Just how does a real estate
syndicator or a fund sponsor?

Think about the exit? How are we
going to exit out of this

property? What is the mechanisms
that we can do that this video

is going to go through the five
different ways of exiting out

getting your investors back
their money?

My name is Tilden Moschetti. I'm
a syndication attorney with the

Moschetti syndication Law Group.
Let's go through those five

different ways in order to get
out of a property to exit and

then get investors money have
that capital event occur. So the

first way is very clear cut,
it's probably what you think of

first, well, don't we just sell
the asset? Yeah, that's exactly

what you do. You sell the asset.
Now, whenever that happens, the

asset gets sold. The money's
sitting there. And now what do

you do with it, you just follow
through what you told them, Look

at the operating agreement, look
at the PPM look at everything

you've told them, and use that
like a recipe. For example, if

you've got a waterfall structure
with a preferred return and

says, Well, first you give
investors the money back, then

you give a preferred return of
8%, just making numbers up here.

And then we've got a 7030 split.
So 70% goes to the investors and

30% goes to you the sponsor, you
just follow that like a clear

cut example. And then you give
everybody and accounting you're

done at the end of the day,
that's the most common way that

happens in I mean, that's
certainly the way that you're

going to plan will has the
possibility of happening because

certainly, it happens probably
in 90% of deals. Probably the

second most common way is called
a refinance exit. So if the

property value is here, right,
but you've also got, the loan

amount is already down here. And
so it's got pre existing debt,

or maybe it doesn't have debt at
all, what the sponsor can do is

say, Okay, I'm gonna go put debt
on it, I'm going to put it up

here. And so now I can give
investors that money. So we set

the fair market value, let's say
the shareholders own 70% of the

asset. And I'm able to get
because it's such a great asset,

I'm able to get a loan to value
of 75%, you go to the bank, you

say, give me 75% on the value of
the property, and then you go

back to your investors and say,
Look, fair market value of this

is, is here, we have this pool
of money from refinancing,

here's the money. What it
essentially is doing is making

it that you are the sponsor, you
the sponsor are buying the

property at fair market value.
Now, this has some clear

advantages, it lowers the risk
of the deal going sour, and

lowers the risk of not the risk
of it sitting around, it lowers

the risk of it not trading for
exactly what fair market value

is. The reason the The caveat is
you really want to make sure

that you're doing it at fair
market. As soon as you come to

the investors with this idea
with this proposition of what

you're going to be doing.
Shareholders are immediately

going to be a little taken
aback. They're going to be

asking themselves, how do I know
that I'm really getting fair

market value and not getting
taken advantage of that they're

not getting that property for
pennies on the dollar, they know

it better than I do. So you need
to make sure that the mechanisms

are in place. So your
syndication attorney should have

baked in that possibility if
it's there to make sure that,

okay, we've got this mechanism
will determine fair market value

based on an appraisal by a third
party. And then that appraisal

will go to the investor so that
they can understand it. They can

ask questions, they can question
it. Sometimes if you if we think

we perceive that the trust level
might be a little bit less, we

might say and if there's a
question on fair market value,

the shareholders themselves can
ask for an appraisal, another

appraisal. And if it's off by
more than 5%, then we take the

then we can do a third appraisal
and we take the average or

whatever that is. So there are
mechanisms in order to take care

of that answer. That's a fairly
common thing to bake into a real

estate syndication, so that
those sponsors are able to

basically keep that property for
themselves. The third way that

happens is called a
recapitalisation. So through

recapitalisation what, this
isn't actually a pure sale. This

is changing the way that whole
capital stack happens. So

perhaps let's say that the
property was bought for $5

million, it's worth $5 million,
and you've decided you want to

recapitalize it, so if it was
Buy all cash, right? So that $5

million worth of value and you
go to the bank, and they were

willing to give you a loan to
value of 50%. So now that's two

and a half million dollars in
cash, you can then go to your

investors and say, great news,
based on the equity, you know,

you guys own 75% of the equity,
we're now going to dole out 75%

of this loan out to you in order
to make sure that everybody has

that money. So that's a money
that's being paid out. It

reduces it's a return of
capital, so reduces their bases,

and basically gets them their
money sooner. Why would you do

this? Well, to get their money
sooner, it's going to drive up

your IRR like sky high, because
now you've gotten them a bulk of

money up front, right, so
they've gotten a huge amount of

value, you just want to make
sure ultimately, at the end of

the day is that the fees that
you're going to pay are worth

it, right, because there's still
loan fees and appraisal fees and

all those things that go into
recapitalisation. And you want

to make sure that your investors
are benefiting out of it at the

end of the day. The fourth way
as a way that I oftentimes get

asked, and it sometimes works,
but it sometimes doesn't. And

that way is through what's
called a 1031 exchange. Now, if

you're in real estate, you
probably know what a 1031

exchange is, it's where you take
an existing property and you

exchange it for a light kind
property, replace the dead

replace the money, things like
that. And then you don't have to

pay any gains. So the gains tax
never happens, it doesn't

trigger that. Now, the reason I
say it sometimes works in

sometimes doesn't is because as
an entity as its investment

entity, it can act just like you
as a person, it can do this

thing, where it's going into
into another property. But where

we sometimes run into problems
is if there are people who want

to leave the fund or the
syndication, and you want to pay

them out, sometimes we have a
problem there. And you really

want to talk to a good qualified
tax attorney who specializes in

1031 exchanges will definitely
know about this issue, and be

able to help make sure that
either it's going to work or

it's not going to work and make
sure that it's all done in the

right manner. The last way is
through what's called merger or

acquisition. So this is where
you take that investment, that

all that equity that's in the
investment entity itself, and

you turn it into something that
might be through an upgrade into

another REIT. And it might be
into a merger into another fund

that another fund buys it out.
And gives the investors the

opportunity to either stay in,
or in an opportunity in order to

exit. This works sort of like a
like a 1031 exchange, or

actually works sort of like an
upgrade, but not exactly because

their tax cut, the taxes are a
little bit different. But it's

an opportunity for your
investors to either stay in if

they really want to, if they're
attached to that, that asset or

as a as an ownership or to move
out in general. That's not as

common, maybe because the the
kind of portfolios that exist is

they're not being absorbed in
that way, all the time. It

definitely happens on a larger
portfolio, where a REIT might be

interested in buying out the
entire portfolio and willing to

go through the legal hurdles of
doing an upgrade. Or if it's a

private equity fund or a larger
syndicator that is once to

incorporate that into its fun.
They can happen. It can also

happen with the sponsor, like
hat, who also has a separate

fun, who wants to absorb that as
an opportunity can be set up

ahead of time, but they got to
know it ahead of time your

investors have to know it
because again, it looks like

maybe something fishy is going
on here. And I'm getting either

getting this new thing that I
never bargained for in the

beginning. So you're want to
make sure that your syndication

attorney has baked in that
possibility into the PPM into

the operating agreement. So it's
there. So at the end of the day,

if there's any question and your
investors start asking you why

why you're doing it and what
basis you can do it. You can

point to them and say this is
why and this is why it's a good

thing. My name is Tilden
Moschetti. I am a real estate

syndication attorney with the
Moschetti syndication Law Group.

We specialize in Regulation D
rule 506 B, and rule 506 C

offerings for real estate
syndicators, real estate

investment funds, businesses,
really anyone who's trying to

raise money, they want to take
investor money and be able to

use it in order to make them
More money and make the sponsor

you as more money as well.
That's where we help. Give us a

call if you'd like to meet and
discuss your project and see if

there's a good fit between what
you're looking to do and what we

offer.