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Embedded and quoted with the permission of Rod Khleif's team.
Noel Walton, a general partner and the founder of The High Route Agency, joined Rod Khleif on Lifetime Cash Flow Through Real Estate Investing to walk through the first syndication he raised capital for. He explains why that 506(b) raise ran short of time, and why a GP's investor list has to exist before the deal does.
Rod released the episode as "The $11.8M Deal That Taught Him Everything". The $11.8M was the purchase price of that first property, an apartment complex in Waco, Texas. Commercial bank financing covered most of the price; the capital raised from investors covered the down payment and extra costs such as capital repairs.
Why do first raises run short of capital?
On my first syndication my main role was investor relations and capital raising, and we ran it as a 506(b) offering. We did not have years of an investor list built, so once the deal was under contract we called everyone we knew. We ran short of time, bought contract extensions, and closed the gap with preferred equity.
The preferred equity got us to closing, and it came with its own reporting and its own say in the deal. As I put it to Rod, "it's like having another boss in the picture, extra reporting."
When should a GP start building an investor list?
Before there is a deal. In the episode I said that people don't start their investor list early enough, and sometimes wait until they have a deal, which is much too late. Starting between deals gives each relationship time to grow before anyone is asked to invest, so the list is ready when the next deal arrives.
How do you start an investor list from scratch?
Pick 30 people you already know, as friends or colleagues, who have talked about investing or financial freedom. Raise the topic in ordinary conversation. Keep a record of who you spoke with and the date each conversation started. Rod's suggestion for the record was a free tier of a CRM, or a spreadsheet at the very least.
Why does the date of the first conversation matter under 506(b)?
On the episode I called the first conversation the start of the clock. SEC staff guidance generally looks for a substantive relationship that exists before the offering begins (Citizen VC no-action letter, 2015), and Rule 152, the SEC's integration rule, frames the same test as a relationship established "prior to the commencement" of the offering (17 CFR 230.152(a)(1)(ii)).
A dated record of each first conversation shows when each relationship began. The SEC staff describes a "substantive" relationship as one in which the issuer, or someone acting for it, has sufficient information to evaluate, and does in fact evaluate, a prospective investor's financial circumstances and sophistication (SEC staff C&DI 256.31). On the conservative reading, a relationship formed after the offering began, even a genuine one, does not count. The question to put to your own securities counsel: what record of each investor relationship, and of the date it began, should our team keep before our next offering opens? My reasoning on 506(b) and 506(c), with each source cited, is in the 506(b) vs 506(c) decision tree.
Nothing here is legal advice. Always review it with your securities counsel.
How do GP teams build trust with investors between deals?
Through education and honesty, sent on a regular rhythm. Investors need to know who you are, like how you think and trust how you operate. In the episode I said that this trust is built from education and from sharing stories of what went wrong. Rod added that people learn more from those stories than from the successes.
What does Noel Walton do now?
Noel Walton is a general partner and the founder of The High Route Agency, an investor marketing agency for US real estate GP teams, based in Innsbruck, Austria. On his own GP deals he ran investor relations and capital raising, plus the team's marketing. He still holds GP seats on those deals and is not raising for new deals.
From the transcript
Excerpts from the recorded conversation, lightly edited for reading; "[...]" marks words left out.
On the first raise
Noel Walton: "And especially for a first deal where we didn't have years of an investor list built, and this was flying by the seat of our pants at this point."
Noel Walton: "We had, we had good investors. We had a lot of connections between everyone in our group."
On where to start
Rod Khleif: "So give an action item for my listeners that they could do right away if they're thinking about getting into this business, what's something they could do to get started, if you can think of anything."
Noel Walton: "So right now, I would say number one thing right now is, if this is what you're wanting to move that direction, get the right education and start on that, but also start building your investor list and people don't start this early enough."
Noel Walton: "[...] they realize, oh, I don't have this long list of people ready to invest. How do I get to that? And sometimes they wait till they have a deal which is much too late. So start building that list, go through and pick out 30 people."
Noel Walton: "Or just have the conversations and when you do that, make sure you're keeping track of who you're talking to and the date that you start that conversation."
Noel Walton: "Yeah, start that, because that's going to start the clock on that relationship."
On trust
Noel Walton: "They need to say, hey, this is someone I, I could relate to. I, I like how he thinks. I, I trust what he does and how he operates and that trust is built from, like you said, education, sharing stories of what went wrong, just honest."