#109 - The Flight Plan for Syndications: Risk, Returns, and Real Wealth

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[00:00:29] Hey everyone, welcome back to Passive Income Pilots. Tait and Ryan here doing an episode with just the two of us this week. We wanted to take the opportunity to run through some education on syndications and passive investing and the kinds of deals that Ryan and I do all the time. And so without further ado, Ryan, how you doing, man? Tait, what kind of a curtain is that behind you? Is that like, are you at the Bates Motel or something? Like, what is that?

[00:00:58] So interesting story. I'm actually in Canyon City, Colorado for any of our listeners who might have invested in a deal that we did back in 2023, we bought 1300 acres in Canyon City, Colorado. It's about 45 minutes Southwest of Colorado Springs and really cool deal. We bought this acreage with a golf course.

[00:01:20] And we're doing all the entitlement and selling those parcels off developers. But in any case, this is the St. Cloud Hotel. This place was originally opened in 1883. It was then abandoned. And there's a group from Denver called Unbridled. So we're not an investor in the hotel or anything. But Unbridled bought the hotel. I don't know how many years ago.

[00:01:42] But they've spent way upwards of $20 million bringing this hotel back to life. It was abandoned and dilapidated. So really excited. The guest rooms just opened. It's really a catalyst for the area here. So excited to be staying here. And I'm standing in this hotel room. There actually isn't a desk because it was built in the 1800s. And so, yeah, I'm standing in this hotel room and there's some beautiful period.

[00:02:09] The drapery. It looks lovely. I was just like, where the heck are you? You're not in your Hawaii, you know, cool. I know you're married now, but bachelor suite, you know, your whole thing on the beach. That's right. Anyway, that's cool. Yeah. Today's casual Tuesday. We're just sort of chilling. And we're going to talk about a few things. I'm actually getting ready to go on a trip myself. And this is what we do. You're going to look at a deal in Texas, right?

[00:02:36] Yeah, we're looking at a big deal. Seven storage facilities, actually, in Houston. And so we're going down there. We're going to fly in and we're going to do due diligence and feasibility and just sort of check things out, kick the tires on a project. And, you know, if it looks good and works, the numbers add up, we'll then present it to the investors. I think that's one thing that, you know, goes without saying, you know, people always kind of look at, should I be a passive investor or active investor?

[00:03:02] And I think what people got to consider is like the work that goes into it, like flying to Canyon City on your days off and meeting with the mayor and the city council and trying to make this, you know, get the things that you've done. You know, like I'm going, you know, at a moment's notice down to Houston to look at projects. And, you know, these are things that you've got to like do as active investors. You've got to, you know, attend to your investments and you have to sort of like water the plants and take care of things.

[00:03:28] And that that's what grows. And I think that's when, you know, there's many benefits to being active. There's very, very many benefits of being passive. I think, you know, it's interesting, you know, someone asked me the other day, like, are syndications risky? I think I saw that at like the forum or something. And, and it's like, it's not, it's kind of the, you're just missing the point. Like kind of, yeah, kind of a, you know, there are no dumb questions, but that would be one that is a dumb question. I think because, you know, it's not the syndication itself, you know, it doesn't carry the inherent risk.

[00:03:59] The, the underlying deal does. Right. So like, you know, I'm not. It'd be like asking if flying is risky. Yeah. Yeah. You know, it depends. It depends on who's flying the airplane and what you're flying and what you're flying in. And it's, you know, yeah. The flying isn't inherently risky. The conditions. Yeah. So it's like, it's like, or, or maybe even break it down further. Like is a 737 risky? It's like, I don't know. Is it flown by somebody who's completely incompetent and, you know, or whatever, I don't know, you know, whatever it is.

[00:04:28] So it's, there's kind of a couple different ways. So, but, but like the Canyon city deal, like the syndication structuring doesn't make it risky, but the Canyon city deal carries its own inherent risk. It doesn't matter if it's a syndication or some guy just going to do it and buy himself, you know, it depends on like how it's levered and, you know, how, who the operator is and what kind of experience is on the resume of the folks that are doing the deal. And, and things like that, that's, that's where the risk is found. And I think, you know, people think about syndications.

[00:04:56] They think like, Oh, is it, I heard syndications are risky. It's like, well, it depends on what the syndicator or the person that's the GP is, but what they're going and buying, you know, that could be the risky part. But let's talk about, you know, I, I talked briefly about this in a, in an ebook that I wrote, but let's talk about the risk spectrum when it comes to the types of, of deals, everything from core all the way up to opportunistic. So Ryan, why don't you break down what a core project is?

[00:05:22] Core is like your main and main class, a multi-story glass or, you know, tenant anchor tenant retail, you know, Starbucks building or, you know, something, something that's like never going to go away. It's, you know, there's, there's core investments, you know, you can actually buy land underneath the fast food restaurant, for example, and you're going to pay a five cap for that.

[00:05:44] And that land is going to be on a super long lease, very low risk, very low upside, but it's just sort of kind of performs like a bond. You're going to make sub six, 7% return. And, you know, you're pretty much not going to lose your money. Those are deals that, you know, you're probably not going to see syndicators do too often because those deals are usually just consumed with people that want to have their money in real estate and, and have nice core deal.

[00:06:09] You know, the core plus is when you start to get a little bit more fur on the deal, but you also get more return, right? You get, you have a deal that maybe is in a secondary market, meaning like it's not in Chicago or Vegas or something like that. It's like a secondary market, maybe like Portland or, you know, Madison, Wisconsin or something. And that market is not as affluent per se.

[00:06:35] And maybe the buildings of B plus, or there's a little bit more mark to market, meaning that they've got to adjust the rents to something a little bit higher. There's some, there's some things that need to happen, or maybe they have to increase occupancy a little bit, or maybe the tenant isn't as sticky. That's going to bring core plus when you get the value add, that's what we're talking about. Syndicators are always finding value add deals and your risk is a little bit higher, but your return is great.

[00:07:01] You know, potentially 15, 20% returns for value add versus core plus, which might be like 10 to 12, maybe 13%. Now, now your value add is going to be a little bit better because now, now you've got to take an asset. Maybe you've got to fix it up. You've got to repair things. You've got to expand the site. You've got to do a kind of a heavier mark to market strategy. Value add is where you're going to start making money. And that's when people kind of get excited about these syndications.

[00:07:28] And unfortunately, I feel like people use, throw the word value out around quite a bit. You know, you could have a value add is a big range of value add. Yeah. I mean, you could have a C minus building in a C minus market and somebody might slap a value add sticker on it. And you're taking a lot of risk for something like that versus, you know, you could have a, an A minus asset in an A plus market.

[00:07:53] And someone might slap the word value add on it to completely different deals, but still in the value that I'm using air quotes here, value add bucket. Where to me, I'd be like, that's a really C minus deal, C minus market. No one's going to be dumb enough to buy that from you at the end. And no one's going to be dumb enough to lend you the money. Right. And that's what I kind of say. You know, those are the two things that kind of make real estate go around. It's like, you got to, you got to have somebody who's going to lend you the money and someone who's going to be willing to buy your projects.

[00:08:20] And if it's a crappy market and a crappy asset, even if you have to throw a bunch of money at it. And you think about it, like, where do your tenants go in tough times? Like when the market starts going down, they're going to move up. You know, it's funny, like the last go around in real estate, the real estate cycle, a lot of people were like, oh, well, you know, you're never going to go wrong with C properties because, you know, people will just move down a letter grade.

[00:08:43] And then there's always people who are looking for C, you know, and it's like, no, whatever, what ended up happening was when the market got hit and rents went down, the tenants then could go up a letter grade and pay the same as a lower. So then the lower ones got hit pretty hard, you know, and, and a lot. Yeah. So it's just, it's a, you know, it's an interesting time. I'm going to tack on to that. You know, you can also have a light value add versus a heavy value add.

[00:09:07] I mean, you know, there are, there are buildings that have no deferred maintenance and just have shag carpet. And it's like, all you really got to do is go in, put, put in some hardwood laminate, maybe upgrade the countertops, things like that. There's other buildings. I mean, we've, we've done some deals where a building is condemned by the city because of a broken sewer line under it. It's like really heavy value add.

[00:09:33] You're taking a dilapidated product, you're, you're, you know, renovating it into something that's, that's nice. And so value add is a huge range. You can also talk about physical value add and operational value add there. There's either physically improving the property through renovation and construction. There's also operationally improving the asset, which is just improving the net operating income through managing it better. Yeah. You know, it's funny.

[00:10:01] I just, an analogy came to my head, an aviation analogy of all analogies. IFR is IFR, but then there's like hard IFR, right? Like there's a difference between 500 overcast and 10 miles. And there's then, then there is like shooting a cat three to minimums, you know, with the auto land on. I mean, that's a huge difference, right? Lots of training, different things. And here's the thing, guys, like there's a lot of value add people that will pick up the junker properties in the junker market because nobody wants them.

[00:10:31] And then they, they can slap a huge return on it. And people go, probably the worst call that I take from investors, to be honest, is like people call me and they're like, well, this guy's, you know, he's going to, he's going to give me a 30% annual return. And, and, you know, don't triple my money. And, you know, no time at all, you know, your deal only pays 20%. And I'm just like, well, let me look at his deal. And then I look at his deal and it's like, you know, a C minus property, a C minus market. So it's IFR. So in my deal is value add, you know, but it's a, you know, B plus property in an A market,

[00:11:00] completely different risk return. And that like risk adjusted return, right? You're the risk you're taking for the return that you're getting is completely skewed. And, you know, that person may have very little experience in going into a market like that in an asset quality. But I just want to get to opportunistic. Opportunistic in my mind is like, again, opportunistic. So value add and opportunistic are where things can get really wobbly, right? So opportunistic to me is like ground up development.

[00:11:28] But, you know, there's so many different types of risk within opportunistic because are you buying a piece of land that is completely unentitled, no building permits, you don't have permission to do what you're going to do. You've got to change the zoning. You've got to go get some special permit from the army corps, from the wet, you know, from the wetland, the authority having jurisdiction. And that's like crazy opportunistic. You better be getting paid a lot if you're going along with that ride.

[00:11:56] Or there's, you know, ground up development where it's like, hey, this comes permit ready, fully entitled. The construction starts in 30 days kind of thing. That's different. Or maybe opportunistic might be like, hey, we're buying an empty building that was recently constructed and we're taking it through its lease up. Those are completely different things, right? No construction risk. You have some construction risk and then you have entitlement risk.

[00:12:20] So opportunistic could be, you know, something that's like wildly, wildly variable in that. So yeah. So, you know, opportunistic, it's even more harrier. And it's like trying to look at like-kind deal to like-kind deal. Yeah, absolutely. So, and again, to kind of recap, you know, core properties, you're going to see anywhere from a 6% to 10% annualized return, but there isn't a whole lot of upside, right? Because it's a property that's already stabilized. It's beautiful.

[00:12:49] The tenants are paying top market rent. There's nothing to do. You're buying a cashflow stream. Yeah. Core plus, there's a little bit of optimization to go into it. Value add. Now you're actually, you know, rolling up your sleeves potentially and making some changes. And then opportunistic, you'd be pushing up into that. Really, to me, opportunistic has to be a minimum of 25%, 30% projected annualized returns to make it worth the risk. Because you said something earlier, which was risk-adjusted returns.

[00:13:19] I want to jump into that. And everybody looks at the projected return, but retail investors tend to be poor analysts of risk. And so what we really care about is the risk-adjusted return. So the probability of how this thing is going to turn out multiplied by the projected return. Because if you have a really high return, but a very small likelihood that it's actually

[00:13:47] going to happen, then that high return isn't all that attractive anymore. But if you have a somewhat mid-range return with a very high probability and likelihood of that project executing and delivering as promised, as expected, as projected, then your risk-adjusted return is actually higher. Yeah. And here's the other thing. Let's talk about timelines.

[00:14:16] Because, you know, I see, you know, it's really easy to manipulate the timeline to make your returns look better. You know, a short timeline generally is going to make higher returns, especially if you're doing a ground-up development opportunistic deal and you see a short timeline. What I do is I run the other way as fast as I can. Because when you look at like, when you're building something from the ground up, especially

[00:14:43] when there's challenging entitlements or some kind of land splits involved, I mean, that could take years and you could get your subject to a bureaucrat or somebody who might get in your way of having those approvals done and nothing wrong with them. Just this is just the way the system works. And so you might just consider if the timeline is super short, it's like, okay, this guy's deal has made a two-year deal. He's going to pay me 60%, so 30% per year. But what if this goes to a five-year timeline? Do I still like those annual returns?

[00:15:13] Because there's only 60% potentially. Now, let's say if it goes to five or 10 years, do I like that? If I still like those returns, then, you know, maybe you're okay. But if it's a 30% return in one year, well, what happens when that year gets missed and it turns into a two or three-year project, well, now your 30% goes down to 15% or worse, maybe even down to 10%. And you took, to Tate's point, you took all that risk. And then when you adjust it to what, you know, the potential downside, you're only getting 10%. That's not a really great deal.

[00:15:43] These are things to think about. And, you know, that's why I'm like, are syndications risky? Buying a C-minus property in a C-minus market is risky. But the structure of a syndication, it may not be that that's not the risky part. It's what's underlying that structure. So let's talk about debt. I had a good question the other day on our, our hanger talk series. And someone was asking, what is, what is a general rule of thumb for what is a risky

[00:16:12] level of debt? So loan to value, right? If you're, if you're going to put, hey, a hundred percent cash versus a hundred percent leverage, you know, what's the, what's the sweet spot there? And I was saying, it completely depends on the deal, because if you're buying a completely stabilized core asset, going to, let's say 80% loan to value on a deal like that is really not very risky at all, because you've got an in-place tenant base.

[00:16:39] You know, there isn't, like you said, it's not very wobbly. So, so taking on a healthy amount of debt, as long as you're, you're healthily cashflow positive, not very risky. Compare that with, let's say this Canyon city deal that we bought back in 2023, we'd used no leverage. We bought it 100% cash because it's, it's vacant, it's vacant land. We have to entitle it.

[00:17:06] So it's a very risky deal, but we de-risked it by not taking debt. So it doesn't cost us anything to own it. So now we can just sit back and take our time. But you imagine had we leveraged this thing 70%, we owe the bank every month on this project and if we're not making progress, we're, we're, we're getting bled dry. It's a completely different story when, when we bought it a hundred percent cash, because now we've got, you know, $2 million worth of CapEx budget, just sitting in the bank and we're, we're cruising.

[00:17:36] We've got our feet up. We're going, okay, we can, we can take our time and do things correctly. And, and it takes the stress out of it. So, you know, leverage is a double-edged sword. It increases returns. You know, you can lever up your returns by taking on more debt, but it also increases your risk profile. Absolutely. And, and, you know, LTV is loan to value. So, you know, if you buy a property for $10 million and you take out a, it's worth $10

[00:18:04] million, you take out a $5 million loan, you got a 50%, five, zero LTV. And, you know, I used to, I used to put a lot of credence to that. It is still important because, you know, of course, if you go to sell the property, you got to have enough value to pay off the debt and make a profit. Right. Okay. Great. But I care about the SDR, you know, debt service coverage ratio. I want to know, can the property service the debt and then some, yeah, that's the most understated thing. I think. Sorry, sorry. I don't mean to cut you off.

[00:18:31] I was just going to say, you know, we, we, we covered this on a, an episode or two ago when we were talking about how loan to value is sizing the loan, uh, based on the value. So if something is a million bucks that the bank might say, you know, Ryan, you want to take a loan out and I'm a banker. Right. So I say, okay, well, what do you have as collateral? A lot of people think of, of debt as it's something that I get, I get a loan when I buy a property. Well, the bank thinks of it differently.

[00:18:59] The bank thinks you want a loan. So we want collateral to lend against so that if you don't pay us back, we can take it back. And we want that collateral to be worth more than the value of the loan, more than the money that we're loaning you. And so the loan to value is sizing the loan to the value of the collateral. DSCR debt service coverage ratio is different. It's sizing the loan to the cashflow that it produces. Yeah. So let's add this together, right?

[00:19:28] So we, we talked earlier about opportunistic value add core plus core. So you buy that C minus property in a C minus market and you leverage it 80% LTV and it's, and it's producing a DSCR of like 1.25. Right. And you might be thinking, oh, great. I'm, I'm, you know, for every dollar, you know, dollar I'm spending on a loan. I bring in a dollar 25 cents in profit after my expenses are paid. Net operating income. Right. Yeah. Net operating income.

[00:19:58] So, you know, my, my property is, is covering the loan service, but you're in a C minus market and a C minus property. So the chances of your tenants turning over or something bad happening to the property is probably very high. Right. So, so one tenant moves out and you're boom, you're at 1.25. If you fall below a one, meaning that your, your loan is a dollar per month and you're only bringing in enough net operating income of a dollar, you start to be able to not cover your debt service.

[00:20:26] And so this is something that puts a property in trouble and then makes the project risky. Whereas if you are buying a C minus property in a C minus market and you've got a DSCR, maybe 2.5 or three, you know, okay, that's a little less, that's a lot less risky than buying it with a 1.2. Cause you just have tons of extra cashflow. Yeah. Yeah. So now for every dollar debt you have to pay, you've got two or three bucks left over, right. Or a dollar or two, I should say.

[00:20:55] And, and so, you know, these, these things, that is the risky part. Again, not the syndication. So I like to say like, okay, well, what are we, what are we buying here? And what is the underlying, you know, asset? And, you know, I see deals all the time. I see lots of deals and, you know, I see syndicators, you know, put out, put out deals. And, you know, again, they're, you know, they're trying to convince you to do the deal that they have in front of them and all this stuff. Right. And so, you know, your job as the passive investor is to kind of unpack the risk and

[00:21:23] make sure you're understanding like what, what you're signing up for. And, you know, I always give this out. I always kind of go on this tangent, like you're buying into an operating business. Like this isn't, there is no guarantee of anything, you know? And so no matter how good the deal is or isn't even in the first year or six months, I mean, you're buying into it ebbs and flows. You could have revenue and more expenses and less expense, you know, so you could have tailwinds, headwinds, you could have the whole thing. And so this is the, these are the things that you're, that you're, um, you're signing up

[00:21:51] for, but we're, you know, I know Tate and I, we wanted to talk about, you know, preferred return because, you know, as a way of sort of structuring a syndication, you can be put kind of in the first economic payment, right. Of the, of the investment. So if there's cashflow or any sale profits that come out, a preferred return is going to give you the economic right to the first profits that are made on an investment opportunity.

[00:22:17] And what Ryan's talking about here is the first hurdle in what we call the waterfall. So if we talk about the waterfall real quick, just unpack this. It is the way that money is split between the general partners and limited partners in a syndication. So we, we typically say, Hey, you know, the wonderful thing about being a limited partner is you're able to take home 70, sometimes 80% of all the profits of a deal for doing none of the work. You didn't have to find it.

[00:22:47] You didn't have to finance it. You didn't have to run it. You didn't have to do a thing other than sign a subscription agreement and wire the money and read your investor reports, or you don't even have to do that. You don't have to do that. Yeah, exactly. But yeah, but I think too, I think too often people get, people get preferred return confused with cash. Yes, correct. And that's what I wanted to hit here. Exactly. So what, what, what we're talking about here is there are multiple hurdles in the waterfall.

[00:23:16] So when let's say a thousand dollars of, of distributable cash comes off a deal, then what happens to it first? And the, usually there is a preferred return in syndication deals. And so Ryan, you want to unpack what a preferred return is from the perspective at MLP? Yeah, absolutely. It's the economic, I mean, I like to say it's the economic right of, I mean, nevermind what the textbook definition is. Everybody can go to Google and do that.

[00:23:45] But basically if, if there is money produced on the investment, if, if, if there is cash flow to distribute, if the, if the business is making money and you're an investor in it, it means that based on your investment amount, say a hundred thousand dollars, you get a certain percentage of those profits first before any splits with the operator, with, with the person you've invested the money with.

[00:24:11] So if you put a hundred thousand, let's say you, you were the singular investor in a deal and you put it a hundred thousand dollars and you were a hundred percent LP, no one else was in the deal with you. And that investment produced $8,000 of cashflow at the end of the year. And you have an 8% preferred return. Let's say that deal came with an 8% preferred return. Well, you're going to get $8,000 and the GP, the general partner, the person you've invested with, they're going to get nothing.

[00:24:38] So, and you know, so that, that's what the preferred return does. And then when Tate says waterfall, what he means is that that could be the first step in a waterfall. And then after the waterfall, there could be further economic rights that the investors get. And this is, all this is, is just to protect you as the investor, to make sure that you guys are going to get your profits first before there's any splits with the sponsors

[00:25:08] in terms of cashflow from the operation. It's a huge incentive alignment tool because it's saying, Hey, a hundred percent of all cash flows go 100% of the investors until you've been satisfied with, let's say a six, seven, eight, nine ish percent preferred return depends on the deal. You have to make seven, 8% on your money first. And then the general partner gets to eat at the same table as you.

[00:25:34] And so that is a huge incentive for the general partner to work really hard. To hit and exceed that preferred return. But Ryan, what you said earlier is really important because a lot of people, when they see an 8% preferred return, they think, Oh cool. This deal is going to cashflow 8% in the first year. That is not what it is. It is a hurdle rate. And that means that everything up until you've been paid 8% goes 100% to you without any portion

[00:26:02] of it being siphoned off to the general partnership, to the operators for doing the work. In fact, there are deals that have preferred returns that have no cashflow. It could be a development deal. It could say, we could be digging a hole in the ground. There's, there is no cashflow. Yet your preferred return is accruing on a daily basis. And so if it's a 7% preferred return on a hundred thousand dollars, you're going to divide that by 365.

[00:26:27] And every day that preferred return will accrue at that rate. And that has to be paid up to zero. It's called your accrued preferred return balance, uh, prior to that split kicking in. All right. Another airline analogy. So as airline pilots, what's the, what's the most clear section of the con the contract to read? Usually chapter three, I think it's chapter three, uh, pay rates, right?

[00:26:54] Like it's so easy to open up the book and go, Oh, what does my pay? Oh, I'm in my fifth year. I get this much money per hour. Right. That's the easiest thing to do. That's like a preferred return. A preferred return is like, all right, what's my preferred return? My preferred return is 7% on this deal. Okay, cool. So I know that anything, right. But what's the harder part about an airline contract is how trips touching works or vacation swaps or how I can, how many, you know, so many days I get of this.

[00:27:24] And so many days, I get, you know, what's a vacation day worth and what, well, what happens if you touch it against this and what all this stuff, right? That's the, that's where it gets complicated. And that's where there's contract interpretation. So the, the, the, what, how, how your preferred return and how your investment is treated, that's where it gets murky. And like, that's where like the devil's in the details. And so my favorite section, and I know this is kind of nerdy, but like when you go to a PPM, my favorite section is called the plan of distribution. It's usually section 10.

[00:27:53] And the attorney that writes our offering docs, which by the way, we're going to have on the show, hopefully. That's right. And, and the plan of distribution is literally going to be a couple of pages and it's going to explain what happens, what, when. So like, for example, Tate and I are in a deal together years ago and the property's cash flowing and Tate's getting his preferred return. He was an LP in one of my investments and then one of the, the, the part of the property sold.

[00:28:21] And so you've got to like, remember, go to your plan of distribution and you open up the playbook and it contemplates what happens when part of this investment sells, you know, in this case it was a carwash. And so we had to sell this carwash for a million dollars. And so that million dollars was an influx of cash that was coming in. And so the plan of distribution tells the investor how that cash will be treated in the event

[00:28:46] of a sale or a refinance or a partial sale or a capital event. Like what's, let's say you have a, a, a, a property that has a bunch of trailers on it, like RVs and things like that. And you sell them for profit. Like, how does that cash get treated? It gets, it might get treated differently than operating returns. So it's really, it's that, that's a fun section to read. If you're like, you know, get the PPM. Oh, I don't know. I trust this guy. I'm going to put my money with them. Go to the PPM and just read the plan of distribution and at least kind of understand how you get

[00:29:16] paid. Right. That's section three for me of the, of the collective bargaining agreement. So. And, and the plan of distribution is really the, the formal term for the waterfall. So the waterfall is kind of the slang term. It's like a, what's the waterfall in this deal? Uh, and the formal term is the plan of distribution that's, that's contained in the PPM. And usually there's a, there's a waterfall for cashflow and there's a waterfall for liquidity events, which is what Ryan's talking about.

[00:29:43] Whenever there's a refinance event or a sale within the portfolio, uh, that'll be a liquidity event. And there's a, a plan of distribution for that. And there's also a plan of distribution for ongoing cash flows within the syndication. Yeah. And that's a great thing to review with your operator. Um, and in also with your attorney, you know, if you have an attorney looking over this thing, you know, when I talk to my attorney, I always like to say, Hey, this is how I think this agreement reads.

[00:30:12] Can you make sure that my expectation is correct? Uh, and then they go through it and they say, yeah, you're right. Or no, you have no idea what you're talking about. Well, usually one of the two are somewhere in the middle. So. And that'd be a big red flag. If any of the marketing material doesn't match that plan of distribution, big red flag. Totally. Yeah. Because, because the marketing material is going to tell you basically what the, what the splits are, are the preferred rate of return. And if something doesn't match inside of the PM, that is not a good sign because that means

[00:30:41] that what is being marketed is not representative of what is legally binding.

[00:31:14] Yeah. You know, cause that's, that's what matters. Right. Wrong. No, you actually, like, you actually want to know how the losses are divided up, especially when you're buying real property, because you're going to get tax benefits. You're going to get a K one that gets you, that gives you tax benefits. And the cost segregation study is going to give you those things, you know, in, in a cost seg. And so you can go in and you can, you can take advantage of this depreciation and offset any income that the investment generates. Right.

[00:31:43] And so now you're like kind of interested, Hey, how much of the split in losses am I going to get on this syndication? You know, the operator might take some losses. It might be based on your ownership percentage. The operator might take all the losses. They can really be divided up. However, you know, however the operator deems it necessary and whatever you're willing to agree to. Right. So I think that's kind of another one that I would not pay a ton of attention to, but just kind of understand how the depreciation works on an investment. How much are you getting?

[00:32:12] So we'll dive into legal documents with, uh, with Byron when we have him on the show. Uh, very soon. But with that, I want to talk a little bit about how to get into some of these deals. We'll wrap this, this episode up with the accredited investor certificate. So with that, um, I, I love this subject because it's a question that we get asked a lot on investor calls, you know, how this stuff works.

[00:32:37] Uh, but Ryan, you want to, you want to tell, uh, listeners what an accredited investor is. All the, uh, SEC wants to, you know, they drew a line in the sand, right? It's just like being a commercial pilot. They said, okay, you got to have 1500 hours for whatever reason. That was the line that was drawn in the sand. And that's what the rule was, right? 1500 hours. The accredited investor is no different. The SEC basically says, Hey, in order for you to be a, an investor and be accredited and

[00:33:04] be in these deals that, you know, Tate and Ryan are talking about, you've got to be accredited. What does that mean? Well, they just took, they just drew a line in the sand and said, that means you got to have a million dollars in net worth, excluding your primary residence or where you live, or, or you can qualify on the income, which is 200,000 a year or 300,000 a year for, uh, for people that want to invest together. Um, so that, that's, that's where they do the line in the sand. Right. Yeah. For the last two years. And you have to reasonably be able to expect that you're going to make that income in the current year.

[00:33:33] So then, you know, so the certification is just, you know, someone popping the hood and looking at your W twos, your tax returns and, and you proving that you actually qualify. And then you get this letter that we stuff away in our little drawer of, of compliance. That just says that, you know, Tate Durier meets the definition of an accredited investor as pertained by the sec. You can have your accountant write that for you, your attorney, you can have your CPA write that. Yeah. Licensed professional and good standing.

[00:34:02] But in modern times, it's even easier than that because when you're signing up on someone's portal to, to do a deal, you click a link and it takes you to a free website that you can go on and fill out a letter. That's how ours work anyway. You can just. And of course it's not actually, it's not actually free, but we cover it for you. We cover the cost. Yeah, we do. Yeah. So common misconception. A lot of times people think that it's, it's not, or it's, and they think they need the net worth and the income. That's not the case.

[00:34:32] It's one of the other. I will say that income verification is a lot easier because if you're qualifying via net worth, you're going to need a credit report that shows all your liabilities, stock accounts, tax assessments for your real estate. I mean, it's, it's, it's a little bit more of a pain to if, if you're trying to qualify by net worth. So we always say that, Hey, if you can qualify with income, it's much easier because all you need is your past two W2s. So you have to have made over 200,000 for the past previous two tax years.

[00:35:02] Uh, and W2s are the easiest way to do that. If you're an airline pilot, you probably qualify. If you don't think you qualify, you probably do just give us a call and we'll probably like help you point out that you're qualified. Exactly. You probably meet the definition. You still have to have a third party verify it, but, but you're closer than you think. Yeah. A lot of people also forget that airline 401ks count. So because the SEC is very loose in its definition, it just says earned income.

[00:35:28] And so if you were at 185,000 for, for, you know, the previous, uh, the, uh, 2023 or whatever it is, uh, that 401k contribution that the airline made likely kicked you over it. And all you gotta do is make a note in your verification. And then that's, that's the last thing I'll touch on here is, oh, one more thing before I, before I wrap up is, uh, a lot of people think that if they're married, they have to make 300,000. That's not the case.

[00:35:55] If you're married, you can still qualify at a $200,000 for the previous two year income level. You just have the option of joining forces. So if your spouse made 150, you made 150, you're accredited. Uh, whereas neither of you would be on your own. They're just giving you an additional option, uh, to combine income, to get over that $300,000 threshold. You don't have to make 300 K if you are married. Exactly. And like, like a 401k is defined contribution, right?

[00:36:24] So that means income. As long as it's a hundred percent vested, which as airline pilots, it's always vested at the moment. Those dollars go into your account. They're, they're your dollars. There are some professions where, where you're on a vesting schedule where they're not actually your dollars. In those cases, it would not count, but for us it does. Yeah. And the last thing I'll say there is it has to be verified by a third party. So a lot of people say, well, well, so do I send my WTs to you? And it's like, no, we never see that stuff. It, it goes to a third party.

[00:36:54] There's a verifier, uh, some attorney that, you know, works for the verifying company. They look at it, they provide a letter. And that letter, like Ryan said, goes into our files. Now, this is another interesting one. How long is that letter valid for? Well, by the letter of the law, from the time you produce that letter, the date that it's, that that's on that letter as, as an issuer. So if you're, if you're going into a Spartan deal or you're going into a turbine deal,

[00:37:21] technically we need that letter to be dated within 90 days of the day that you're making that investment. However, for follow-on deals, you can self-attest to no material changes for up to five years. So a lot of times, you know, I'll, I'll see a letter that comes in at six months old and it's like, I know that, that you're still credited. Right. But in, in order to be in compliance and proper compliance, we need a fresh letter.

[00:37:47] But once we have that letter done, it's in the files, you're good for five years. And if you went, if you're outside that 90 day window, the system will just ask you to self-attest to no material changes. You don't have to go through the verification process again. Yeah. And I think the, yeah, like we've had turbine capital letters, you know, come in and suffice because they're dated within 90 days. Right. And, and getting a new one, it's just not a big deal. It's not a big issue. I think people, oh, I got to get my certification. It takes 10 seconds.

[00:38:15] I mean, you go in, you, you upload your W2s, you're done. You know, it's not a, it's not a, and we don't see, I want to stress, like I have no idea what people are worth and how much they make. And I don't see any of that stuff. And that's the beauty of this is like some other third party who I have no idea, you know, they verify it. Exactly. And so that's, that's kind of a benefit. Absolutely. But that's the line in the sand that the SEC draws and, you know, that might change in the future. And there's things you can do, like you can take a certification and I think they're to get around it.

[00:38:42] But at the end of the day, you know, as pilots, you know, we're all pretty much in that, that income range at this point. I mean, heck, even the regionals, I mean, make it a lot more than I made at the regionals. No kidding. Doing really well with signing bonuses and things like that. So, you know, it's a much more favorable market now. Well, hope everyone found this to be educational. If you have questions, drop it in the Facebook forum. We'd love to hear from you there. Passive Income Pilots on Facebook. You can also email us at ask at passiveincomepilots.com.

[00:39:10] Be happy to answer your questions. See you on the next episode. Thanks, everyone.