If you’re financially ready to dive into a security deal but not so confident about it, Gene Trowbridge shares the four golden questions to ask before investing your money. Find out more about our investing opportunities here 👉 www.vonfinch.com/invest 👈 With over 25 years of experience in creating and sponsoring real estate investment groups, Gene Trowbridge possesses a wealth of wisdom we were lucky enough to hear back in Episode 168. In this episode, we’re bringing back one of the best snippets from our previous interview with Gene where we talk about security investing, and how you can do them right. According to Gene, the four questions that you need to ask in a security deal are: “What happens if something happens to you?” “Have you done this before?” “Are you going to put money into this deal?” “What happens if something happens to me?” A lot to unpack there, so if you want to learn about business continuity, liquidity, and assessing a sponsor’s track record, click that ‘Play’ button and re-listen to this amazing interview with the one and only Gene Trowbridge.
If you’re financially ready to dive into a security deal but not so confident about it, Gene Trowbridge shares the four golden questions to ask before investing your money. Find out more about our investing opportunities here 👉www.vonfinch.com/invest👈
With over 25 years of experience in creating and sponsoring real estate investment groups, Gene Trowbridge possesses a wealth of wisdom we were lucky enough to hear back in Episode 168. In this episode, we’re bringing back one of the best snippets from our previous interview with Gene where we talk about security investing, and how you can do them right.
According to Gene, the four questions that you need to ask in a security deal are: “What happens if something happens to you?” “Have you done this before?” “Are you going to put money into this deal?” “What happens if something happens to me?” A lot to unpack there, so if you want to learn about business continuity, liquidity, and assessing a sponsor’s track record, click that ‘Play’ button and re-listen to this amazing interview with the one and only Gene Trowbridge.
KEY TAKEAWAYS
1. Put everything in writing to let everyone in the deal know what’s going on.
2. When it comes to investment deals, education is everything.
3. Ask the four questions above before diving into a deal, especially if you cannot afford to lose money.
LINKS
https://www.linkedin.com/in/genetrowbridge
https://trowbridgelawgroup.com/attorney/gene-trowbridge/
https://www.valuehoundacademy.com/public/Gene_Trowbridge.cfm
Matt: [00:00:01] Hi, everyone, this is Matt, the producer of The Investor Mindset Podcast. And this week, we're taking a look back at the interview that we did with Gene Trowbridge. Now Gene is going to tell us what to look for when investing in a security deal. There's some amazing information in this episode, so you're not going to want to miss it. Let's get to it.
INTRO: [00:00:28] This is The Investor Mindset Podcast and I'm Steven Pesavento. For as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation. Today's episode is sponsored by Vonfinch Capital. If you're interested in investing alongside me in the same type of real estate opportunities that I personally invest in, then head over to Vonfinch Capital and join their private investor network, you can do so at Vonfinch capital.com/invest. Join me on that next deal. I look forward to seeing you on the inside.
Steven: [00:01:16] What is your recommendation that you like to see or look for in those documents that kind of outlines who's going to be in charge, if something should happen, and when that actually does come down it actually does happen in real life? How does that process work for investors on replacing a manager?
Gene: [00:01:36] Well, first of all, there should be two people in the manager, there should be an LLC, or it could be an S corporation. it doesn't make any differences acting as the managing member, and there should be a second living person. So we don't have to, in the middle of a disaster or catastrophe or stress, figure out who to vote in. The members don't want to be managers if they wanted to be managers, they would have bought their own property. They don't want to do that. So you need to have someone in place right away, then my documents say that with a 75% vote, we can replace the manager. But what about the day after the event? What about the fact that the lender, and other people have documents out there, and the operating agreement says that the manager is the only one who can sign the documents, and now the manager is gone. I don't care who you vote in, we're talking three to four months to solve that problem. Put a second person in there that has the ability to sign documents, and be there. And then you can take your time, and you can worry about who's going to be the replacement. And that second person doesn't have to be, well, let's put it this way, they can be a very minority owner in the manager entity to start with, they're just there for continuity and I think it's very important. And a lot of times when you go to the lender, if you don't have a second person in there, for continuity, the lender, Fannie or Freddie, depending upon the size of the loan is going to require you to have a springing member. They're going to require you to go to a corporation, an ongoing Corporation, and that has a department like this and you will have to get that corporation to name a certain officer to be the springing member. Now that officer can come and go, but the title and the place is still there. So if something happens, the lender can immediately go and enforce the springing member provision the next day, and their full documentation that says the next day the springing member has all control and can write and sign all the documents. So I don't think you can say Steven that Well, yeah, if something happens, Larry, will take over. Well, seven years from now, where the hell is Larry?
Steven: [00:04:21] Yep. Yeah,
Gene: [00:04:22] You can't do that. Let's solve that right now and then we still put in place that you can replace, we can replace a manager. We have one situation I'm aware of right now where the sponsor died and the other family member of the sponsor was the second person. Okay, so nothing stopped, everything continued on, but the family member really wasn't the answer for long term. So now we're going to head and we're voting and we're going to get a replacement person, but at least it was --there were no hiccups.
Steven: [00:05:02] Of course, well, that makes a lot of sense. So moving on to the PPM, I know you're really excited to talk through all these different pieces, walk us through what's important and what goes into that document.
Gene: [00:05:14] This could be a whole day, so we're not going to do this. There was a rule for a long time, it's called guide five and guide five is part of the securities laws under regulation D, which is how we do all of our business. And it told you what should be in a private placement memorandum for a real estate offering, and that guide has been revoked. But we all write our documents kind of the same way. There's some art in writing private placement memorandums but there's also some rules and I've made this picture. And just quickly, if you're going to go through PPM, which is the story, this is the first document I write for a client. I write the story, I send it to the client. Do I have the story right, If I do, then I can draft the operating agreement, which are the rules and the subscription agreement. But the first thing you have to have and doesn't always have to be in this order. You have to have a description. What are you doing? Are you buying an apartment building? Are you building Self Storage? Which I did. And you talk all about that. In my documents, a lot of the description of the business ends up in the property information section, as an exhibit. I draft documents that exhibit number four to the PPM is the property package that the investor can get that shows the pictures, the rent roll, and all the spreadsheets. And I make that separate because I don't want to have to change this document, as we're going through three or four weeks while this is all happening. Due diligence gives you different numbers so this staffing understanding, but description of the business is important. The offering terms, we're raising $3 million, the minimum investment for many investors is 50,000, you can invest more if you want, the offerings going to start on a certain day, and continue until someday in the future, then risks. Actually, the old guide five had risks coming right after the description. If you invest in this, you're going to lose all your money, well, that's fine. But there are all sorts of risks and generally, Steven, the risks are in groups. There's a risk in investing generally, in real estate. There are risks related to investing in this particular piece of real estate. This is not all boilerplate. The PPM needs to tell the investor about this investment. I've been in court as an expert witness when someone's been on the stand, and they had a PPM and the judge says I can't even tell what property this is about. Well, that's bad. So what are the risks of this property? What are the risks of the economy during the projected holding period? What are the risks of the environment? And what are the risks of tax law changes? So it's kind of a heavy duty section. And some of it is boilerplate because you get into the risks of the tax law, depending upon where we are in the legislative cycle, that section might be the same for two or three years in a row. But real estate in this particular property is pretty important. Then we get into conflicts. And this really relates to the manager's business. Does the manager already have 16 offerings out there? What are the conflicts if one of those offerings starts falling apart and the manager is asked to fund a manager loan? Does he have to? If he funds it for one, does he have to fund it for all? What if the managers, a broker, a real estate broker and a syndicator at the same time, what are those conflicts? What are the conflicts about the manager, let's say you're a manager and you're out raising money for apartment buildings and you're just always looking at apartment buildings well, which offering gets which apartment building? So there's a lot of conflicts, those are important sections to read.
Steven: [00:09:51] So, so far what we've talked about really is the PPM is this governing document, or I should say it's the governing story, that kind of outlines all the information that an investor would want to know and need to know so they can really understand well, what is it that I'm investing in? What are these risks that are potentially there? What are the offering terms? What is this all about? And then obviously, we're going to go further into detail, but just want to make sure people really understand that the document is really telling the story over the rules, which are the offer memory, or sorry, the operating agreement, which we're going to talk about as well.
Gene: [00:10:31] Right. Then we get into the suitability standard. Who can invest? Can we take sophisticated investors? Or is it only for accredited? Or can it be both? That's fine sources and uses. There's a chart in there that tells people where the -- let's say we raise $2 million, where does the $2 million get spent? The sources come from the investors, and then the use is in a chart form. And that's very important. So you can compare different offerings, distributions and fees, who gets what, how is the cash distributions sent to the investors and what are the fees that the manager gets? I already told you about the exhibit for the property information, voting rights. What authority does the manager have? What authorities do the members have, and I'll just stop there for a second. Beginning syndicators usually give extensive voting rights to the investors. And I think that's because they're not as comfortable in their money raising skills, and they have no track record. So they're asking and they're giving the investors a chance to vote on a sale or refinance or any major leases. But experienced syndicators don't do that. And it's not unusual to see an offering where the manager makes all the decisions, except for modifying the operating agreement and replacing the manager. I always want the members to have the right to replace the manager. I have been the replacement manager six times in my career. And it's always devastating for the members not to be able to get a replacement and move the manager out if we need to. So that's one thing you always should find in an operating agreement.
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