14] to [00:12:12.22]

Joe Fairless: And in court, ignorance is not a defense. Correct?

Tilden Moschetti: Ignorance is never a defense in this. And ultimately, I think a lot of syndicators -- because I think every one... I certainly charge up front. I think all of my peers and all of my competitors charge up front... The thing that gets missed is that ultimately, your investors are paying for it, but it really is a syndicator's insurance policy at the end of the day. So it protects them. Ultimately, it's being paid for by the investors... Why wouldn't you do it?

Joe Fairless: And it's not only the legal documents, but it's also filing them, right?

Tilden Moschetti: It's also making sure that the Form D gets filed, that the states get notified... And like what my firm does, I do a lot of deals. And I do deals for myself, because I still syndicate, and I do a lot of deals, obviously, for clients... So I know what everybody's charging in terms of fees. I know what normal structures look like. And I'm happy to make sure that my clients are successful... So I love it when they call me and say, "Well, what should we do about this situation?" because I know that's just putting them that much closer to a successful finish line. And you get that at no additional cost. It's just part of what we do is [unintelligible 00:13:30.00]

Joe Fairless: Let's talk about the normal fees for getting these documents done with an attorney, and the follow-through process, plus some consultation... What is that the range?

Tilden Moschetti: I would be surprised if a syndicator could find it for less than $10,000. They go up from there. It's based a lot of times more on the size of the firm than on anything else. When you go to a very large firm, like you go to one of the huge national law firms, you're going to pay a huge amount; you're going to pay 50k, 60k, 70k, 80k dollars. But you don't need that level. And what you really need is a more boutique level, like a small office that just does these, and doesn't have to feed a lot of people. So the giant law firms need to feed a lot of people, and they do a good job, but you don't need that. You need somebody who does this regularly. So you're looking at a range anywhere from 10k on the very, very low end - and I don't really even know anybody who's charging that - probably to maybe 30k at the top; somewhere in there.

Joe Fairless: Okay. Then the normal structures - what are the normal structures that you've seen? And I assume you are referring to the general partner and how he or she structures the deals for their investors.

Tilden Moschetti: Almost everybody - there's a set of LLCs, that you have two entities... I like to call it the investment entity, and that's the entity your investors put money into, that ultimately own the asset or assets... And then that is being managed by a sponsor entity, which is what your syndicator controls. So they're the ones in control of that, and they manage that investment through that sponsor.

Joe Fairless: When you are working with clients, what's a scenario that you can share, that you were presented, where the client was in a tough spot, and he or she came to you, and you had to try and fix it or help defuse the bomb?

Tilden Moschetti: Sure. Typical tough spots that are complicated, especially like a 1031. I've got this investor who wants to give me a large sum of money, but they have to do it in a 1031 exchange. It's doable, it's really challenging, and I wouldn't advise doing it on a small scale, or trying to do it on a small scale... If they're trying to invest 500,000, it might be worth it. If they're trying to invest 10,000, absolutely not. So you'll need a syndication attorney to take care of that piece of it. But at the same time, the investor will need their own 1031 attorney to make sure that they don't blow their taxes, and then there will probably need to be a real estate attorney as well, to make sure that the [unintelligible 00:16:24.14] agreement works appropriately. You're taking a round peg, square hole, because the world of title and that world of real estate and the world of securities are very different things, and the way that we think about things and the way that things fit together just are different. So it's pretty seamless when it's a single property and everybody's investing cash, but when a 1031 is involved and the IRS is there, you've got to make sure you've got everything covered.

Joe Fairless: High-level, how do you structure that?

Tilden Moschetti: Most of the time it's through TICs, tenant in common. So there'll be two tenant in common -- for example, if you had one investor, there'd be a tenant in common that is the investor and a tenant in common that is the rest of the syndication; then there will be a TIC agreement between the two tenant in commons about how things will work. And most of the time, we'll also bring that investor in that's doing the tenant in common in underneath the investment entity as a different class of ownership, so that way there's still a conduit for paying of fees and things like that. But it gets more challenging in terms of making sure that distributions happen right... It gets very complicated very, very quickly.

Joe Fairless: What's something that we haven't talked about, that you think we should?

Tilden Moschetti: I think the most important thing is - syndication is great. You wouldn't have the show if you didn't think so, too. I think that what people who want to get started in syndication need to do is they need to think about what I call the founder investment theory. They need to think about what it is that they're presenting to investors, and how are they showing up? So what makes them different from everybody else that's putting together a deal? Why should investors say yes to this particular sponsor, and no to all the others?

So that goes from property type, expertise, what kind of risk model that they're typically using, and how they present themselves is important in that, too; how that fits in with legal is - that's how you show up. So when you show up with a really good-looking PPM, you've got a really good pitch deck... Which isn't something we do, but it's something that's important. That all just tells the investor you're for real, you should be trusted, and you're going to take good care of their money, rather than just showing up expecting everything to work out.

Joe Fairless: Taking a step back, based on your experience, both as a legal mind and also a real estate investor, what is your best advice ever for real estate investors?

Tilden Moschetti: Learn to underwrite your own deals. So learn to underwrite everything. The more you know about how to do your own financial analysis of a property, how things work, how risks work - being able to see that is going to give you an enormous leg up on being able to pick the right investments to go, into whether it's being syndicated, because you'll know when the things have been put together right or not, to just finding a deal that you're gonna own for yourself.

Joe Fairless: We're gonna do the lightning round. Are you ready for the Best Ever lightning round?

Tilden Moschetti: Yup! Let's go.

Joe Fairless: Alright. What's the best ever deal that you've personally done?

Tilden Moschetti: A development deal in California that did a 45% return in one year.

Joe Fairless: Wow. Is that project level or net to investors, if you had any?

Tilden Moschetti: That was to investors.

Joe Fairless: Wow, that's amazing. You were a general partner on that?

Tilden Moschetti: Yup.

Joe Fairless: Bravo. What was the business model?

Tilden Moschetti: A ground-up development of a retail pre-leased property.

Joe Fairless: Over what period of time?

Tilden Moschetti: Just over one year, so we could get it --

Joe Fairless: Wow. In and out?

Tilden Moschetti: Yep.

Joe Fairless: What deal have you lost the most amount of money on? And how much?

Tilden Moschetti: I've never lost money on a deal, fortunately. I will one day. I've lost sleep on deals... [laughs]

Joe Fairless: What's the best ever way you like to give back?

Tilden Moschetti: I give back regularly. My job is part of how I give back. I like to invest in my clients, invest my time... I really, really do like them quite a bit. I don't take clients that I don't like, so I want to over-deliver. I love entrepreneurship. I love people making money and helping other people make money... I think it's great.

Joe Fairless: And how can the best ever listeners learn more about what you're doing?

Tilden Moschetti: Probably the best way is on my website,

Joe Fairless: Tilden, thank you so much for sharing your expertise on securities law, on the common structures that you've seen, and on some common mistakes that you hear apparently very frequently, one of which is that "Well, this is the first time I'll be doing a syndicated deal." No, you've been doing them all along, you just haven't properly put it together and registered it. And so hopefully, that helps out some listeners who have that thought process now, and they will course-correct so that they don't get in trouble. Well, thanks so much for being on the show. I hope you have a best ever day, and we'll talk to you again soon.

Tilden Moschetti: Thank you.

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