Part II: Investing In Real Estate With Self-Directed IRA Accounts (ft. Ken Holman)

This is a little bit more of a sophisticated subject. We're not gonna be talking about the basics of how to do a real estate investment. Instead, I'll be covering the following...

• What Is Real Estate Syndication?
• Breaking Down 1031 Tax-Deferred Exchanges
• Examples of Incorporating 1031 Exchanges with Real Estate Syndications

First, let me introduce who I am. My name is Ken Holman, I'm president of (NAREA) the National Association of Real Estate Advisors. NAREA is an organization that works with commercial real estate brokers, agents, and investors that want to do commercial real estate.

I have a bachelor's degree in accounting from BYU, and an MBA from the University of Utah.

I'm also president of the Overland Group which consists of five independently owned and operated companies.

A little bit about NAREA, we offer two basic types of membership. If you want to get on our website, which is nareagroup.org, you can sign up for a basic membership, and it costs absolutely nothing. You'll start getting all of our real estate information and things that we do. If you want to get a little bit more involved in the program, you can sign up for a pro membership which is $199 a year. Some of the benefits you get in our pro membership, we do a monthly newsletter, webinars, podcasts, blogs, etc., and have affiliate partners that you can receive discounts for like Matt Sorensen and his directed IRAs...

Our company basically does construction development, property management, brokerages, all the normal stuff. Plus we do some real estate short-term loans and work with other developers and builders that need capital short-term. We have a bunch of investors that work with us on that.

Real Estate Syndication

Let's talk about real estate syndication. There are some regulations that are involved. If you're doing real estate syndication, you're going to be involved with the SEC to some extent, because they regulate all syndications public and private.

The SEC regulates all securities laws. And you have to ask yourself the question, Why in the world is a real estate deal security? Real estate transactions by themselves are not securities. But, most often when you're doing a bigger real estate deal, you're involved with some form of ownership, like a partnership or LLC, or a sub-S corporation. Those are all regulated by the SEC. So that's how they get yah. If you put a real estate transaction in an LLC you fall under the guise of the SEC.

Most of these syndications that we do in real estate can be they can be public, they can be private, they either have to be registered or unregistered, or not unregistered, but exempt from registration. So, if you're doing a real estate investment trust, that's a registered public offering. And that all relate to and that all relates to the public side of the business.

What we tried to do is do exempt registrations. She'd had enough and I hadn't even got five minutes into the presentation. We tried to have exempt registration exempt deals that are exempt from registration with the SEC. So to do that 99% of the projects that want to be exempt from registration fall under the guidelines of what's called rule 506 of Regulation D of the Securities Act of 1933. So we're really big on trying to be in compliance with rule 506 of regulation D. That's what it's all about.

If you want to put together your own real estate deal, and, and form an LLC, and it's not hard to do that, to be honest with you. You can get online, you can form an LLC, and cost you $70 to do that with the state and get Articles of Organization is what they're called and, and then you usually have to work with an attorney to get an operating agreement for that. But once you do that you're in business, you can go out and buy or put under contract a piece of real estate. And then if you want to get a bunch of investors together, you can do that. But you want to make sure you start trying to stay in compliance with rule 506. So here are the basic requirements.

You can't do what's called general solicitation unless you work solely with accredited investors. Okay, we'll define that term in just a minute. So if you're working solely with accredited investors, you can go advertise publish it everywhere. Let people know what you're doing and you're good to go. But as soon as you get somebody in there that is not accredited, then that's when the compliance issues can cause some problems for you. So the company may sell to an unlimited number of accredited investors or up to 35 non-accredited, sophisticated investors.

On any one transaction, if you wanted to put together a real estate syndication, form your LLC, put your real estate deal inside that, go raise equity capital, as long as you meet the accredited requirements, you can advertise anywhere, but if you don't, then you have to read then you have to advertise only to those people that you have a pre-existing business relationship with.

I went to the state securities division and said, okay, what's a pre-existing business relationship? And they said, Well, friends and family count. I said, Okay, how about the people that I've got on LinkedIn? And? And they said, well, we're not sure. Tell us about that. So I told him a little bit. And I said, I've got about 201st tier connections, I've got about 1000 second tier and almost 5,003rd tier.

They said, Well, we think your first tier LinkedIn connections would qualify as a business relationship, or even somebody that you've done business with and exchanged business cards, it can be that loose. But they said, no second-tier connections, note that or dairy connection. So I got pretty active A few years ago, and I'm, I capped out on LinkedIn at 30,001st tier connections.

I have a pretty good network of people that I work with and do these deals with. But so the next thing is, whatever you do, and this is just good. Business policy always provides full disclosure. And so we work with a securities attorney, which I'd advise you to do, and prepare a private placement memorandum or private offering memorandum. They're the same document. But that'll get you going.

All of that is probably going to cost you somewhere around 10 to $12,000. Depending on who you use, and what you do. If you're paying more than that, call me because you've got the wrong attorney. But 10 to $12,000. I've had, I've had attorneys quote me up to $50,000 to do this year from San Francisco. So you're gonna pay double what just take everything that I'm saying and multiply it by two or three times. All of the filing fees and everything.

Accredited investors are people that have a net worth of more than a million dollars, excluding their home, or they make an earned income of $200,000 a year and have done for the past two years, and are expected to do that again, the next year.

Or if you're a couple, that's investing, then the threshold can go to three. But it's not. You have to have 1,200,000 a year, you just have to have one of the two. So yes, it's three o'clock. You told me you tie every five minutes, right, raise my hand. That was a really dumb idea on my part because I'm going to call on you every five minutes. No, that's good. Yes, that's good. That's perfect.

Is there some level of verification that is typically recommended by syndication?

Yes. You get yourself in trouble if you don't qualify. So what we do is As we have an investor qualification questionnaire that they're obligated to fill out. And then and then it has to be verified by an independent source like a CPA.

That does not require verification by third-party service. But whatever the investor says on that survey they are responsible for so you say you're accredited, and you're not.. and you try and come back later... that's on you. You've got issues if you don't verify. So it's always good too if you're going to do one of these always good to verify the investors?

Would it be good enough to have them send you a copy of their tax return?

We haven't required that because a lot of times they don't want to disclose how much they're worth or give you all their tax information. So we've, we've found that if they just get their CPA or you know, somebody that you know, can verify that then we have some data. That works really well.

1031 Tax Deferred Exchanges

Now we're going to talk about 1031 exchanges for a minute and then combine the principles with real estate syndications.

On a 1031 tax-deferred exchange, it's all regulated by section 1031 of the Internal Revenue Code. It allows the owner of an investment property or exchange property and defer paying federal and state capital gains tax.

If they acquire what's called a light do what's called a light kind exchange. What's a like-kind exchange? I get questions all the time... "well can I sell my condo and buy something else? a retail property or land? Can I sell my land and buy an income-producing property?"

The answer is yes. As long as it's real estate, it all qualifies. The thing that doesn't qualify is you can't sell a property and trade it into an LLC. That is not a like-kind exchange.

So even if you have that property and sitting inside your LLC, that's not a like-kind exchange. That's where it gets a little tricky. Can you exchange a business for a business? Yes.

When you're doing a 1031 exchange, whatever name you're coming out of, you're going in that out of the what's called a replacement property, you're going into the is Yeah, the relinquished property is when you're coming out of going into the replacement property.

I have never run across somebody wanting to do an LLC into an LLC. And maybe that would be considered a light-kind exchange. But I don't have a good answer for you on that. It seems like a simple question, but most of the people that are doing deals with me, are coming out of a piece of real estate, and they want to go into a new development project or a new acquisition that I'm doing. They have their ownership.

They can own it any way they want, whether it's an LLC or a trust or whatever. They just have to whatever they're going out of, they have to come into the new relationship under the same ownership. Yes. Oh, that's a bad idea. I've called on her twice. I'm gonna call on her four more times before this is over. No, I like it. I feel like you're engaged. So, most 1031 tax-deferred exchanges are handled through a 1031 are handled through what's called a Qualified Intermediary.

There are some local people that do these things. And there are some national organizations that do them. Two of the biggest that I'm familiar with our first American exchange, and the Old Republic exchange, haven't done anything with the Old Republic exchange. I've done some deals with the first American exchange, and probably not the old Old Republic because they're not here in Utah. They're located in other states.

For most people doing a 1031, there are three different rules, but most people that are doing a 1031 are doing it with this three property rule. And basically, what that does is that just says, you're going to identify three properties, like-kind properties of equal or greater value than the one you're selling. And, and then, and you do that within 45 days, and then you're obligated to close within 180 days.

Those are calendar days, counting holidays, weekends, everything. If you miss your date, you're toast. So it's really important to hit your dates. Yes, I recently heard about a reverse 1031. Yes, I don't know anything about that. Does that reverse? 1031 is just the office at a regular 1031. Okay, so but yeah. Can you just like just breathe just. Okay. So going into a regular 1031.

You're coming out of a property that's not associated with the 1031. And you're doing a 1031 into a new property of equal or greater value? reverse 1031 reverses that process? You're in a 1031. And you're getting out of it. Okay. These transactions require the parties involved to meet all the applicable laws of the IRS and the SEC. So they're more complicated.

Example Syndication/1031 Exchange Deals

Thinking about doing a deal where you bring other partners? If you're doing that, you have to be in compliance with all of the rules for both 1031 exchanges and the SEC. Now, I'm going to give you a couple of examples of deals I've done where I mix it up, but I've got a bunch of stuff. So here's how we do it. When we combine it.

There are basically four things you have to adhere to. Then we'll talk about and then we'll talk about a couple of examples.

First, the 1031 exchange investor enters into a purchase agreement with the LLC to buy a portion of the land or real estate. Yes. While we're 15 minutes down. So the 1031 exchange investor works through a Qualified Intermediary, same program. The 1031 exchange investor purchases a portion or fractional interest in the real estate. And then the last one, the 1031 exchange investor in the LLC enters into a tenant in common agreement, specifying who owns what and how the deal works.

Let me give you a couple of examples of that. Oh, I'm just going to throw in this one little tip before we do that. If you're a syndicator, the sponsor of one of these investments and you want to do these You're working with a 1031 investor that wants to put their money in your deal. It's always good if you get what's called a limited power of attorney. Because they're going to be on deed on the property that you own. And you have to go back to them every time you want to do something, I get a signature from them.

Whether you're borrowing money to do the loan, paying anything off, transferring the land into a deal, putting the first mortgage on the property, they have to sign off on all that. But if you get a limited power of attorney giving you the right to do that, as the sponsor and the manager of the LLC, then you can generally handle all those transactions, and not have to be chasing them down. I had one deal where I had to a guy who was on a cruise somewhere in the Caribbean. And we had to chase him down. And he, when he landed at a port had to go find a place that he could sign documents, and they had to be original signatures. So then we had FedEx back to the states in order to get the deal done. So I learned that lesson the hard way.

So here's the deal we did up in Helena, Montana. It was a Staples store that had gone dark. And many of you know that staples have done a lot of downsizing in the last few years. And they had a 25,000 square foot store and re-approached Big Lots, we didn't own it, but we thought it might be a good investment really good location up there. And so we thought it might be a good investment. So we approached Big Lots to see if they wanted to participate if they wanted to be our tenant on the property. And they said, "Well if you can get us up to 30,000 square feet, we'll do it." And so we had to put a $5,000 5000 square foot addition on the back of the property in order to do it. But and then at so, we got this 5000 $5 million deal we're doing raising about 2 million in equity capital.

We had a couple that owned a trust that approached us on doing a 1031. And they were coming out of a four Plex that they owned in Provo, not one of faith. But coming out of a four Plex was tired of doing the management. Now they wanted to get a more passive investment. And so they did the deal with us. Well, their deal was about 700,000. They came in with 350 in cash, and they needed 350 in depth. And so we worked with our bank, which was a US bank on the deal. And they said sure, we can let them sign on the doubt for 350.

They get to meet their debt requirement. And some of these are all-cash deals, some of them have debt with an F, if they have debt, and you're selling a deal that has debt, the deal that you're going into has to have debt. So So they came into the deal with us, but they could not be a part of our LLC, we actually had to sell them an interest in the property itself. And so they owned an interest, and our LLC owned all the rest. And then to blend those two together. We took the two parties and created what's called a tenant and common agreement spelled out all the terms of what we were doing. And we became joint venture partners in the deal. And, and they owned certain percentage ownership and the project and our LLC owned everything else. That's kind of how they work. Any questions about that?

Somebody coming into syndication besides their initial investment. If the syndication, you wanted to borrow fraternities, you're going to get a mortgage. I mean, you could create such a debt structure that you could put me at risk.

Yeah, so the question becomes, the question was, what risk is associated with one of those and could that put me at additional risk because they may be coming out of a mortgages 300 50,000 and now we're going into a mortgage, it's 3 million or more, right? And so, fortunately for us, US Bank was willing to basically bifurcate the loan, and say, okay, your portion is 350. And you're not responsible for anything above that. And the LLC is responsible for all the rest of the DAP. So if you sign a power of attorney, and then I screw up your deal, you're toast.

You know, if I, if I do something that messes up your deal if you don't sign a power of attorney, then I just go back to you every time we want to do something and ask for, you know, your signature on doing that. So you can retain that if you're a 1031. investor, usually most people are not going into that deal unless they feel comfortable enough with the sponsor, that they know that the sponsor is not going to take advantage of them or do something to jeopardize their money. Yeah. To go back to that other person. Yeah. There are too many things that need to move forward. Yeah. Yeah. In a short timeframe, so yeah, that would be difficult. So. Okay, here's another example. And then I'll end with this. What's our time? How are we doing? So we're in good shape.

The second example was a self-storage project that we're doing in Woods that crashed Utah 536 units. You know, it just occurred to me, let me say a couple of other things. Do we have handouts for these projects? Where are we? Yeah, no, not this project of the deals that we're doing. They're right there. We ought to put them somewhere. And let's put them in the back on some chairs.

If you want to get a copy of the deals that we're doing, this is just a two-page, single, you know, double-sided presentation, but you can get on our website and download the entire offering memorandum. And everything, we have it on our overland website, overland corp.com, if you go there, you can download that. And then this presentation. I've you know because you only have 40 or 50 minutes to make a presentation like this. You don't get to cover everything that you'd like to say, in a class like this. So we've put on our website, nareagroup.org. We've doubt I've written a white paper, about 14 or 15 pages on each subject that I'm teaching. And we've, we've downloaded them yet.

Okay, within the next day or two, they'll be downloaded onto our website. And you can get on there through the newsletter in our media center through newsletters and white papers, you can get on there and download that at no cost and, and get a lot more information about what's going on. So this transaction was a ton more complicated than the previous one, that when we had 110 31 investors in this one, we had three. And among the three investors, we had a total of just over a million dollars of the equity capital raised on this.

I'm not quite half, but a lot of the equity capital raised on this deal was from 1031 investors. And, and so each of those investors owned percentage ownership of the land that we were purchasing. Our land deal was a million and a half dollars and, and we had us as an LLC, and three other 1030 ones in there doing this deal. But if you're raising equity capital, and you have a chance to work with 1031 it's a little bit more complicated.

But it's a pretty slick way to raise a lot of equity capital in a short period of time. The 1031 investor is motivated to get into something good and a profit Pretty, that's probably better than the one that they're getting out of. So these are good deals. And on this deal, say somebody came in for half the ownership of the land. But it only represented 25% of all the capital that you were raising. Are they now 50% owner in your deal? Or a 25%? owner in your deal? That's kind of a complicated question. But the reality is, even though they own 50% of the land, they only own 25% ownership of your entire deal because now you're building a new project on there. And so they don't get a 50% ownership in your whole deal.

And all of that is spelled out in the tenant in common agreement. That's where everybody knows what ownership interests they have, how the whole deal works. And, and we go one step further, and we make we create in the tenant and common agreement, we mirror the rules, regulations, and agreements that we have in our operating agreement for the LLC, in the tenant a common agreement, so everybody in that tenant in common, all the parties are agreeing to the same thing. So does that make it complicated enough? No, it's a purchase. I mean, we don't know we didn't lease the land that that is something you probably could do. But the 1030 ones on the part of the property, your hidden part of the buildings? Yes.

They own part of the buildings, but they own it a lower percentage and the percentage ownership they had in the land. So yeah, they own a bit of the whole thing. A land lease would complicate the heck out of the whole process. You could do it with a land lease, but it's probably more difficult. And now with some of the deals, what these three projects that we're doing one's 116 unit, apartment deal in St. George, and actually Washington city. And then the other one is a two other two are in Mesa, Arizona, one's a two-story Self Storage project.

One is, is 112 unit assisted living project. So we're doing different things, and raising different investment capital for all three, they have different types of returns. And for the small one, the storage project, we're letting both accredited and non-accredited investors come into that one. And the minimum investment amount on those is 25,000. And the bigger deals the apartment deal and the assisted living deal. the minimum investment on those is 50. And, and theirs are just offered to accredited investors only. So we can do some general solicitation on those. So if I confused anybody, have you? Is this something you want to do? Or is this something you think like, a lot, but it's really fascinating? Yeah, this is not real estate one-on-one. This is probably might be considered more of a graduate-level course.

Advantages of Investing in an Opportunity Zone

In an opportunity zone, which is the new theme that's come up, which is, you get some tax advantages if you're investing in an area that is having some economic issues.

What it is, is if you invest in an opportunity zone, over 10 years, they will reduce the amount of your capital gain tax every year, for 10 years until at the end of 10 years, if you've held the property in there. No tax, you completely eliminate the capital gains tax.

You can do those kinds of deals. And I don't know all the ramifications of the opportunity zones, because I haven't done anything in there yet. But I've been thinking about it.

The IRS giveth and the IRS take it away.

Am I soliciting new investors? It depends on the deal that I'm doing. Okay, if I'm doing a small deal, like our, like the self-storage project that we're doing down in Mesa to the story, that'd be about an $8 million project, we're gonna raise somewhere around two and a half million on that. And I'm going to accept both accredited and non-accredited investors into that deal. So we'll do a private placement, memorandum, all the same stuff that we would normally do regardless to provide the disclosure, but I am only, I'm only contacting people that I have a pre-existing business relationship with. Now, that's a big group. That's my 30,000 leading groups.

That's everybody else I know, on NAREA or anywhere else. And so it's a pretty big group, plus all past investors and stuff like that. And now guess what, we now have a pre-existing business relationship. We can all get together and do a group hug up here if we want or, but, but yeah, so. So that's what I'm doing with that one. On the other ones. I'm doing a major email campaign. We've through a group called info Yeah, it used to be called info USA net.

They're now called info group. But they are a major player in the mass email marketing program. And we're doing a major campaign with them. They have identified almost 400,000 accredited investors throughout the United States. And, and we're doing an email campaign that started last Tuesday to 50,000 of those guys. And, and what they do is for the first week, the seed that investor potential investor group through Facebook advertising, so if you Get Facebook ads showing overland group you can blame me.

But they do that to that group for about a week. And then they go out with email blasts. And they found that if they see it with an email campaign first, then you get a higher response rate when they actually, when they actually get your email, because they've already seen 500,000 impressions from them before, you know, I mean, collectively not individually. But 500,000 impressions and then, and then we do two email blasts to them.

And we'll see how that turns out. But yes, probably more than I care to count, but I've done I, I started out working for a company as a financial planner when I got out of the MBA program. And they started doing real estate syndications back in the 80s. And, and then, starting in 1987, I started my company and I have probably done 30 or 40 of these, sell a property. Sell syndication, it's easy, you're just selling an LLC, or you're selling an advanced more as a tech. One sign-off, you got to be careful how you structure your deal, you can't have one guy messing up the whole transaction, but we usually put majority rules in there.

I haven't had a lot of people that have balked at the idea of selling a profit selling a property at a big profit. So that doesn't seem to be the issue. But I, I usually we like to keep these long term. And what we normally do with our investors is if we have any, we tell them to stay up for five years. And if you want to get out, let us know.

We'll buy you out. It'll either be ash or I'll find another partner little, little another investor that will come in to buy you out if you want to get out and I've had two or three of those. And within days, I've usually got another partner that wants an investor that wants to come in. So it really hasn't been a big deal. But for the most part, these are long-term investments they like being in and they're there. They're just good opportunities.