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Global Investors Podcast
GI63: Structuring & Building Your Real Estate Business with Attorney Jeffrey Love
September 2, 2020
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Jeff Love is an attorney and partner with the law firm Gibbs Giden. His practice encompasses all facets of real estate transactions, including drafting and negotiating purchase, sale, syndication, and financing transactions in connection with commercial, industrial, and residential assets.

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Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast. I’m your host Charles Carillo. Today we have Jeffrey Love. Jeff is an attorney and partner with the law firm Gibbs Giden and his practice covers a number of aspects of the real estate including; structuring deals, negotiating, syndication and working with foreign investors. So thank you so much for being on the show. Jeff.

Jeffrey:
I’m happy to be here. Thanks for having me.

Charles:
So what was your professional background prior to starting with your current firm?

Jeffrey:
I was always interested in real estate. So even from college, I knew I wanted to get into some aspect of real estate. Originally on the operation side, I figured, you know, I’m going to go to law school. I’m going to learn about the law and transactions, and then I’m going to do it for a couple years and I’m going to go be a real estate investor and real estate developer went through law school, graduated at our last recession around 2009 and realized, no, let me, let me try it. Nobody was hiring real estate attorneys though. So I had two jobs is let’s call it as a general counsel. My first was with a scrap metal recycling company, learning everything about corporate law, kind of being in house with a business, seeing what their concerns are. And then I want to be more real estate. You know, that couple of leases I’ve helped you buy a building. I really want to get more into the real estate side. So I moved to a real estate developer that owned about 18 million square feet of retail and industrial property throughout the country and did everything and anything for them, new leases, acquisitions financing. And after a few years there, I loved it, but I wanted to work with a variety of clients, new investors, seasoned investors bigger deals, kind of smaller deals and have a variety of clients instead of just one. So I joined my current firm back in late 2012, 2013, and have been here ever since.

Charles:
So what parts of the real estate law do you currently practice?

Jeffrey:
We really do anything dealing with dirt with the exception of a few Myers. We don’t get much involved in environmental law. You really want a specialist there, anything beyond your typical phase one, if it property dirty, you want to have a specialist and dealing with some types of entitlements I’m in Southern California. So certain cities you want a land use specialist that has relationships with city officials expediters. So you’re able to get those permits on, on an expedited, quick basis. But besides that we help clients, you know, soup to nuts, acquiring commercial real estate, leasing it, financing construction all the way through disposition and really a subspecialty dealing with real estate syndications with both domestic and foreign investors, raising a lot of capital putting projects together. So that’s where the corporate side of my practice really really comes into play is structuring these different investment vehicles for real estate investors.

Charles:
Okay, great. We have listeners that are experienced investors and some that are just starting out and you work with a lot of founders. What mistakes do you typically see new investors, new entrepreneurs make?

Jeffrey:
There’s a lot, but to be gentle, I had clients that you learn from your mistakes. You’re doing everything right. I have a client that, you know, two younger gentlemen, they went to you know, under a graduate program, real estate development and started developing properties and pick on them as an example, I won’t put the name in there. First project was a, it was a disaster. They came to me halfway through and they, it was a small syndication tearing down a couple a couple, I guess, a TriFlex South of Los Angeles and building three new townhomes and their operating agreement did not talk about distributions and how profit was going to be divvied up in terms of their management fees versus investors returns. All it had was ever was a pro rata return. So they obviously got into a lot of trouble later on in the project when they were trying to figure out cash flow and accounting. Another issue you, new investors and they ran into is, and this is also seasoned investors, but did not have. And I can’t probably stress this one enough is having the right team in place and jumping off in the deep end, before they were ready, their contractor was over budget and delayed on every possible aspect. And while it wasn’t their fault, they didn’t have the proper protocols in place to manage that contractor and make sure that that deadlines were met and their, and their construction contract with the contractor didn’t have the proper provisions to really hold that contractor’s feet to the fire. So I guess my three of the biggest ones I’d say for new investors is outlining everything and making sure you understand the deal and all the mechanics, not just from the real estate side, but, but legal accounting insurance, making sure you understand it all before you jump in into your first deal, making sure you have your proper team in place, not just, you know, account line insurance, whether it’s your real estate broker or whether it’s your community, your partners, making sure that you have everyone there to help you there. There’s no shame in all limited to there. There are things even as the real estate attorney that, that I don’t know, but having someone that I can get that information from him getting the right information is I think, paramount and finding the, well, it doesn’t seem like a big issue. And, you know, figuring things out later is really thinking long term. If you’re ending introduces with a partner, are you signing on this purchase agreement, you’re going to take down a deal and it’s in your own name and you’re going to vote corporate later that could lead you to problems with liability. So really taking that bird’s-eye level approach and thinking what’s my three, five, 10 year plan even been your first deal. You can always change it, but kind of think through that before you really jump in and start investing.

Charles:
Yeah. And fall along with incorporation, a question that I receive often is about incorporating businesses. What are guidelines that you use with investors about when to incorporate and where to incorporate all the different questions since there’s so many different options out there for incorporating, especially with real estate.

Jeffrey:
It’s a difficult question. And I’ve talked to, you know, with clients before I’d like calling them to the five W’s and you know, the whole, what, when, where and why of incorporating, because there is a cost involved for you, especially in California, you’re paying a minimum of $800 in franchise taxes, just for a limited liability entity. So you, what we say is if there’s going to be significant liability and you don’t have the insurance in place to cover it before you sign on that dotted line, even on your purchase agreement, you may want to consider incorporating because even if you assign an agreement, you know, let’s say that Jeff was gonna buy a 10 unit apartment. Once I signed on that first year agreement, I’m still liable under the purchase agreement, even if I assign it to Jeff’s LLC later on in the process. So thinking ahead of time and making sure you have that, LLC, maybe you have one that you’re going to use for investments and you assign it to a different entity, but whenever there’s significant risk, then the main benefit really the why to incorporating is can I limit my liability and my exposure, if I’m buying a Ford, you know, call it again, 10 unit apartment building. One of my tenants has a party, someone slips and falls. We’re getting an Amazon package delivery and the courier falls, they’re not just going to Sue the tenant and they’re going to see you as the landlord. And maybe you have a million dollar insurance policy. And after bits, if something happens and someone is seriously injured and there’s a $5 million claim, well now you have $4 million of exposure at the very least. If you were to incorporate, you can limit that liability to that single project. If you have multiple, multiple investments, multiple properties, you can segregate the liability between each one. There are many different reasons to incorporate. We get, you know, that’s the one that I w I would hit on right away is can I limit my liability in terms of entities, your most common real estate entities are really going to be your limited liability company and your limited partnership, a true try it and try it and test it. And those, the ones that allow you enough flexibility to encompass, you know, sophisticated projects, but also give you all the upside in terms of limiting liability and structure.

Charles:
Where do you usually suggest, obviously if you’re operating in California and your properties in California, you’ll have at some point in California LLC, do you ever suggest your clients to incorporate outside of California or outside of it into a different state for different asset protection or other reasons.

Jeffrey:
We do for the most part, we recommend that you incorporate in the state where you’re going to eat our whole property or where you’re located, just because, you know, you want to limit your fees. So for example, you know, Delaware, why all made in Nevada are three of the common States that come up in terms of incorporating outside of your home state. And for good reason, Nevada has great privacy laws, Delaware. Your corporate law is probably the most litigated and understood of any corporate law in the country. And it’s very business favorable. So a lot of big businesses want to incorporate in Delaware, but back to our example, with our 10 unit apartment building in Los Angeles, if we incorporate in Delaware, we’re paying Delaware franchise taxes, and then we also have to qualify to do business in California. Cause that’s where the property is generic paying California taxes as well. So unless there’s a significant reason to really want to be in Delaware we want to be cost effective and maybe just incorporate in, in California or properties in Texas or in Nevada. But you do hear a lot about Delaware. And like I said, Nevada, Wyoming with good reason, but you do want to weigh the upside of what you’re getting by incorporating those States versus what you’re getting the cost savings of just being local in California.

Charles:
So as it as an answer to any legal question, it just depends on your situation.

Jeffrey:
You know, it always depends. And it’s for in, for this one for good reason, to me, if you’re a new investor, you that extra 800, you know, Delaware franchise tax is even a few hundred dollars. You may want to save that to say California’s laws are understood as well. I don’t need it, but yes, with any good attorney you’re going to get it. It depends my favorite two words.

Charles:
Okay, great. Yeah. I talked to the podcast, a great deal about partnering in order to scale your, your real estate business. What are some of the main things that can be taken into account when partnering.

Jeffrey:
Good question. And it’s another one where I’d go back and say, look at the high high level, Birdseye kind of approached to your partner, Charles and Jeff we’re, we’re going to create a real estate business. We’re, we’re gonna, you know, let’s change it. And let’s say we’re gonna acquire and maybe value value, add small apartment buildings, duplexes, and triplexes, and make some money. Well, what are just in Charles? What are our motivations? You know, are we, is my retirement plan in, in 10 years? And you think you have another 30 years of working life because that that’s one issue is what are our attentions. If you know, if you’re intending on being in the business a lot longer than I am, when we get towards your retirement age, are you going to want to be starting taking more money out of the business while I’m thinking, no, let’s grow it, let’s expand. Let’s put money. So there may be a little friction there in terms of longterm planning. Another kind of huge item with, with partners is what happens if something happens to us, you may have heard the term, you kind of buy sell, and it’s not just real estate business, but small business in general, many when you have two, three, four or five partners, if one of us, you know, we’re, I can’t have mentioned it. We were in the COVID-19 pandemics. So if something were to happen to one of us and we get sick, or God forbid pass away, do you want to be in business with my spouse or my kids? They may know nothing about real estate. It may not want to be in that business, sort of thinking through if something happens to one of us or if one of us just want to leave the business, how does that buyout work? So we’ve really run this company. We’ve got a great management arm and got a host of different investors and our businesses, you know, we think it’s worth $10 million. We’ll we may not have the cashflow to just to buy out each other for $5 million. So how does that buyout work? Is it structured over time? How do we determine the valuation of the business and what events can we buy each other out? If it’s a death, disability, divorce? What if one of us just don’t want to work? Or one of us want to take a sabbatical for a year and travel around the world when we’re able to things that you deal with with partners that you may not, if you’re running this as an individual, because well, at the outset, everyone, maybe on the same page, people change over time. So it’s thinking of those things from the outset to make sure that you are on the same page. And even if things change that you’re able to really figure it out. And you’ve just, you’ve outlined what will happen in the mechanics of that certain transaction.

Charles:
Yeah, no, that makes perfect sense. When I was buying my first multifamily property, years back, I was at the closing table and we were buying it from a more veteran real estate investor. And he was explained to me how his first partnership blew up. And it was that he was 20 or 30 years younger than his partner. And he wanted to grow. In fact, I just want to invest some of his money and retire in a few years. And he had a restructured buy him out and the whole nine yards. So it’s really important of having that plan of where you’re going to be five, 10 years in and, and, and beyond, and make sure that you guys are on the same page. So what happened? Sorry, what happens if someone dies and then like in a partnership? So if I die in our example, how does that work?

Jeffrey:
If we didn’t have a buy seller shirt and mechanism to deal with that, your interest in our company, you call we’re we’re an LLC would go on to your estate. So your, your spouse, your kids, whoever, whoever you’re leaving your assets to the problem for me in this example is because they may not know anything about real estate. We may not get along. I may not want to be partners with them. So without that mechanism in place to deal with it, we’re stuck. I don’t have any right to buy him out of the business and they don’t have any range and require me to buy them out. A lot of times, when, you know, if you were to pass away your, your state, your heirs, they want the money from the business. They may not want to be involved. So a buy sell is a, is a legal agreement when you’re talking about certain triggering events, like a death, and what happens, how do we value the business? Am I required as the remaining partner to purchase your shares in the business? And how does that buyout work? Is it a lump sum? Is it over time and installments? And a lot of times a small business, especially when you start getting real value, you may consider getting life insurance to help with that lump sum payment. So the company may have had life insurance on your life for $3 million. That lump sum gets paid to your, to your kids right now. And then over the next five years, myself in the business pay off the other 2 million, and then I become the sole owner. And that really helps because in this case, it’s a debt that wasn’t by choice, but that’s kind of your business divorce, what we’re splitting up. So you’re a buy sell. Is your business prenup, just like a marriage. We’re figuring out what happens down the line to make sure that there’s a continuing, you know, continuous operation of the business and that this doesn’t crumble the business, or it doesn’t create hardship or, you know, financial Stripe cashflow problems. And that the remaining partners able to keep, keep on with the business, keep raising money, keep doing real estate deals, but adequately compensate the former partner.

Charles:
Yeah, that’s one fear that I always have is getting to business with someone that you didn’t plan on getting in business with, whether it’s a, a divorced spouse of one of your partners or their children, like you were saying, or them selling the business and you not having an agreement in place where they’re selling it to a third party and you don’t, you know, now I’ve gotta be in business with this third party. And it wasn’t my decision. It’s not in that operating agreement.

Jeffrey:
It also happens a lot, you know, not just the partner, but, you know, in your example, the individual you purchase the property from what is his planning for the rest of his real estate investments. As you get older, you maybe you’re a more seasoned investor, you know, you’re kind of winding down just managing your assets. Are your children or your heirs, your state, are they going to be able to come in and assume where you left off and understand that? So it’s really exit planted on that end as well, to making sure that, you know, are they going to exchange and other properties, or what’s the plan for kind of the next generation to assume these real estate assets and be able to manage them and potentially continue to run your business? Just making sure it’s, as you know, as we get older, that you’ve kind of thought through those issues, we get that a lot. And I have, I have one client who inherited probably about a hundred million dollars of real estate on her parents. And, you know, frankly is not that involved in it. And doesn’t really want to be. And the assets that she inherited are really management intensive or big apartment buildings mobile home parks, where you’re dealing with, you know, day to day issues. So slowly but surely she has transitioned out of those assets into your kind of coupon property, triple net properties, where she’s getting a check every month and doesn’t have to manage much. So she’s able, that’s more her style with real estate versus the prior generation when they were managing those properties and new, like the certain asset.

Charles:
Right. Right. So like more of like a mailbox, money type, type setup than compared to, like you said, a lot of asset management, which I imagine, especially if, especially with large apartment buildings, that’s a, that’s a lot of work. It’s a full time jod.

Jeffrey:
Right.

Charles:
So about half of our listeners are living outside the US how would you suggest a foreign investor to be set up or prep themselves for us investing in real estate?

Jeffrey:
It depends. And that one, it depends. If you are not a US Citizen, are you willing to subject yourself to US taxes? And that that’s really the question right there, if you are, and you’re willing to file a tax return here, you can use any of the same structures, your LLC, or limited partnership that a US based investor would pay. But those types of entities we have called pass through taxation. So the entity itself is not paying taxes. The taxes flow through from your LLC to the individual and losses, and that individual reflects them on their tax insurance. So say you are a resident of the, of the United Kingdom, and you’re investing in the United States and call it California. Yeah. You would now have to pay federal and California state taxes on any profits you received from that investment. If you invested an individual or even an LLC or limited partnership, we get many investors that don’t want to pay taxes here, and they don’t want to be involved at all. How can you be tax insurance here, get another PA, have their accountant deal with it. So for those individuals, a lot of times what we’ll create is what’s called a blocker. And that is usually a C corporation. It is an entity that pays its own corporate level tax. So they’ll, they’ll create you know, one, two, three main street corporation, and that entity will pay its own taxes. And any dividends that would flow to the investor can flow directly back to the UK and they don’t have to pay any other taxes in the United States on their individual worldwide income. They still file that you can tax return. The only thing they have to do is the company would file a tax return, but you’re shielding all of your forward income. The downside to that is now you have a corporate level tax. And right now it’s, you know, it’s lower, but depending on what side of the political spectrum we get, there’ve been talk about increasing the corporate level tax up to in 37, 38%. So that’s a big factor to consider because it’s really eating into your returns. So again, it depends because there’s pros and cons to each, I mean, eating up my returns in terms of flexibility and administrative ease, or I’m subjecting myself to really filing an individual tax return in the United States. But I could be saving myself 18, 19% on the money that I’m making in the cashflow that this investment property is, is generally every month.

Charles:
Okay. Yeah. So there’s all different types of entities that can be set up. I think most investors that work with us for, in our setting up US LLCs, and then they can use that with all different types of projects that they’re working with. So they’re getting their ITIN, they’re working with a CPA and they’re getting set up with traditionally an LLC, and then they’re investing with that through syndication, or they can use that as like the holding company when they have that property specific LLC that they’re purchasing for.

Jeffrey:
That’s also one of the other benefits that you using an LLC rather than individual is what we talked about earlier is now you have that liability protection. So whether you’re using it just for that or using it for tax planning that gives you the benefits of both.

Charles:
Yeah, definitely. Thank you. Yeah. So Jeff, how can people learn more about you and your firm

Jeffrey:
Check out our website. That’s one of the best places for information it’s www.gibbsgiden.com I also have a LinkedIn page where we post a lot of blogs and information that are relevant to real estate investors. Also, I’m always happy to answer questions, so, you know, feel free to send me an email, happy to talk.

Charles:
Okay, Great. Well, what I’ll do is I’ll put all those links into the show notes and thank you so much for being on the show today.

Jeffrey:
Thanks for having me. Great.

Charles:
Talk to you soon.

Jeffrey:
Bye bye.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

Announcer:
Thank you for listening to the Global Investors Podcast. If you’d like to show, be sure to subscribe on iTunes or Google play to get new weekly episodes. For more resources and to receive our newsletter, please visit global investor podcast.com and don’t forget to join us next week for another episode.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of harborside partners incorporated exclusively.

Links and Contact Information Mentioned In The Episode:

About Jeffrey Love

Jeff Love is an attorney and partner with the law firm Gibbs Giden. His practice encompasses all facets of real estate transactions, including drafting and negotiating purchase, sale, syndication, and financing transactions in connection with commercial, industrial, and residential assets. He also regularly drafts and negotiates office, retail, and industrial leases for regional landlords and tenants throughout the West Coast. Mr. Love has extensive experience drafting, negotiating, and reviewing real estate loan documents, including originations, modifications, note purchase agreements and other finance-related transactions from structuring through loan closing.

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