May 31, 2022 • 47 mins
Embark on a journey through the world of real estate investment with Dallin and me as we peel back the layers of syndication and fund structures, revealing how anyone can take a slice of the property pie. We swap tales from the trenches, mine peppered with the highs and lows of syndication, while Dallin charts his ascent from financial uncertainty to commanding investment funds. Our candid conversation promises to arm you with the wisdom to navigate the legalities of LLCs and the fortitude to embrace both the stumbles and strides of your investment odyssey.
Tune in for a deep dive into the gravity of shared values and the delicate balance within investment partnerships that can shape your success. I'll lay bare the scars from litigation battles, underscoring the paramount importance of aligning with partners who share your vision and integrity. We'll dissect the nuances of the investor-dealmaker relationship, and I'll champion the belief that true transformation in real estate comes not from deep pockets alone, but from the alchemy of monetary resources and value-driven partnerships.
Our episode culminates with a strategic comparison of the structured elegance of investment funds against the communal spirit of syndications. As we explore the meticulous organization of funds like Invictus Real Estate Fund 1 LP, we shed light on the transparency and security benefits for investors, and the tactical considerations for launching a fund. Through our shared experiences, we extend an invitation to all aspiring investors to consider the transformative potential of real estate, whether through the immediacy of syndication or the enduring growth offered by funds. Join us for this revelatory expedition into the heart of real estate investment.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome back to the show.
It's Aston Incorporated.
I'm Wayne Aston, your host.
This is my co-host, DallinAston.
Welcome back, guys.
Today we've got an excitingepisode.
We're gonna be covering thedifference between syndications
and a fund.
So we're gonna start with somedefinitions for you guys,
because this is hardcore realestate 101.
(00:23):
This is an educational episode.
Here Dallin's got a little bitof experience on both sides of
this.
I've got a lot of experience onboth sides.
I'm gonna kick it off with thefact that I believe a
syndication is a more common.
(00:44):
It's definitely a more commonway to structure a deal.
So for those of you brand new toreal estate, what is a
syndication?
A syndication, generallyspeaking, is a group of one or
more entities or people thatcome together to do something.
Okay, so you can have corporatesyndications, where people,
(01:07):
companies join, venture into asyndicate to accomplish a
certain goal.
And so, in real estate, whenI'm talking about a syndication,
what we're talking about hereis we're talking about let's
boil it down to the basics we'regonna go buy a house and flip
it.
That means I'm the sponsor.
I typically, if I have my owncash, then I'm gonna be my own
(01:29):
equity partner, but I'm gonna goget a hard money, loan or
bridge capital to take theproperty down and renovate it.
But for those of us who aregetting into the game and you
don't have a quarter milliondollars in the bank, you can go
bring an investor to the tableand syndicate the deal, which is
(01:50):
what I did, and you've donethat successfully.
So we're gonna get into some ofthe nuts and bolts of structure
and how that worked for you,because I think, as we kick this
whole show off, guys, we wantyou to understand that money is
not the barrier for you to notget involved.
(02:13):
If that's your excuse for notgetting involved, then go home.
Now you have to be able tofigure out how to get
resourceful and how to put adeal together and create so much
value that you make the dealhappen even if you don't have
money in the bank.
So that's part of this is theinspirational value that anyone
(02:33):
can do this with a little bit ofperspective on how.
Speaker 2 (02:37):
Would you agree with that, dallin?
Well, absolutely Well.
I mean, if I'm any example, Iwent from literally having
negative dollars on my bankaccount.
I was driving Uber just to payrent.
I was delivering food in my2000 little car right, it was
100,000 miles on it just to goeat right, and I managed to
(02:58):
raise 760 grand.
Speaker 1 (03:00):
That's none.
Of that was my money.
Speaker 2 (03:03):
So that's important to a little perspective there.
Speaker 1 (03:06):
So let's talk a little bit about structure.
You guys, I mean I could go asan individual and I could go
borrow money from the bank in myname and that would be a
personal loan and any gain thatI would have on anything that I
go do with that.
If I buy a house and I renovateit and I flip it and I do that
(03:27):
in my name, I'm gonna get taxedon that capital gain one way.
But if I go set up a companylet's say in Utah I'm setting up
a limited liability company.
That's my favorite structure.
It's easy to set up.
If you have an attorney in theaccountant, they can certainly
help you set that up.
(03:47):
But a limited liability companyis a basic structure that I
mean that's your business.
That's like what's the name ofyours?
Elevate travel destinations,that's right.
Yeah, llc, yep, okay.
So it's an LLC as an example.
So, okay, down, set up his LLCElevate travel destinations.
(04:09):
I have I've probably set up morethan 50 LLCs in 27 years.
Most of them are buried at thebottom of the ocean.
Okay, so that's the other coolthing, guys.
I mean you're gonna set up anLLC and if you're successful and
you can scale it successfully,it can live longer than you do,
(04:36):
but statistically speaking, mostbusinesses fail in the first
five years.
So there's a lot of LLCs.
When you go to register andchoose your name and get an LLC
set up, that company that's justa vehicle that kind of
establishes your ability to goand transact business in, and if
(04:56):
you have a business failurethen that LLC basically gets
unwound or dissolved or it endsup just going, like I said, at
the bottom of the ocean.
And so anybody who's been inthe entrepreneur game for a
decade or more is gonna havemultiple entities that they
started, that they thought wouldbe great and they ended up not
(05:18):
working out for one reason oranother.
Speaker 2 (05:19):
Well, I personally even have probably seven, okay,
okay good case and point.
Good case and point, and mine'sbeen a much shorter journey
than yours or some other peoplethat have been around the block.
Speaker 1 (05:32):
But even then.
Speaker 2 (05:33):
I have quite a few that I've started that haven't
worked out and some that have,and the majority of them have
not.
Yeah yeah, but I mean, I thinkthe point here is it's trial and
error here, right, and there'sa lot of them, that's right
that's right guys.
Speaker 1 (05:51):
So one of the real pros of syndicating with a
company like this, thisparticular structure, is that
you could go to your uncle orsomeone in your family that
knows and trusts you and youcould say hey, I've got this, I
have this opportunity, I'm gonnabuy this house, this is how
(06:11):
much it's gonna cost to renovate, and we're gonna flip it.
And I'm just using that as abasic example.
That cause everyone canunderstand.
You watch flipping Vegas orsome of these TV shows.
That's a very basic real estateinvestment kind of beginner
strategy.
So to syndicate, that meansyou're gonna go and you're gonna
involve an outside person orentity to become a partner, and
(06:34):
literally that's what'shappening when you syndicate.
You're bringing on a newpartner, and so that could be
structured a lot of differentways, but it really is project
level and it really it has to dowith the direct membership
interest of the LLC.
So a true syndication meansOkay, I set up XYZ LLC and I
(07:00):
bring my new investor in.
He's going to bring a hundredgrand in and I'm going to give
him 30% of that LLC.
So now we have an operatingagreement for the LLC and the
operating agreement it's a 48page document that's going to
spell out our relationship andhow we're going to do that deal.
If we're going to do more thanone deal, it's going to spell
(07:21):
that out.
If it's just isolated to thatone flip, then that's what it is
.
But typically every company isgoing to have an operating
agreement that spells the rulesout for me and you, if you're my
investor, and so we're allclear.
We're on the same page legallyspeaking.
This is good, because when youbring your investors in, they're
(07:41):
probably going to have theirown attorneys and their own
accountants review the operatingagreement.
That's in bolts of everything.
It's not uncommon for a moreexperienced investor to want to
have a controlling interest inan LLC.
So you guys, when you'resetting this stuff up, if you're
(08:01):
coming from nothing, it's notuncommon to have go to an
investor and approach them for ahundred grand, 250 grand, and
have them want to own 80% ofyour company at first and you
can structure an operatingagreement so that they own the
majority until there's a certainhurdle point Maybe that's the
(08:25):
sale of the propertysuccessfully and you're moving
into the next one in the captable or the capitalization
table or the schedule of themembership.
Interest will shift and you cankind of earn your way into
owning the majority interest ofyour own company if you can
negotiate that with yourinvestors.
Over the years I've hadcompanies where I have given
(08:49):
away the majority interest.
Nowadays I do everything I canto make sure that I maintain the
controlling interest, and thisjust comes with some serious
battle-tested experiences anddeals that have gone sideways
and why it would have beenbetter for me to have a
(09:10):
controlling interest.
If I'd have had a controllinginterest I could have avoided
litigation and a lot of problems.
When you're syndicating guys, apoint I want to drive home is
that you've got to really knowyour investor.
Dellen and I have covered we'vejust scratched the tip of the
(09:31):
iceberg of who do I have tobecome to be a successful
business operator?
That's the core question foryou guys thinking about the
entrepreneur leap off the cliff.
We're going to jump.
There's no net, it's all on me.
We're going to make it work orwe're not.
And so character and values andso much of that comes into play
(09:54):
here and unfortunately and I'llspeak from experience when I've
allowed investors to come intomy deals at a company or project
level inside of a syndicationand we're not aligned with
character and with values.
If there's a misalignment ofintegrity, for example, that's
(10:16):
always a huge one One partnerdriven by money, another partner
driven by the relationship, andthat's like oil and water the
money and the relationship sideof it.
We've covered that in pastepisodes.
But specifically speaking tosyndications, when you get into
decision making and you have apartner in your LLC that has
(10:38):
voting rights because they owndirect membership interest, it
means that you're bound by theoperating agreement and they do
have the right to vote and theydo have a right to influence how
the deal goes.
Which is why, if you bringsomeone in just because they
bring in the money, but theirvalues are totally misaligned,
you could be in for a verydifficult time, and most often
(11:01):
in my experience has beenlitigation.
I don't know what it is.
I've been like a magnet over 27years of attracting these
greedy the money guys that allthey care about is the money and
they.
You know you're making greatmoney and then people want to
stab you in the back.
So you know it takes a lot ofemotional bandwidth to partner
(11:23):
with people and have it go badand then do it again, and then
do it again so you get morefocused.
Like me, at 27 years in, I amso picky about who I'll partner
with.
I mean I have to.
Well, number one there's thesevery specific principles,
integrity being the first one,but it gets a lot deeper than
(11:46):
that.
I've cultivated such arelationship driven focus in my
businesses and selectingpartners that I have to really
connect with you on a humanlevel and know that we're
aligned and we have the sameoutward focuses and the same
goals and ambitions.
Before I'll allow anyone into avoting priority inside of a
(12:10):
company that I establish.
Speaker 2 (12:12):
Yeah, that's interesting.
It almost sounds to me and I'dlike to ask about this but it
almost sounds to me like you'retaking this traditional view of
hey, you know, the institutionalfinance guys or the investors
are the ones with the cash, thenwhy should I?
So, if I'm the investor, well,why should I work with you?
You're kind of flipping it.
(12:33):
You're kind of, in a sense, ranabout way, saying to the
investors of the finance you'resaying to the money well, why
should I work with you?
Yeah, right, yeah.
And in the words of WarrenClaff, you're flipping the
script.
Speaker 1 (12:48):
Yeah.
Speaker 2 (12:48):
Right, Because really and if I'm understanding what
you're saying here correctly andI personally have my own views
about this but the money iseverywhere right, and so the
second you become held hostageto the money is the second where
things don't necessarily goright.
Yeah, that's kind of what I'mhearing.
Would you agree with that,that's?
Speaker 1 (13:07):
absolutely right, dallin.
I mean when you're starting andyou don't have a credit profile
and you don't have a bigbalance sheet with you know $10
million in the bank and youdon't have real estate assets.
When they ask for your scheduleof real estate owned and you
don't own any real estate, it'svery easy for banks will do this
(13:28):
a lot, but investors do it allthe time.
They'll want to leverage thisagainst you.
Speaker 2 (13:35):
Yeah.
Speaker 1 (13:36):
They'll want to take these negatives about you, and
they'll want to discount myvalue as the sponsor or the
dealmaker, the person whocreated the opportunity, from
scratch.
And so it's traditionally beena fact that, in fact, there's
this cliche saying he who hasthe gold holds the purse strings
(13:57):
.
I think that's completebullshit.
He who holds the gold, holds thepurse strings.
That may be how oldergenerations have operated and
old banks have operated, but,like you say, money is a
commodity.
Money is not the prize, moneyis not the value.
In fact, if you have a vaultwith $10 million of cash in it,
(14:21):
it's worth nothing.
It's paper stacked in a closet.
It's not until you deploycapital into something that has
value that the money expands andthat's where the value's at.
So I'm trying to create a shiftin everyone listening's mind
here that you are the prize.
You are that one human on earththat has a unique value
(14:45):
proposition and you bringsomething that no one on earth
can buy.
Okay, now I'll use a.
Really I just had an epiphany,a really interesting example of
this.
So when we were doing theproject in Moab 2015, we bought
(15:06):
the land.
It took two years to get theapprovals and get the financing
and get things rolling down.
There's was a very, very slow,arduous start to that project,
and this is before Moab.
Really, it was kind of a sleepytown in 2015.
It really didn't wake up untila few years after we bought the
(15:28):
land.
We were cranking, we finallyget all the plans approved, we
get fully vested, we record ourfinal plot.
That's the land plan for theresort and the city approves it
and that's recorded in the titlecompany and that was in 2018.
In 2019, what happens is thecity decides hey, we're going to
(15:53):
pass a prohibition over theentire county.
There will be no more approvalsof any project with a nightly
rental component to it.
So if you wanted to go build anew hotel or condos, or even a
new campground in Moab, that'sno longer possible.
So, case in point If you have abillion dollars in the bank and
(16:17):
you fly your fancy jet to Moabtoday, it doesn't matter.
You can't go by land anddevelop a resort or a hotel,
because it's not permitted,right?
Wow, See the value, the value isin what we created, and it's a
casual production machine.
Now that it's prohibited, it'seven more valuable.
(16:40):
Yeah.
So the city inadvertently kindof helped with valuation on that
.
So that's a key kind of exampleof just because you have a
billion dollars doesn't mean Imean, it means you can do stuff
Right.
What would be awesome is if youhave a billion dollars and you
have the mindset that alignswith me.
Man, that's a powerful combonow, because I don't have a
(17:03):
billion dollars, but I haveprojects that could deploy a
billion dollars Right.
So you have.
If you have a good deal makerand a good execution specialist
let's call that the expertinvestor and you have capital
and you combine those that canmake for a powerful syndication.
Yeah, you following that, yep,absolutely.
(17:26):
And if you're lucky enough tohave that big investor that is
aligned with you and I've had afew it's a magical thing because
you can do incredible thingsand you are aligned and neither
side is greedy and you kind ofboth view the value proposition
fairly Right.
Speaker 2 (17:49):
One.
I'd even say that, with the waythat I did mine, mine was a
syndication.
I brought in partners, but fromthe beginning I'd say the
expectations or how therelationship was pretty solidly
built.
I love them dearly and I'veknown them for a while and they
(18:15):
were not the first people that Ipresented this with.
I would call lenders Everyonein the internet I could find a
joint Facebook groups and Itried to find these people.
And then the story of this Ithink I've told in the past, but
they ended up reaching out tome and saying, hey, can we fund
this?
And the rest is history.
But we had a very goodrelationship and we were pretty
(18:35):
in line with, hey, this is thevision here.
And they both were kind of likehey, you know, down here the
one with the grand picture here,we want to support that and
lift that because we see thevision, we see the deal so
awesome, we see that you can dothis and you're uniquely
situated to be able to do this.
And that allowed me to maintaincontrol, because I was coming
(18:56):
from a position of value.
I was telling a story that wascompelling enough and focused
enough on the relationship thatthey saw it and were able to buy
in, and so I think it'spowerful in what you're saying
in the sense that, and probablyinspiring too for a lot of
people, in the sense that man,look, you don't have to give
control to the money.
(19:18):
And another thing, too, that Ithink is really powerful is you
never should be desperate forthat money because the money
will take advantage of you allday, every day, It'll be like
yeah we have the money.
You're the only, we're the onlyreason you're able to do this,
which is false, that's not true,that's right, and if my story
is any indication of that, Ihope it's inspiring, motivating
(19:40):
enough to say look, you do notneed to allow the money to
control you, you don't need toallow it to dictate your value
or your ability to execute adeal.
So that's powerful.
Speaker 1 (19:55):
That's a great perspective and for the
listeners out there, I want tounderscore something down was
touching on and that's thementality of his relationship
with his partners inside of asyndication.
That's a very similar mentalityto what we're going to be
talking about here when wetransition into the fund
structure We've talked we'vetouched on this in past episodes
(20:18):
there's an obligation as asteward of capital.
When I create a deal and Icreate all of that value and I'm
the execution man.
If it's not me operating it,the money's not going to operate
it.
They depend on me tosuccessfully operate it and
(20:38):
provide a hurdle rate.
So having an outward focus,really being concerned, really
being focused on my investors asmy number one priority that's
critical.
That in either structure soyoung bucks coming into the game
if you're focused on the moneyand the returns, you're going to
(20:58):
have a hard time syndicating aninvestor and letting them
having them, let you keepcontrol.
If it's all about a return,you're not going to have any
answers of them saying, well,what makes you so special that
you should have any percentcontrol.
You won't answer that if it'sall about a return, if it's
(21:19):
bigger than that, and they cantell that you're a steward.
The way that you've been ableto present this correctly with
your investors is they trust you.
They are confident you canexecute it.
They're confident you havespecialized inside kind of
insight into the operationalacumen of how to make that
(21:40):
business operate successfullythat they don't necessarily have
.
So there's an appropriatealignment and acknowledging your
value to that value proposition, guys.
Speaker 2 (21:51):
Well, they have no doubt in their mind at least I
hope they have no doubt in theirmind that I'm putting them
first.
That's my goal is to make surethat they're taken care of and
treated correctly.
Everything is working how itshould.
That's my role, because if thatall is working, then there's a
greater relationship of trust,love is there, and then that's
(22:14):
going to open up opportunity forlater.
That's my genuine belief.
Speaker 1 (22:19):
Well, you're talking about the playing the long game.
Speaker 2 (22:21):
Yeah.
Speaker 1 (22:22):
I mean that truly is like guys.
When we talk about the moneydriven people, it's a short game
.
There's a short sided let's geta deal done and bounce.
There's no stewardship for yourinvestors.
You're focused on making your50 grand on that flip and you're
gone and everyone's out.
That's very short sided man.
So when you get focused on thelong game, it's relationship
(22:45):
cultivation.
So there's a naturaldistinction when we talk about
the spectrum of the people moneydriven and the people
relationship driven.
If you're playing a long game.
It's relationship driven,because if you take care of them
and you're an excellent stewardand you execute the plan well,
you make them money.
Sometimes you can surprise themand make them more.
You can pay them off early,like you're doing with this deal
(23:09):
.
You come up with these creativeways to make it even more
valuable, more lucrative to yourinvestors along the way, and
that cultivates the building ofthat relationship.
They want to do more and theywant to do more.
That's the goal, guys, is thelong game of relationship
building.
So let's shift gears to a funstructure, shall we?
(23:35):
You ready to do that?
Yeah, absolutely so.
Hopefully.
Speaker 2 (23:39):
that was a yeah, if I may, just what's in your
simplest of terms, what's thebiggest difference?
Speaker 1 (23:47):
The big and that's a great question man.
So maybe this could lead to theconversation.
Yeah, yeah, guys.
So the biggest difference iscollateral.
Okay, it's collateralization Ina syndication, bringing my
partners in.
They own part of the companyand therefore they own part of
the real estate.
They're secured by real estate.
In a fund model, there is nocollateralization of the real
(24:12):
estate.
They're purchasing securitiesas an issuer.
So when I create a fund, I'missuing securities that are not
collateralized by a piece ofreal estate in a traditional
sense.
So for some investors who kindof lack experience in being
involved in a fund, that couldbe potentially scarier, because
(24:37):
everyone understands the wordcollateral.
They understand the wordsecurity.
Now, security is defined a fewways.
We've talked about security forentrepreneurs.
We have no security.
But in real estate you do wantsecurity.
But in a fund the focus reallyshifts off the project level
focus and it shifts onto theoperator who is the team behind
(25:01):
the fund.
And it's kind of like the bestanalogy I could use is Elon Musk
.
We love Elon.
If Elon Musk opened a fund forI don't know his new electric
trucks and you had a chance asan investor to put $100,000 into
(25:23):
it and you could make a 30%annual return.
Would you care what they werebuilding?
If it was Elon Musk behind it,he could be building a spaceship
.
We don't even care what Elon'sbuilding, because his track
record is so good and his teamis so strong.
(25:44):
We know we can trust.
Well, we know that the odds are, the probability of success is
high because the operator is sogreat.
Okay, and that's different whenyou're talking about a
syndication.
Speaker 2 (25:58):
So to your point then it and I was going to ask okay,
well, is it viewed as morerisky than?
But it sounds to me it's adifferent.
You know, it's the perspective.
Yeah, it's like, well, maybetouching that right?
Speaker 1 (26:12):
Yeah, that's a sweet question.
Yeah, I haven't evencontemplated that.
But analyzing risk, okay, ifI'm syndicating and I'm new to
flipping and I have no trackrecord, so I'm kind of learning
as we go.
But my investor has securitiescollateralized on the property.
All that means is, if I fail toexecute my plan, he can take
(26:36):
the property, take it, yeah, andthen he's got to go sell it.
Speaker 2 (26:38):
But there's exposure there still.
Speaker 1 (26:41):
He still has to go dispose of the assets.
It's not like this failsafe,like you automatically are
getting your money back as aninvestor.
Okay, yeah.
Speaker 2 (26:48):
Okay, so, but then as a fund.
Speaker 1 (26:52):
I'm an investor going in and I'm putting you know 5,
10, 50 million in because of theoperators I mean the business,
the project levels that wedeploy into project level
investments have to make sense.
We have to believe in whatthey're doing, but mostly we
know the probability they canexecute the plan because of a
(27:12):
track record and what they'vebeen known to be good at is high
.
So that's my securityInteresting Right.
All investing involves risk andexposure.
You go risk Right.
You go invest in a stock markettoday.
You're probably going to lose.
I've invested in a stock marketmany times.
All of that.
I've lost more than I care toadmit.
Okay, if you're going to goinvest in cryptocurrency, I
(27:36):
think that's fantastic.
Right now, I haven't had theballs to do that just yet, but.
I have some really greatpathways right now to get into a
fund that indexes over multiplecurrencies, for example, to me,
that's a fund.
It's a fund.
I would rather go invest in afund that has operators with a
track history that know whatthey're doing inside of crypto
(27:58):
than me going to buy.
Bitcoin myself and getting myhead cut off because I don't
know what I'm doing.
Speaker 2 (28:03):
So that's a great example inside the crypto space.
That's a perfect example, and Ithink exactly what we're
talking about here.
If you put it in thatperspective, it's almost less
risky for an investor.
Absolutely, absolutely.
Yes, that's super.
Speaker 1 (28:17):
The team is more important because now you're
talking about all the thingsthat are so important on the
relationship side of thespectrum.
It's the character, theintegrity, the track record, the
experience, the deal selection,the due diligence process.
How do they analyze a deal?
How do they choose which marketto go into?
(28:38):
All of those questions can beanswered pretty easily with a
fund Most of the time.
With the syndication, you don'thave as much of that detail.
Speaker 2 (28:49):
You can.
You can, I mean I syndicated.
Speaker 1 (28:51):
Sage Creek and it was project level.
Project level details to theinvestors, but on the fund side
of it it's a different animal.
Speaker 2 (29:01):
Yeah, so a fund, just so that everyone's clear.
And then I'm clear, you'resitting here with it's not
project level investment, it'syou're investing in a fund that
does X.
Yes, and then the execution ofthe fund is then project level,
but the investor side of thingsis not project level.
Speaker 1 (29:22):
That's right.
Speaker 2 (29:22):
That's why there's no collateral.
Speaker 1 (29:24):
Yeah, yeah, yeah.
And when we get into themechanics of a fund.
So why do I love a fund model?
I love a fund for theflexibility.
As an operator, I'd love to beable to raise capital with a
mission.
So I have a goal, a target Iwant to hit with the funds, with
(29:44):
the dollars we're going toraise and deploy, and it has to
be into a certain asset class.
So let's talk about InvictusSovereign.
So Invictus Sovereign is my callof my flagship.
That's my management companyand it currently manages three
private offerings.
All three of them areclassified as Regd506C funds.
(30:08):
So these are, these are SECregistration exempt, private
funds or private placements, andso, with these particular
structures I'm focused on,there's three types of investors
that can go into a privateoffering.
You have a non-accreditedinvestor, that's average Joe.
(30:31):
You have an accredited investorthat could be anyone with a net
worth of $1 million, notincluding their personal home,
and then you have a qualifiedpurchaser.
Qualified purchaser has to havenet worth in excess of $5
million and there's some otherqualifying factors.
But a qualified purchaser is aperson or entity who's very
(30:55):
experienced in this type ofinvestment in a private
placements space.
They've probably invested in ahedge fund.
They could have invested in acrypto fund.
They're diversified in aportfolio, so the investors that
I'm allowing into the threefunds that Invictus Sovereign
manages are only qualifiedpurchasers.
(31:16):
Okay, in the past, in 2006, 2008, I had experience with five
other funds that I raised andmanaged and we had
non-accredited investors as wellas accredited investors, mixed
results and mixed exposures.
With all of that Unfortunatelyfor us myself and partners going
(31:39):
into the.
We did.
We raised those funds headingright into the 2008 apocalypse
event, okay, and so the resultwas ugly for us.
We ended up having all thebusinesses fail, losing all the
capital, and the non-accreditedinvestors were friends and
family and they were people thatcame in with low dollar amounts
(32:02):
and limited perspective andthey really, really had a
struggle with the losses.
The accredited investors, themore experienced ones, were like
, well, this really sucks, but500-some-odd banks went out of
business.
Merrill Lynch just went out ofbusiness.
I mean, what could you havedone differently to avoid the
(32:23):
total loss?
And there was perspective andunderstanding with my more
experienced investors.
That was.
It just led me 15 years laterto be that's the only investors
I can really relate to and dealwith right now, as my qualified
purchasers and the projects havea lot to do with it.
(32:44):
If you're raising a fund to dosomething like elevate travel
destinations, you probably wantat least accredited investors.
You might even takenon-accredited investors.
It just depends.
But with big projects like whatI'm doing, all four of my
projects are minimum.
My smallest project is $149million project costs.
(33:07):
So the minimum to get into oneof the funds is $5 million.
It's a different class ofinvestor completely.
I'm really focused oninstitutional investors and
funds that can invest in otherfunds.
So if there are funds out there, who are making soft
commitments to come into anenvironmental impact fund, who
(33:28):
want to support what we're doingwith American spec ESG, for
example.
So, we've got the three funds.
We have Invictus Real EstateFund 1.
That is a fund set up tobasically finance OPEX and the
equity gaps project level of theresort properties we're
developing.
Speaker 2 (33:49):
So it can build real estate.
Speaker 1 (33:52):
The next fund is Invictus Environmental Impact
Fund 1.
That one can also fund OPEX.
It can fund R&D, research anddevelopment.
It can fund equipmentfabrication.
It can fund the alternativetechnologies to be developed and
built to produce something cool, so something that has an
(34:16):
environmental impact.
So, for example, with Americanspec ESG we can produce, we can
convert municipal solid waste orconstruction waste into
alternative superior lumberproducts.
So I can take a truckload ofgarbage and convert it into
lumber.
So right now it's railroad tiesis the leading product and we
(34:38):
have plans to be doingdimensional lumber for
construction.
And then the third fund isInvictus Modular Manufacturing,
fund 1.
And that speaks for itself.
So that's to finance OPEXequity gap on a project level,
build facilities that willmanufacture modular housing.
So American spec Modular is thecompany that the fund is
(35:03):
supporting on the equity side.
So that's the high level on thefunds that I currently have and
kind of why we've taken thatapproach.
Speaker 2 (35:13):
And it's interesting too, because all that stuff you
just talked about, how difficultwould it be to syndicate to do
all that?
Speaker 1 (35:23):
It would be impossible.
So, yeah, I think it would beimpossible because you know, to
go back to, you know, sage Creekat Moab, when we syndicated
that we were just syndicating $8million onto a $44 million
capital stack, so I hadbasically had, you know, $40
something million of debt andall I need was $8 million of
equity.
But it was like seven or eightdifferent investors.
(35:44):
So getting all of thoseinvestors to come and get their
funds into escrow at the sametime to you know the close, it
was very challenging With a fund.
When I talk about flexibility,we get the soft commitments, we
get the investors that areexcited, and then we make
capital calls.
Yeah, when we make the capitalcalls, they have a certain
(36:07):
timeframe.
It's usually like a couple daysto wire their money in.
They've already committed,they've already signed all the
documentation, they're in queuefor a capital call, they wire
their money into the fund andthe fund administrators deploy
the capital.
Now one thing that I love downis that back in 2006, 2008, this
(36:27):
is like pre-Bernie made off.
It was like the Wild West therewere no.
No, like the SEC regulatorybody is a very serious thing not
to be trifled with.
When I talked about goingthrough the investigations of
the SEC, it was because we losta lot of investor money and they
wanted it.
They wanted to find out andthey'd go and investigate as if
(36:50):
you're guilty first.
So they're coming in andthey're taking laptops and
they're you know it's hardcore.
And then, as you become clear,then they kind of release
everything and luckily we hadall of our ducks in a row.
But one thing that didn't existback then was third-party
supporting entities of a fund.
(37:12):
When we talk about exposure orsecurity, when investors talking
about putting their dollarsinto a fund, what can we do as a
team to show the strength of ateam?
What we've been able to do isit starts with an amazing legal
team.
We have SEDIS and Goldberg outof New York City, for example,
and we have Mangum andAssociates, also out of New York
(37:33):
City, two very experienced SEClaw firms to structure the funds
to start.
But then we have third-partyadministrators.
Nav consulting does ours, sothey manage $180 billion.
They are third-party managers of2,500 different funds.
(37:54):
They professionally do that.
So they provide all of thereporting, all of the investor
distributions audits.
If investors want audits, theyhave investor portal that your
investors can log into and inreal time get the data.
I'm not having to interfacewith all my investors any more
(38:14):
than my investors want tointerface with me personally.
They can go to that third partto England and have consulting.
We have ACA Global out there,who's handling ESG advisory
services, cybersecurity,security of their accounts, and
we have Prime Corporate Services, who handle fund-related tax
(38:37):
matters.
So we have this amazing team ofproviders that support our
in-house team of partners withinInvictus, sovereign and the
family of funds.
So when you look at thismachine, it's not just a guy out
there raising money for a fundand then you're having to trust
Wayne.
Yeah, no, like it's highlysophisticated.
(38:59):
Highly sophisticated, I meanyeah.
Speaker 2 (39:01):
You're talking about something that is so.
Again, it's the team.
Yeah Right, it's the team thatyou're investing in, not
necessarily the deal, and I feellike that is super powerful.
Yeah, it gives the team a lot ofpower, but it also gives the
investor a lot of power,absolutely yeah.
So pros and cons right.
I mean syndications are greatfor a lot of reasons.
(39:24):
Yeah, a fund is a fund, notkind of a syndication.
I mean it's kind of asyndication of investors pooling
this money together, but it'snot in the sense that they're
not become you know thecollateral is the different part
.
Yeah.
Speaker 1 (39:35):
Well, the nature of a fund.
That's a great question.
The nature of a fund is exactlythat.
Investors are pooling dollarsinto what's called a limited
partnership.
That's, instead of an LLC, it'san LP.
Right, so Invictus Real EstateFund 1 LP.
That's an entity and theinvestors own basically 80% of
(39:58):
that.
Invictus Sovereign owns only20% of that fund, right, right.
So the investors get the lion'sshare of the dollars that the
fund produces.
Speaker 2 (40:07):
Yeah, yeah.
Speaker 1 (40:08):
And you know the Invictus Sovereign charges a 1%
management fee.
So it's nothing, it's just it'sPending for staff is paying for
these third party things and tokeep the lights on and manage
the fund appropriately, yeah.
Speaker 2 (40:20):
And is there a preferred return?
So I saw there's a lot thatgoes into this.
Speaker 1 (40:25):
Yeah, yeah, this is the tip and you can structure
syndications with preferredreturns and equity waterfalls
and all of that.
But in a fund that's typical.
All three of our funds have a7% preferred return.
That means dollars that getearned by the fund when we
deploy capital with the fund.
That fund generates revenue andthe first money off the top of
(40:50):
those revenues, 7% of that, goesto the investors.
Okay, and then there's a split.
There's an 80-20 split oncarried interest, which is all
gross earnings.
You know SANS, fees, managementand preferred returns that go
out in dividends, and it couldbe done quarterly or annually.
And so you know, depending onthe type of the fund, you'll
(41:11):
have different distributionschedules.
But I really feel like it's waymore secure because you have so
much more insight.
You have access to data,real-time data, auditable data,
and if I want to actually becomea public entity which I don't
have any ambition to do or if Iwanted to sell a fund or sell my
(41:34):
company, being fully auditablewith a team like this with all
of the data is way moreimportant.
On a syndication, you knowyou're syndicating with a
developer or a sponsor and theymay provide some accounting.
Speaker 2 (41:47):
They may provide some reporting.
They don't have to do any ofthat.
Speaker 1 (41:50):
Right.
So your access to informationin my mind in a fund is way more
organized.
In a syndication that's alittle more Wild West, depending
on who the sponsor is.
Speaker 2 (42:01):
So why is knowing all this stuff, the difference
between the two, even knowingabout the two, so important for
listeners?
Speaker 1 (42:09):
Well, there's two points of value.
I mean, I think any newinvestor is thinking about
getting into real estateinvesting they're going to need
to get clear about do I want tostart my own fund and hire the
people to do that?
What's that going to take?
What's that going?
Speaker 2 (42:26):
to take.
Speaker 1 (42:27):
How does that all come together?
How do I build a team?
How do I find all these people,these specialized people, or do
I want to syndicate?
But then also for our listeners, who are very well healed
institutional folks just wantingto get to know us, it's
important to understand ourmentality about how we build a
(42:47):
fund, how we underwrite ourprojects, how we deploy capital.
There's real processes and realprotocols Absolutely Next level
organization on the fund versusthe syndication yeah, which for
me, at my stage in my career 27years in, with almost a billion
dollars of development,construction and motion to me
(43:10):
it's much more valuable to beable to have big, secure
entities and high net worthindividuals be able to look at
that fund and I mean theyunderstand that environment and
so it's easier to make adecision to go.
So this is for all levels oflisteners.
We're just trying to helpcreate value of contrast here
and how you're going topotentially start your real
(43:32):
estate business or how you'regoing to take your business to
the next level if you're moresophisticated real estate
investor.
Speaker 2 (43:39):
Well, an interesting perspective too, having
experience with a syndicationand then transitioning into the
fund model.
It's like I'm appreciative ofthe experience syndicating a
deal, absolutely, it's almostrequired.
Speaker 1 (43:52):
You should all.
It should be almost arequirement that you syndicate a
few deals.
So you know what that is beforeyou go try to start a fund.
I think that's very valuable.
As a fund manager, you need toknow the inner workings of the
syndication and how thatoperates in order to really be a
good fund manager when you geton the fund level.
Speaker 2 (44:12):
Okay, yeah, yeah, that's very important and also
gives you a kind of a path.
Okay, I want to start a fund.
What do I need to do then?
Okay, then I start syndicating,then I start meeting the people
that are going to be helpfuland building the team, then you
start making any introductions,then you start having the
opportunity to, I think, growinto what a fund would be.
Speaker 1 (44:29):
Yeah.
So on the subject of funds,have you decided to start a fund
?
If you grow up with the name,and what is that looking like?
Speaker 2 (44:37):
Yeah, I've been thinking a lot about it and I
think it's the only path to moveforward.
Agree, and so.
Yeah, I mean there's a lot tocome in regards to what that's
going to look like and how I'mgoing to do it, but the decision
has been made.
Yeah, nice, I've committed to.
That's the only way to stepforward for me in the business,
(44:57):
I think.
Speaker 1 (44:58):
Man, if I could have come to that realization at age
24, I can't even imagine how bigof a consortium I'd have right
now.
I mean, I raised my first fundwhen I was 32 and then we had
the Apocalypse event and I justhave been out of the fund game
until now.
I've just been syndicating forthe last 15 years and it's
(45:21):
become time and I'm very excitedto be back on the fund status
here with Invictus Sovereign.
Speaker 2 (45:28):
But yeah well listen to.
Another thing, too, is we talkabout syndicating and then going
into funds.
My experience with syndicationis not as extensive as a lot of
people.
For example, you've beensyndicating for 15 years.
I've syndicated over the pastyear and I've done really well
with that specific deal, thosespecific partners, those
(45:50):
specific investors and we'recrushing it.
We're getting ready to do somereally great stuff with it, but
I have such an awesome team andsome connections here I feel
confident going into a fundmodel after just this and again,
this is going to look differentfor everyone.
Some people might say, oh, Ineed to syndicate 10 times
before I start a fund.
But for me personally, themodel that I have, the team that
(46:12):
I have and just the directionwe're moving forward, I feel not
only super confident but I alsofeel like I'm obligated to go
in the fund route for thisspecific initiative.
And there's a lot of reasons Icould dive into that, but I mean
again, I guess the point I'mtrying to make is it's going to
look different for everyone, andfor me it looks different
because of the way I've donethings, the way people that I've
(46:34):
connected with and all thisstuff.
Speaker 1 (46:36):
This is going to be fun to unpack the process, man,
as you go down the path ofraising your first fund.
That's very exciting.
Well, guys, I think that'sabout a wrap here.
We've covered pretty extensivehere syndication versus fund.
Thanks for tuning in with ustoday and stay tuned.
Welcome back to the show.
It's Aston Incorporated.
I'm Wayne Aston, your host.
This is my co-host, DallinAston.
Welcome back, guys.
Today we've got an excitingepisode.
We're gonna be covering thedifference between syndications
and a fund.
So we're gonna start with somedefinitions for you guys,
because this is hardcore realestate 101.
(00:23):
This is an educational episode.
Here Dallin's got a little bitof experience on both sides of
this.
I've got a lot of experience onboth sides.
I'm gonna kick it off with thefact that I believe a
syndication is a more common.
(00:44):
It's definitely a more commonway to structure a deal.
So for those of you brand new toreal estate, what is a
syndication?
A syndication, generallyspeaking, is a group of one or
more entities or people thatcome together to do something.
Okay, so you can have corporatesyndications, where people,
(01:07):
companies join, venture into asyndicate to accomplish a
certain goal.
And so, in real estate, whenI'm talking about a syndication,
what we're talking about hereis we're talking about let's
boil it down to the basics we'regonna go buy a house and flip
it.
That means I'm the sponsor.
I typically, if I have my owncash, then I'm gonna be my own
(01:29):
equity partner, but I'm gonna goget a hard money, loan or
bridge capital to take theproperty down and renovate it.
But for those of us who aregetting into the game and you
don't have a quarter milliondollars in the bank, you can go
bring an investor to the tableand syndicate the deal, which is
(01:50):
what I did, and you've donethat successfully.
So we're gonna get into some ofthe nuts and bolts of structure
and how that worked for you,because I think, as we kick this
whole show off, guys, we wantyou to understand that money is
not the barrier for you to notget involved.
(02:13):
If that's your excuse for notgetting involved, then go home.
Now you have to be able tofigure out how to get
resourceful and how to put adeal together and create so much
value that you make the dealhappen even if you don't have
money in the bank.
So that's part of this is theinspirational value that anyone
(02:33):
can do this with a little bit ofperspective on how.
Speaker 2 (02:37):
Would you agree with that, dallin?
Well, absolutely Well.
I mean, if I'm any example, Iwent from literally having
negative dollars on my bankaccount.
I was driving Uber just to payrent.
I was delivering food in my2000 little car right, it was
100,000 miles on it just to goeat right, and I managed to
(02:58):
raise 760 grand.
Speaker 1 (03:00):
That's none.
Of that was my money.
Speaker 2 (03:03):
So that's important to a little perspective there.
Speaker 1 (03:06):
So let's talk a little bit about structure.
You guys, I mean I could go asan individual and I could go
borrow money from the bank in myname and that would be a
personal loan and any gain thatI would have on anything that I
go do with that.
If I buy a house and I renovateit and I flip it and I do that
(03:27):
in my name, I'm gonna get taxedon that capital gain one way.
But if I go set up a companylet's say in Utah I'm setting up
a limited liability company.
That's my favorite structure.
It's easy to set up.
If you have an attorney in theaccountant, they can certainly
help you set that up.
(03:47):
But a limited liability companyis a basic structure that I
mean that's your business.
That's like what's the name ofyours?
Elevate travel destinations,that's right.
Yeah, llc, yep, okay.
So it's an LLC as an example.
So, okay, down, set up his LLCElevate travel destinations.
(04:09):
I have I've probably set up morethan 50 LLCs in 27 years.
Most of them are buried at thebottom of the ocean.
Okay, so that's the other coolthing, guys.
I mean you're gonna set up anLLC and if you're successful and
you can scale it successfully,it can live longer than you do,
(04:36):
but statistically speaking, mostbusinesses fail in the first
five years.
So there's a lot of LLCs.
When you go to register andchoose your name and get an LLC
set up, that company that's justa vehicle that kind of
establishes your ability to goand transact business in, and if
(04:56):
you have a business failurethen that LLC basically gets
unwound or dissolved or it endsup just going, like I said, at
the bottom of the ocean.
And so anybody who's been inthe entrepreneur game for a
decade or more is gonna havemultiple entities that they
started, that they thought wouldbe great and they ended up not
(05:18):
working out for one reason oranother.
Speaker 2 (05:19):
Well, I personally even have probably seven, okay,
okay good case and point.
Good case and point, and mine'sbeen a much shorter journey
than yours or some other peoplethat have been around the block.
Speaker 1 (05:32):
But even then.
Speaker 2 (05:33):
I have quite a few that I've started that haven't
worked out and some that have,and the majority of them have
not.
Yeah yeah, but I mean, I thinkthe point here is it's trial and
error here, right, and there'sa lot of them, that's right
that's right guys.
Speaker 1 (05:51):
So one of the real pros of syndicating with a
company like this, thisparticular structure, is that
you could go to your uncle orsomeone in your family that
knows and trusts you and youcould say hey, I've got this, I
have this opportunity, I'm gonnabuy this house, this is how
(06:11):
much it's gonna cost to renovate, and we're gonna flip it.
And I'm just using that as abasic example.
That cause everyone canunderstand.
You watch flipping Vegas orsome of these TV shows.
That's a very basic real estateinvestment kind of beginner
strategy.
So to syndicate, that meansyou're gonna go and you're gonna
involve an outside person orentity to become a partner, and
(06:34):
literally that's what'shappening when you syndicate.
You're bringing on a newpartner, and so that could be
structured a lot of differentways, but it really is project
level and it really it has to dowith the direct membership
interest of the LLC.
So a true syndication meansOkay, I set up XYZ LLC and I
(07:00):
bring my new investor in.
He's going to bring a hundredgrand in and I'm going to give
him 30% of that LLC.
So now we have an operatingagreement for the LLC and the
operating agreement it's a 48page document that's going to
spell out our relationship andhow we're going to do that deal.
If we're going to do more thanone deal, it's going to spell
(07:21):
that out.
If it's just isolated to thatone flip, then that's what it is
.
But typically every company isgoing to have an operating
agreement that spells the rulesout for me and you, if you're my
investor, and so we're allclear.
We're on the same page legallyspeaking.
This is good, because when youbring your investors in, they're
(07:41):
probably going to have theirown attorneys and their own
accountants review the operatingagreement.
That's in bolts of everything.
It's not uncommon for a moreexperienced investor to want to
have a controlling interest inan LLC.
So you guys, when you'resetting this stuff up, if you're
(08:01):
coming from nothing, it's notuncommon to have go to an
investor and approach them for ahundred grand, 250 grand, and
have them want to own 80% ofyour company at first and you
can structure an operatingagreement so that they own the
majority until there's a certainhurdle point Maybe that's the
(08:25):
sale of the propertysuccessfully and you're moving
into the next one in the captable or the capitalization
table or the schedule of themembership.
Interest will shift and you cankind of earn your way into
owning the majority interest ofyour own company if you can
negotiate that with yourinvestors.
Over the years I've hadcompanies where I have given
(08:49):
away the majority interest.
Nowadays I do everything I canto make sure that I maintain the
controlling interest, and thisjust comes with some serious
battle-tested experiences anddeals that have gone sideways
and why it would have beenbetter for me to have a
(09:10):
controlling interest.
If I'd have had a controllinginterest I could have avoided
litigation and a lot of problems.
When you're syndicating guys, apoint I want to drive home is
that you've got to really knowyour investor.
Dellen and I have covered we'vejust scratched the tip of the
(09:31):
iceberg of who do I have tobecome to be a successful
business operator?
That's the core question foryou guys thinking about the
entrepreneur leap off the cliff.
We're going to jump.
There's no net, it's all on me.
We're going to make it work orwe're not.
And so character and values andso much of that comes into play
(09:54):
here and unfortunately and I'llspeak from experience when I've
allowed investors to come intomy deals at a company or project
level inside of a syndicationand we're not aligned with
character and with values.
If there's a misalignment ofintegrity, for example, that's
(10:16):
always a huge one One partnerdriven by money, another partner
driven by the relationship, andthat's like oil and water the
money and the relationship sideof it.
We've covered that in pastepisodes.
But specifically speaking tosyndications, when you get into
decision making and you have apartner in your LLC that has
(10:38):
voting rights because they owndirect membership interest, it
means that you're bound by theoperating agreement and they do
have the right to vote and theydo have a right to influence how
the deal goes.
Which is why, if you bringsomeone in just because they
bring in the money, but theirvalues are totally misaligned,
you could be in for a verydifficult time, and most often
(11:01):
in my experience has beenlitigation.
I don't know what it is.
I've been like a magnet over 27years of attracting these
greedy the money guys that allthey care about is the money and
they.
You know you're making greatmoney and then people want to
stab you in the back.
So you know it takes a lot ofemotional bandwidth to partner
(11:23):
with people and have it go badand then do it again, and then
do it again so you get morefocused.
Like me, at 27 years in, I amso picky about who I'll partner
with.
I mean I have to.
Well, number one there's thesevery specific principles,
integrity being the first one,but it gets a lot deeper than
(11:46):
that.
I've cultivated such arelationship driven focus in my
businesses and selectingpartners that I have to really
connect with you on a humanlevel and know that we're
aligned and we have the sameoutward focuses and the same
goals and ambitions.
Before I'll allow anyone into avoting priority inside of a
(12:10):
company that I establish.
Speaker 2 (12:12):
Yeah, that's interesting.
It almost sounds to me and I'dlike to ask about this but it
almost sounds to me like you'retaking this traditional view of
hey, you know, the institutionalfinance guys or the investors
are the ones with the cash, thenwhy should I?
So, if I'm the investor, well,why should I work with you?
You're kind of flipping it.
(12:33):
You're kind of, in a sense, ranabout way, saying to the
investors of the finance you'resaying to the money well, why
should I work with you?
Yeah, right, yeah.
And in the words of WarrenClaff, you're flipping the
script.
Speaker 1 (12:48):
Yeah.
Speaker 2 (12:48):
Right, Because really and if I'm understanding what
you're saying here correctly andI personally have my own views
about this but the money iseverywhere right, and so the
second you become held hostageto the money is the second where
things don't necessarily goright.
Yeah, that's kind of what I'mhearing.
Would you agree with that,that's?
Speaker 1 (13:07):
absolutely right, dallin.
I mean when you're starting andyou don't have a credit profile
and you don't have a bigbalance sheet with you know $10
million in the bank and youdon't have real estate assets.
When they ask for your scheduleof real estate owned and you
don't own any real estate, it'svery easy for banks will do this
(13:28):
a lot, but investors do it allthe time.
They'll want to leverage thisagainst you.
Speaker 2 (13:35):
Yeah.
Speaker 1 (13:36):
They'll want to take these negatives about you, and
they'll want to discount myvalue as the sponsor or the
dealmaker, the person whocreated the opportunity, from
scratch.
And so it's traditionally beena fact that, in fact, there's
this cliche saying he who hasthe gold holds the purse strings
(13:57):
.
I think that's completebullshit.
He who holds the gold, holds thepurse strings.
That may be how oldergenerations have operated and
old banks have operated, but,like you say, money is a
commodity.
Money is not the prize, moneyis not the value.
In fact, if you have a vaultwith $10 million of cash in it,
(14:21):
it's worth nothing.
It's paper stacked in a closet.
It's not until you deploycapital into something that has
value that the money expands andthat's where the value's at.
So I'm trying to create a shiftin everyone listening's mind
here that you are the prize.
You are that one human on earththat has a unique value
(14:45):
proposition and you bringsomething that no one on earth
can buy.
Okay, now I'll use a.
Really I just had an epiphany,a really interesting example of
this.
So when we were doing theproject in Moab 2015, we bought
(15:06):
the land.
It took two years to get theapprovals and get the financing
and get things rolling down.
There's was a very, very slow,arduous start to that project,
and this is before Moab.
Really, it was kind of a sleepytown in 2015.
It really didn't wake up untila few years after we bought the
(15:28):
land.
We were cranking, we finallyget all the plans approved, we
get fully vested, we record ourfinal plot.
That's the land plan for theresort and the city approves it
and that's recorded in the titlecompany and that was in 2018.
In 2019, what happens is thecity decides hey, we're going to
(15:53):
pass a prohibition over theentire county.
There will be no more approvalsof any project with a nightly
rental component to it.
So if you wanted to go build anew hotel or condos, or even a
new campground in Moab, that'sno longer possible.
So, case in point If you have abillion dollars in the bank and
(16:17):
you fly your fancy jet to Moabtoday, it doesn't matter.
You can't go by land anddevelop a resort or a hotel,
because it's not permitted,right?
Wow, See the value, the value isin what we created, and it's a
casual production machine.
Now that it's prohibited, it'seven more valuable.
(16:40):
Yeah.
So the city inadvertently kindof helped with valuation on that
.
So that's a key kind of exampleof just because you have a
billion dollars doesn't mean Imean, it means you can do stuff
Right.
What would be awesome is if youhave a billion dollars and you
have the mindset that alignswith me.
Man, that's a powerful combonow, because I don't have a
(17:03):
billion dollars, but I haveprojects that could deploy a
billion dollars Right.
So you have.
If you have a good deal makerand a good execution specialist
let's call that the expertinvestor and you have capital
and you combine those that canmake for a powerful syndication.
Yeah, you following that, yep,absolutely.
(17:26):
And if you're lucky enough tohave that big investor that is
aligned with you and I've had afew it's a magical thing because
you can do incredible thingsand you are aligned and neither
side is greedy and you kind ofboth view the value proposition
fairly Right.
Speaker 2 (17:49):
One.
I'd even say that, with the waythat I did mine, mine was a
syndication.
I brought in partners, but fromthe beginning I'd say the
expectations or how therelationship was pretty solidly
built.
I love them dearly and I'veknown them for a while and they
(18:15):
were not the first people that Ipresented this with.
I would call lenders Everyonein the internet I could find a
joint Facebook groups and Itried to find these people.
And then the story of this Ithink I've told in the past, but
they ended up reaching out tome and saying, hey, can we fund
this?
And the rest is history.
But we had a very goodrelationship and we were pretty
(18:35):
in line with, hey, this is thevision here.
And they both were kind of likehey, you know, down here the
one with the grand picture here,we want to support that and
lift that because we see thevision, we see the deal so
awesome, we see that you can dothis and you're uniquely
situated to be able to do this.
And that allowed me to maintaincontrol, because I was coming
(18:56):
from a position of value.
I was telling a story that wascompelling enough and focused
enough on the relationship thatthey saw it and were able to buy
in, and so I think it'spowerful in what you're saying
in the sense that, and probablyinspiring too for a lot of
people, in the sense that man,look, you don't have to give
control to the money.
(19:18):
And another thing, too, that Ithink is really powerful is you
never should be desperate forthat money because the money
will take advantage of you allday, every day, It'll be like
yeah we have the money.
You're the only, we're the onlyreason you're able to do this,
which is false, that's not true,that's right, and if my story
is any indication of that, Ihope it's inspiring, motivating
(19:40):
enough to say look, you do notneed to allow the money to
control you, you don't need toallow it to dictate your value
or your ability to execute adeal.
So that's powerful.
Speaker 1 (19:55):
That's a great perspective and for the
listeners out there, I want tounderscore something down was
touching on and that's thementality of his relationship
with his partners inside of asyndication.
That's a very similar mentalityto what we're going to be
talking about here when wetransition into the fund
structure We've talked we'vetouched on this in past episodes
(20:18):
there's an obligation as asteward of capital.
When I create a deal and Icreate all of that value and I'm
the execution man.
If it's not me operating it,the money's not going to operate
it.
They depend on me tosuccessfully operate it and
(20:38):
provide a hurdle rate.
So having an outward focus,really being concerned, really
being focused on my investors asmy number one priority that's
critical.
That in either structure soyoung bucks coming into the game
if you're focused on the moneyand the returns, you're going to
(20:58):
have a hard time syndicating aninvestor and letting them
having them, let you keepcontrol.
If it's all about a return,you're not going to have any
answers of them saying, well,what makes you so special that
you should have any percentcontrol.
You won't answer that if it'sall about a return, if it's
(21:19):
bigger than that, and they cantell that you're a steward.
The way that you've been ableto present this correctly with
your investors is they trust you.
They are confident you canexecute it.
They're confident you havespecialized inside kind of
insight into the operationalacumen of how to make that
(21:40):
business operate successfullythat they don't necessarily have
.
So there's an appropriatealignment and acknowledging your
value to that value proposition, guys.
Speaker 2 (21:51):
Well, they have no doubt in their mind at least I
hope they have no doubt in theirmind that I'm putting them
first.
That's my goal is to make surethat they're taken care of and
treated correctly.
Everything is working how itshould.
That's my role, because if thatall is working, then there's a
greater relationship of trust,love is there, and then that's
(22:14):
going to open up opportunity forlater.
That's my genuine belief.
Speaker 1 (22:19):
Well, you're talking about the playing the long game.
Speaker 2 (22:21):
Yeah.
Speaker 1 (22:22):
I mean that truly is like guys.
When we talk about the moneydriven people, it's a short game
.
There's a short sided let's geta deal done and bounce.
There's no stewardship for yourinvestors.
You're focused on making your50 grand on that flip and you're
gone and everyone's out.
That's very short sided man.
So when you get focused on thelong game, it's relationship
(22:45):
cultivation.
So there's a naturaldistinction when we talk about
the spectrum of the people moneydriven and the people
relationship driven.
If you're playing a long game.
It's relationship driven,because if you take care of them
and you're an excellent stewardand you execute the plan well,
you make them money.
Sometimes you can surprise themand make them more.
You can pay them off early,like you're doing with this deal
(23:09):
.
You come up with these creativeways to make it even more
valuable, more lucrative to yourinvestors along the way, and
that cultivates the building ofthat relationship.
They want to do more and theywant to do more.
That's the goal, guys, is thelong game of relationship
building.
So let's shift gears to a funstructure, shall we?
(23:35):
You ready to do that?
Yeah, absolutely so.
Hopefully.
Speaker 2 (23:39):
that was a yeah, if I may, just what's in your
simplest of terms, what's thebiggest difference?
Speaker 1 (23:47):
The big and that's a great question man.
So maybe this could lead to theconversation.
Yeah, yeah, guys.
So the biggest difference iscollateral.
Okay, it's collateralization Ina syndication, bringing my
partners in.
They own part of the companyand therefore they own part of
the real estate.
They're secured by real estate.
In a fund model, there is nocollateralization of the real
(24:12):
estate.
They're purchasing securitiesas an issuer.
So when I create a fund, I'missuing securities that are not
collateralized by a piece ofreal estate in a traditional
sense.
So for some investors who kindof lack experience in being
involved in a fund, that couldbe potentially scarier, because
(24:37):
everyone understands the wordcollateral.
They understand the wordsecurity.
Now, security is defined a fewways.
We've talked about security forentrepreneurs.
We have no security.
But in real estate you do wantsecurity.
But in a fund the focus reallyshifts off the project level
focus and it shifts onto theoperator who is the team behind
(25:01):
the fund.
And it's kind of like the bestanalogy I could use is Elon Musk
.
We love Elon.
If Elon Musk opened a fund forI don't know his new electric
trucks and you had a chance asan investor to put $100,000 into
(25:23):
it and you could make a 30%annual return.
Would you care what they werebuilding?
If it was Elon Musk behind it,he could be building a spaceship
.
We don't even care what Elon'sbuilding, because his track
record is so good and his teamis so strong.
(25:44):
We know we can trust.
Well, we know that the odds are, the probability of success is
high because the operator is sogreat.
Okay, and that's different whenyou're talking about a
syndication.
Speaker 2 (25:58):
So to your point then it and I was going to ask okay,
well, is it viewed as morerisky than?
But it sounds to me it's adifferent.
You know, it's the perspective.
Yeah, it's like, well, maybetouching that right?
Speaker 1 (26:12):
Yeah, that's a sweet question.
Yeah, I haven't evencontemplated that.
But analyzing risk, okay, ifI'm syndicating and I'm new to
flipping and I have no trackrecord, so I'm kind of learning
as we go.
But my investor has securitiescollateralized on the property.
All that means is, if I fail toexecute my plan, he can take
(26:36):
the property, take it, yeah, andthen he's got to go sell it.
Speaker 2 (26:38):
But there's exposure there still.
Speaker 1 (26:41):
He still has to go dispose of the assets.
It's not like this failsafe,like you automatically are
getting your money back as aninvestor.
Okay, yeah.
Speaker 2 (26:48):
Okay, so, but then as a fund.
Speaker 1 (26:52):
I'm an investor going in and I'm putting you know 5,
10, 50 million in because of theoperators I mean the business,
the project levels that wedeploy into project level
investments have to make sense.
We have to believe in whatthey're doing, but mostly we
know the probability they canexecute the plan because of a
(27:12):
track record and what they'vebeen known to be good at is high
.
So that's my securityInteresting Right.
All investing involves risk andexposure.
You go risk Right.
You go invest in a stock markettoday.
You're probably going to lose.
I've invested in a stock marketmany times.
All of that.
I've lost more than I care toadmit.
Okay, if you're going to goinvest in cryptocurrency, I
(27:36):
think that's fantastic.
Right now, I haven't had theballs to do that just yet, but.
I have some really greatpathways right now to get into a
fund that indexes over multiplecurrencies, for example, to me,
that's a fund.
It's a fund.
I would rather go invest in afund that has operators with a
track history that know whatthey're doing inside of crypto
(27:58):
than me going to buy.
Bitcoin myself and getting myhead cut off because I don't
know what I'm doing.
Speaker 2 (28:03):
So that's a great example inside the crypto space.
That's a perfect example, and Ithink exactly what we're
talking about here.
If you put it in thatperspective, it's almost less
risky for an investor.
Absolutely, absolutely.
Yes, that's super.
Speaker 1 (28:17):
The team is more important because now you're
talking about all the thingsthat are so important on the
relationship side of thespectrum.
It's the character, theintegrity, the track record, the
experience, the deal selection,the due diligence process.
How do they analyze a deal?
How do they choose which marketto go into?
(28:38):
All of those questions can beanswered pretty easily with a
fund Most of the time.
With the syndication, you don'thave as much of that detail.
Speaker 2 (28:49):
You can.
You can, I mean I syndicated.
Speaker 1 (28:51):
Sage Creek and it was project level.
Project level details to theinvestors, but on the fund side
of it it's a different animal.
Speaker 2 (29:01):
Yeah, so a fund, just so that everyone's clear.
And then I'm clear, you'resitting here with it's not
project level investment, it'syou're investing in a fund that
does X.
Yes, and then the execution ofthe fund is then project level,
but the investor side of thingsis not project level.
Speaker 1 (29:22):
That's right.
Speaker 2 (29:22):
That's why there's no collateral.
Speaker 1 (29:24):
Yeah, yeah, yeah.
And when we get into themechanics of a fund.
So why do I love a fund model?
I love a fund for theflexibility.
As an operator, I'd love to beable to raise capital with a
mission.
So I have a goal, a target Iwant to hit with the funds, with
(29:44):
the dollars we're going toraise and deploy, and it has to
be into a certain asset class.
So let's talk about InvictusSovereign.
So Invictus Sovereign is my callof my flagship.
That's my management companyand it currently manages three
private offerings.
All three of them areclassified as Regd506C funds.
(30:08):
So these are, these are SECregistration exempt, private
funds or private placements, andso, with these particular
structures I'm focused on,there's three types of investors
that can go into a privateoffering.
You have a non-accreditedinvestor, that's average Joe.
(30:31):
You have an accredited investorthat could be anyone with a net
worth of $1 million, notincluding their personal home,
and then you have a qualifiedpurchaser.
Qualified purchaser has to havenet worth in excess of $5
million and there's some otherqualifying factors.
But a qualified purchaser is aperson or entity who's very
(30:55):
experienced in this type ofinvestment in a private
placements space.
They've probably invested in ahedge fund.
They could have invested in acrypto fund.
They're diversified in aportfolio, so the investors that
I'm allowing into the threefunds that Invictus Sovereign
manages are only qualifiedpurchasers.
(31:16):
Okay, in the past, in 2006, 2008, I had experience with five
other funds that I raised andmanaged and we had
non-accredited investors as wellas accredited investors, mixed
results and mixed exposures.
With all of that Unfortunatelyfor us myself and partners going
(31:39):
into the.
We did.
We raised those funds headingright into the 2008 apocalypse
event, okay, and so the resultwas ugly for us.
We ended up having all thebusinesses fail, losing all the
capital, and the non-accreditedinvestors were friends and
family and they were people thatcame in with low dollar amounts
(32:02):
and limited perspective andthey really, really had a
struggle with the losses.
The accredited investors, themore experienced ones, were like
, well, this really sucks, but500-some-odd banks went out of
business.
Merrill Lynch just went out ofbusiness.
I mean, what could you havedone differently to avoid the
(32:23):
total loss?
And there was perspective andunderstanding with my more
experienced investors.
That was.
It just led me 15 years laterto be that's the only investors
I can really relate to and dealwith right now, as my qualified
purchasers and the projects havea lot to do with it.
(32:44):
If you're raising a fund to dosomething like elevate travel
destinations, you probably wantat least accredited investors.
You might even takenon-accredited investors.
It just depends.
But with big projects like whatI'm doing, all four of my
projects are minimum.
My smallest project is $149million project costs.
(33:07):
So the minimum to get into oneof the funds is $5 million.
It's a different class ofinvestor completely.
I'm really focused oninstitutional investors and
funds that can invest in otherfunds.
So if there are funds out there, who are making soft
commitments to come into anenvironmental impact fund, who
(33:28):
want to support what we're doingwith American spec ESG, for
example.
So, we've got the three funds.
We have Invictus Real EstateFund 1.
That is a fund set up tobasically finance OPEX and the
equity gaps project level of theresort properties we're
developing.
Speaker 2 (33:49):
So it can build real estate.
Speaker 1 (33:52):
The next fund is Invictus Environmental Impact
Fund 1.
That one can also fund OPEX.
It can fund R&D, research anddevelopment.
It can fund equipmentfabrication.
It can fund the alternativetechnologies to be developed and
built to produce something cool, so something that has an
(34:16):
environmental impact.
So, for example, with Americanspec ESG we can produce, we can
convert municipal solid waste orconstruction waste into
alternative superior lumberproducts.
So I can take a truckload ofgarbage and convert it into
lumber.
So right now it's railroad tiesis the leading product and we
(34:38):
have plans to be doingdimensional lumber for
construction.
And then the third fund isInvictus Modular Manufacturing,
fund 1.
And that speaks for itself.
So that's to finance OPEXequity gap on a project level,
build facilities that willmanufacture modular housing.
So American spec Modular is thecompany that the fund is
(35:03):
supporting on the equity side.
So that's the high level on thefunds that I currently have and
kind of why we've taken thatapproach.
Speaker 2 (35:13):
And it's interesting too, because all that stuff you
just talked about, how difficultwould it be to syndicate to do
all that?
Speaker 1 (35:23):
It would be impossible.
So, yeah, I think it would beimpossible because you know, to
go back to, you know, sage Creekat Moab, when we syndicated
that we were just syndicating $8million onto a $44 million
capital stack, so I hadbasically had, you know, $40
something million of debt andall I need was $8 million of
equity.
But it was like seven or eightdifferent investors.
(35:44):
So getting all of thoseinvestors to come and get their
funds into escrow at the sametime to you know the close, it
was very challenging With a fund.
When I talk about flexibility,we get the soft commitments, we
get the investors that areexcited, and then we make
capital calls.
Yeah, when we make the capitalcalls, they have a certain
(36:07):
timeframe.
It's usually like a couple daysto wire their money in.
They've already committed,they've already signed all the
documentation, they're in queuefor a capital call, they wire
their money into the fund andthe fund administrators deploy
the capital.
Now one thing that I love downis that back in 2006, 2008, this
(36:27):
is like pre-Bernie made off.
It was like the Wild West therewere no.
No, like the SEC regulatorybody is a very serious thing not
to be trifled with.
When I talked about goingthrough the investigations of
the SEC, it was because we losta lot of investor money and they
wanted it.
They wanted to find out andthey'd go and investigate as if
(36:50):
you're guilty first.
So they're coming in andthey're taking laptops and
they're you know it's hardcore.
And then, as you become clear,then they kind of release
everything and luckily we hadall of our ducks in a row.
But one thing that didn't existback then was third-party
supporting entities of a fund.
(37:12):
When we talk about exposure orsecurity, when investors talking
about putting their dollarsinto a fund, what can we do as a
team to show the strength of ateam?
What we've been able to do isit starts with an amazing legal
team.
We have SEDIS and Goldberg outof New York City, for example,
and we have Mangum andAssociates, also out of New York
(37:33):
City, two very experienced SEClaw firms to structure the funds
to start.
But then we have third-partyadministrators.
Nav consulting does ours, sothey manage $180 billion.
They are third-party managers of2,500 different funds.
(37:54):
They professionally do that.
So they provide all of thereporting, all of the investor
distributions audits.
If investors want audits, theyhave investor portal that your
investors can log into and inreal time get the data.
I'm not having to interfacewith all my investors any more
(38:14):
than my investors want tointerface with me personally.
They can go to that third partto England and have consulting.
We have ACA Global out there,who's handling ESG advisory
services, cybersecurity,security of their accounts, and
we have Prime Corporate Services, who handle fund-related tax
(38:37):
matters.
So we have this amazing team ofproviders that support our
in-house team of partners withinInvictus, sovereign and the
family of funds.
So when you look at thismachine, it's not just a guy out
there raising money for a fundand then you're having to trust
Wayne.
Yeah, no, like it's highlysophisticated.
(38:59):
Highly sophisticated, I meanyeah.
Speaker 2 (39:01):
You're talking about something that is so.
Again, it's the team.
Yeah Right, it's the team thatyou're investing in, not
necessarily the deal, and I feellike that is super powerful.
Yeah, it gives the team a lot ofpower, but it also gives the
investor a lot of power,absolutely yeah.
So pros and cons right.
I mean syndications are greatfor a lot of reasons.
(39:24):
Yeah, a fund is a fund, notkind of a syndication.
I mean it's kind of asyndication of investors pooling
this money together, but it'snot in the sense that they're
not become you know thecollateral is the different part
.
Yeah.
Speaker 1 (39:35):
Well, the nature of a fund.
That's a great question.
The nature of a fund is exactlythat.
Investors are pooling dollarsinto what's called a limited
partnership.
That's, instead of an LLC, it'san LP.
Right, so Invictus Real EstateFund 1 LP.
That's an entity and theinvestors own basically 80% of
(39:58):
that.
Invictus Sovereign owns only20% of that fund, right, right.
So the investors get the lion'sshare of the dollars that the
fund produces.
Speaker 2 (40:07):
Yeah, yeah.
Speaker 1 (40:08):
And you know the Invictus Sovereign charges a 1%
management fee.
So it's nothing, it's just it'sPending for staff is paying for
these third party things and tokeep the lights on and manage
the fund appropriately, yeah.
Speaker 2 (40:20):
And is there a preferred return?
So I saw there's a lot thatgoes into this.
Speaker 1 (40:25):
Yeah, yeah, this is the tip and you can structure
syndications with preferredreturns and equity waterfalls
and all of that.
But in a fund that's typical.
All three of our funds have a7% preferred return.
That means dollars that getearned by the fund when we
deploy capital with the fund.
That fund generates revenue andthe first money off the top of
(40:50):
those revenues, 7% of that, goesto the investors.
Okay, and then there's a split.
There's an 80-20 split oncarried interest, which is all
gross earnings.
You know SANS, fees, managementand preferred returns that go
out in dividends, and it couldbe done quarterly or annually.
And so you know, depending onthe type of the fund, you'll
(41:11):
have different distributionschedules.
But I really feel like it's waymore secure because you have so
much more insight.
You have access to data,real-time data, auditable data,
and if I want to actually becomea public entity which I don't
have any ambition to do or if Iwanted to sell a fund or sell my
(41:34):
company, being fully auditablewith a team like this with all
of the data is way moreimportant.
On a syndication, you knowyou're syndicating with a
developer or a sponsor and theymay provide some accounting.
Speaker 2 (41:47):
They may provide some reporting.
They don't have to do any ofthat.
Speaker 1 (41:50):
Right.
So your access to informationin my mind in a fund is way more
organized.
In a syndication that's alittle more Wild West, depending
on who the sponsor is.
Speaker 2 (42:01):
So why is knowing all this stuff, the difference
between the two, even knowingabout the two, so important for
listeners?
Speaker 1 (42:09):
Well, there's two points of value.
I mean, I think any newinvestor is thinking about
getting into real estateinvesting they're going to need
to get clear about do I want tostart my own fund and hire the
people to do that?
What's that going to take?
What's that going?
Speaker 2 (42:26):
to take.
Speaker 1 (42:27):
How does that all come together?
How do I build a team?
How do I find all these people,these specialized people, or do
I want to syndicate?
But then also for our listeners, who are very well healed
institutional folks just wantingto get to know us, it's
important to understand ourmentality about how we build a
(42:47):
fund, how we underwrite ourprojects, how we deploy capital.
There's real processes and realprotocols Absolutely Next level
organization on the fund versusthe syndication yeah, which for
me, at my stage in my career 27years in, with almost a billion
dollars of development,construction and motion to me
(43:10):
it's much more valuable to beable to have big, secure
entities and high net worthindividuals be able to look at
that fund and I mean theyunderstand that environment and
so it's easier to make adecision to go.
So this is for all levels oflisteners.
We're just trying to helpcreate value of contrast here
and how you're going topotentially start your real
(43:32):
estate business or how you'regoing to take your business to
the next level if you're moresophisticated real estate
investor.
Speaker 2 (43:39):
Well, an interesting perspective too, having
experience with a syndicationand then transitioning into the
fund model.
It's like I'm appreciative ofthe experience syndicating a
deal, absolutely, it's almostrequired.
Speaker 1 (43:52):
You should all.
It should be almost arequirement that you syndicate a
few deals.
So you know what that is beforeyou go try to start a fund.
I think that's very valuable.
As a fund manager, you need toknow the inner workings of the
syndication and how thatoperates in order to really be a
good fund manager when you geton the fund level.
Speaker 2 (44:12):
Okay, yeah, yeah, that's very important and also
gives you a kind of a path.
Okay, I want to start a fund.
What do I need to do then?
Okay, then I start syndicating,then I start meeting the people
that are going to be helpfuland building the team, then you
start making any introductions,then you start having the
opportunity to, I think, growinto what a fund would be.
Speaker 1 (44:29):
Yeah.
So on the subject of funds,have you decided to start a fund
?
If you grow up with the name,and what is that looking like?
Speaker 2 (44:37):
Yeah, I've been thinking a lot about it and I
think it's the only path to moveforward.
Agree, and so.
Yeah, I mean there's a lot tocome in regards to what that's
going to look like and how I'mgoing to do it, but the decision
has been made.
Yeah, nice, I've committed to.
That's the only way to stepforward for me in the business,
(44:57):
I think.
Speaker 1 (44:58):
Man, if I could have come to that realization at age
24, I can't even imagine how bigof a consortium I'd have right
now.
I mean, I raised my first fundwhen I was 32 and then we had
the Apocalypse event and I justhave been out of the fund game
until now.
I've just been syndicating forthe last 15 years and it's
(45:21):
become time and I'm very excitedto be back on the fund status
here with Invictus Sovereign.
Speaker 2 (45:28):
But yeah well listen to.
Another thing, too, is we talkabout syndicating and then going
into funds.
My experience with syndicationis not as extensive as a lot of
people.
For example, you've beensyndicating for 15 years.
I've syndicated over the pastyear and I've done really well
with that specific deal, thosespecific partners, those
(45:50):
specific investors and we'recrushing it.
We're getting ready to do somereally great stuff with it, but
I have such an awesome team andsome connections here I feel
confident going into a fundmodel after just this and again,
this is going to look differentfor everyone.
Some people might say, oh, Ineed to syndicate 10 times
before I start a fund.
But for me personally, themodel that I have, the team that
(46:12):
I have and just the directionwe're moving forward, I feel not
only super confident but I alsofeel like I'm obligated to go
in the fund route for thisspecific initiative.
And there's a lot of reasons Icould dive into that, but I mean
again, I guess the point I'mtrying to make is it's going to
look different for everyone, andfor me it looks different
because of the way I've donethings, the way people that I've
(46:34):
connected with and all thisstuff.
Speaker 1 (46:36):
This is going to be fun to unpack the process, man,
as you go down the path ofraising your first fund.
That's very exciting.
Well, guys, I think that'sabout a wrap here.
We've covered pretty extensivehere syndication versus fund.
Thanks for tuning in with ustoday and stay tuned.
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