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Byron Elliott is a Founding Partner of 3 Pillars Law and the Chief Vision Officer of REI Keyholder Limited. He is an experienced attorney and business owner who has supported real estate syndicators through acquisition, due diligence, closing, entity formation and private equity offerings.
As Chief Vision Officer of REI Keyholder, he provides direction on the investment strategy for the organization, delineates roles and responsibilities of team members, creates strategic partnerships, and interacts with public officials.
The idea of syndication has been a hot topic in real estate for years. But what does it really mean? Byron dives deep into this subject and gives his insights on how syndication works!
He explains how an investor must raise money for bigger projects if they want more exposure on the investment side of things – which will allow them to get involved early enough before prices go up even higher!
Byron stresses the importance of really understanding how taxes work and being mindful about all of your capital sources.
With tons of great questions, we wrapped our show with Byron! We’re glad to have had him on the podcast as he provided us with in-depth information about real estate syndication strategies!
In This Episode
- Details of syndication and its strategies.
- Key points of due diligence as an LP investor.
- Byron’s personal wealth strategy and the lessons learned.
- Mr. Elliot’s piece of advice on how to accelerate your wealth.
Hey everyone and welcome to another episode on Wealth Strategy Secrets. Today we are joined by Byron Elliott. Byron is a founding partner of Three Pillars Law and the Chief Vision Officer of REI Keyholder Limited. He’s an experienced attorney and business owner who has supported real estate syndicators through acquisition, due diligence, closing, entity formation, and private equity offerings.
He has successfully supported syndication deals in the self-storage, multi-family, RV park, manufactured housing, mobile homes, residential assisted living, and mixed-use asset classes. As Chief Vision Officer of REI Keyholder, he provides direction on the investment strategy for the organization, delineates roles and responsibilities for team members, creates strategic partnerships, and interacts with public officials.
Prior to practicing law and investing in real estate, Byron served a 24-year career in the Army with assignments in Korea, Germany, Kosovo, Iraq, and multiple stateside assignments. Byron, thank you for your service, sir. It’s so good to see you.
Thank you, Dave. I appreciate the opportunity.
Yeah, absolutely. So I think probably what would help the audience who is not really familiar with you is to kick off a little bit on your background, Byron, if we could start there.
Absolutely, I appreciate that. I’ll talk about where things transitioned from my service. My wife and I attended the University of Denver Sturm College of Law together and graduated back in 2012 with the intent to hang a shingle. My wife has a very strong leadership background and strong administrative background, and my undergraduate and graduate degrees are in business. We felt we could take that leap of faith and start our own little firm.
Funny enough, while we were waiting for the results from the bar exam, I got recalled to active duty in the Army for another five years. We ended up hanging a shingle, a small general practice here on the north side of Denver in a little town called Commerce City. She carried the water on the legal side for the first five years we were in business—family law, civil litigation, the standard stuff you’d expect in a little bedroom community.
As I was easing into retirement, I had the opportunity to learn about private equity raises and how they apply to real estate investing. As I was looking to transition from active duty, I did an internship at a fast-growing self-storage company and learned how to do private equity raises and all the due diligence involved in purchasing a piece of real estate. Our firm pivoted pretty hard, and now about 90 percent of our work is with first, second, and third-time syndicators.
We also have a handful of bigger clients who have done hundreds of millions of dollars in deals. We have landed in a nice sweet spot where we really enjoy the legal work and our clients.
That’s excellent, Byron. How about family for you?
Byron: I’m married and we have four kids between us. My oldest son is 26 and he’s down in Miami as a real estate agent. He’s been actively participating in real estate. I’ve got three teenagers in the house who are driving me crazy right now.
Yeah, at least he didn’t have triplets, right, so that they were all at the same time which is what I have.
Byron: Oh wow, that’s impressive.
Yeah, yeah, so awesome. Nah, thanks for sharing that. Really, really appreciate that. You know a lot of our listeners, Byron, a lot of folks are new to syndications, this space and private equity. And like everybody else, everyone was drinking the kool-aid of conventional wisdom and talking to financial planners in terms of, hey, this is how we’re going to build our wealth.
So, as they delved into this whole world of private equity and syndications, maybe it would be helpful from your expertise and legal purview to talk a little bit about syndication. If you can give us some background from the JOBS Act, how syndication came out, what is a syndication, and talk a little bit about the Regulation D exemptions.
Yeah, for sure. I have a lot of the same experiences probably as the people you’re talking about. It’s a natural progression we see with our clients where everyone understands that real estate is a great investment. Someone typically buys an investment property, a single-family home, wants to do short-term rentals or a duplex, four-plex, something like that, and does that multiple times. At some point, your personal balance sheet culminates, and you can’t borrow money from a conventional lender anymore.
The next progression is partnering up with someone to piggyback their balance sheet and purchase more property. But unless this is a huge capital provider, your balance sheet between you and your partner or joint venture will culminate, and this is where people get into understanding and using private equity to raise money for larger projects.
Syndication comes out of the Securities Act of 1933. Coming off the Great Depression, people were swindling money from others, making bold claims about returns. The Securities Act highly regulated raising money and investments, but they carved out an opportunity for raising private equity. Under Regulation D, there are two rules that allow raising private equity without registering with the SEC: Rule 506(b) and 506(c). The SEC looks for public policy ensuring investors are informed and sophisticated enough to understand the deal they’re investing in. The first handful of times people do a private equity raise, they often use Rule 506(b).
Rule 506(b) allows raising money from up to 35 non-accredited but sophisticated investors and an unlimited number of accredited investors. An accredited investor generally has a million dollars in net worth, excluding their primary residence, or compensation of $200,000 (single) or $300,000 (married) in the last two years with an expectation to make that again. Rule 506(b) lets you bring in non-accredited investors, often a friends and family round, raising smaller equity.
The issuer or sponsor must determine the investors’ sophistication level. There’s no brightline rule for sophistication, so it’s a factor-by-factor analysis including education, life experience, and investing experience. The sponsor ensures the investor understands the deal and isn’t financially relying on the income.
In 506(b) offerings, investors verify their own accreditation status. I advise clients to use a simple questionnaire with threshold questions on accreditation and questions fleshing out sophistication. A pre-existing and substantial relationship is required for all investors, not just non-accredited ones. This is why 506(b) is popular for friends and family raises.
Dave: What does a pre-existing substantial relationship look like to you, Byron? How would you define that?
Great question. No brightline rule, which is why people pay attorneys to interpret these nebulous rules. Suppose you and I meet at a real estate conference on Thursday night. We get to know each other, share experiences, and talk about our businesses. Over the next two and a half days, if we’ve had enough rapport and communication, I can ascertain if you’re sophisticated enough to invest in my deals. That’s pre-existing and substantial enough in my book.
Some suggest a cooling-off period of a month or two. The brightline rule is you can’t publish your offering and then create a pre-existing relationship, which is more common than you’d think. The timing of the offer publication is crucial, as socializing deal details prior to publication could constitute an offer. Ensure you’ve socialized, networked, built your investor database, and talked to people enough before making the offer. Does that make sense?
Yeah, makes perfect sense as opposed to a 506(c), which can be publicly advertised, correct?
Right. That’s just a natural progression. People get through a handful of deals, cut their teeth on a first multi-family complex, go full cycle on a deal, and start to develop a track record and a name for themselves in the industry. Now they have a deal and can openly solicit. This is where you see a lot of message traffic on LinkedIn, Facebook, email campaigns, postcards—all of that is fair game.
Got it. That makes sense. I appreciate that background because I think this is new for a lot of people. Along those lines, something else that probably weighs on LPs’ minds—I know it was on my mind when I started to get into this space—is reviewing the stack of documents you get with the PPM. There’s a lot of legalese in there. What are some key things that LPs should be looking for when reviewing the PPM and signature docs?
You’ve probably heard this a number of times, but the very first thing a passive investor should look at is the management team—the sponsor of the offering. Who are those players and what’s their level of experience? A typical team includes a CEO or CVO type, an acquisitions type running the financial model to ensure the deal makes sense, an ops type to control operations and implement the business plan, and a marketing person in investor relations. Some may handle all that internally, some may partner with other co-GPs, and some may outsource. The key is to ensure whoever is serving in that role is competent and has a track record in the type of project they’re doing.
The second piece to look at is the carried interest or promote—what the sponsor is getting in exchange for the investor’s money. A lot of passive investors will go straight to the waterfall to see the distribution section, preferred return, and how they’re prioritized in terms of distributions from cash and liquidity events. It’s common for LPs to look for a 70-80 percent equity share for first-time sponsors. However, this depends on the deal’s nature and the sponsor’s experience.
In the waterfall, you’ll see how the sponsor is incentivized. A typical 8 percent preferred return and 70-30 split is common. You may also see performance incentives, like an equity multiple or IRR hurdle, that make the deal more favorable for the sponsor if certain economics are met. LPs should look for alignment between the sponsor and investor.
Fees are another important aspect. In value-add real estate plays, for example, there may be a project management fee, developer fee, or construction management fee on the front end for the value-add component. Once everything is leased up and stabilized, those activities cease, and the fee may go away. Passive investors should look closely at the fee structure for the deal.
Right, and just a point on that, I think it’s important to note that usually these fees are net of the returns that are advertised in the deal. What’s confusing is a lot of people come from the Wall Street domain where fees can be buried in an assets under management type structure. But in this case, the advertised return is your advertised return, and the fees are separate from that. In my experience, I actually like to see fees.
Fees can be good because you want an operator that’s investing in their business. They have a good investor relations team, they’re using good legal work to support their business, because this is a long-term business. You’re in the deal for at least five years, so ideally, you’re working with top-notch people who should be compensated.
Yeah, that’s a great point. We advise clients the same, especially the ones coming in for the first, second, or third round. At the end of the day, you’ve got to have some money coming in because Murphy’s Law—there’s going to be some sort of unanticipated cost. And you do want them to be compensated to be focused on that particular project.
Absolutely. I like what you talked about earlier. This is a big question for people new to the space. It’s good to talk about how I’m compensated, how the GPs are compensated in the deal, and how it works. It comes down to that mutual alignment of interests. When you have that hurdle at the end, it’s an incentive for the general partners to exceed the business plan and provide greater returns to the investors, and everyone wins.
Those are the mutual alignment and incentives nicely structured in these deals. When I compare that to Wall Street—look, we’re just coming off of April, one of the worst months in a while. They’re still collecting assets under management fees whether the market goes up or down. This is a completely performance-driven model based on a five-year business plan.
The other piece I’d advise an LP to look at is how your capital account is treated. It varies from sponsor to sponsor, but what I mean is you’re going to get distributions two ways: from cash from operations, and from some sort of liquidity event. When you put your cash into the deal, that starts a capital account for you. Some sponsors have a preferred return based either on the initial capital contribution that stays the same throughout the deal or on the capital account, which can be reduced over time.
It’s a nuanced thing to look at from the LP side. When my 50 grand goes in, I start getting cash from operations as the preferred return and then a split above that.
What does that do to my capital account? Does it keep it the same or reduce it, and how does that interplay with the pref? Most often, the preferred return is not treated as the return of your capital. You’ll see it on the K-1 in a particular spot, almost as if it’s an interest payment on a loan. Anything above the pref would reduce your capital account. That’s something higher level to look at in a PPM—those are the things to take a hard look at.
Yeah, no, that’s a great point on that one, and anything else with respect to the PPM or really just, at this point, even due diligence overall, that would be important from an LP perspective.
Yeah, so like we were talking about a little bit earlier, there’s some pretty good lessons learned that have come out of the last few years. One example is property taxes, right? If you have an opportunity to take a look at a PPM or an underwriting model, take a look at the property taxes. What’s happening a lot of time, especially in these off-market deals where you’re buying from a mom-and-pop operator, is they’ve owned this thing for 20 years. They bought this thing for $300,000 20 years ago, and you’re about to purchase it for $2.5 million. Their property taxes incrementally increased based on the assessor.
The property tax when you actually purchase it could be triple, quadruple—I mean, it could be a multiple of 10 from what they’re paying at the time of purchase. Now, there’s a mechanism to go back and dispute this with the local county, but at the end of the day, the county is going to say, “Look, you bought this at $2.5 million, that’s the market value, so we’ve got to increase the property taxes based on some percentage of that market value.” People don’t build that into their underwriting model, and now all of a sudden, they’re paying way more property tax than anticipated. That’s common. Take a look at the PPM side of the house—there are risk factors.
It’s a matter of public policy, trying to inform the investor on all the potential things that can go wrong. When we build ours, we start high-level with just what’s going on in the world and how that may affect certain things—the stock market, interest rates rising, the war in Ukraine, supply chain issues—high-level stuff. Then we dig down a little bit into real estate: how is real estate being affected by some of these other factors? Then we dig a little deeper into the asset class.
Is there some risk associated with this particular asset class? Then we go into the geographical location of the property. For example, there are some properties that are highly dependent on one particular industry—think oil and gas. If you’re purchasing an RV park, mobile home park, or multi-family property somewhere that’s heavily dependent on oil and gas, fluctuations in that industry can really affect your occupancy rate, your market rate for rents, that kind of stuff. So take a look at those risk factors in the PPM and see if the operator is addressing some of those things. That’s pretty important.
Yeah, it makes perfect sense. Great. Anything else you want to talk about, Byron, from a legal perspective before we switch gears and talk about what you’re doing on the investing side? Any other things that would be relevant to share?
This is something that we’re working through right now, and I would share with first-, second-, third-time real estate syndicators. There’s this natural progression. The first time you buy an investment property, you’re using the local credit union or whatever local lender. When you get to a bigger property, you may have to use a different lender or someone nationwide. When you start to get into these larger deals, there are lenders with very specific requirements on the structure of your organization.
It’s common to graduate from doing business with a local credit union to a more sophisticated New York-type lender or CMBS lender. Your organization structure is going to change—they may require additional entities: a borrowing entity, a pledger entity, and your special purpose entity for raising money. They have lender’s counsel on the other side. When underwriting a deal, take a hard look at the lender you’re using and their requirements, as your legal fees can go from $10,000 to as high as $100,000 depending on the lender. Be very clear up front and incorporate that into your underwriting model.
Interesting, yeah, that’s a good point. So Byron, we talk on this show a lot about wealth strategy, and we see this as an overall strategy to grow your wealth. There are multiple areas that can impact different things, like having a very strategic tax plan, proactive tax planning, investing in tax-efficient assets, and everything.
As you piece this all together, it’s a holistic strategy that can provide more exponential results versus the typical Wall Street model where we’re just looking at a singular rate of return on a particular investment. Tell us a little bit about your personal wealth strategy and how that’s evolved into REI Keyholder for you, and some lessons from your own personal wealth journey.
That’s great. I love sharing this. We do a lot of mentoring and coaching, not just with clients but with people in general. Right now, the way my wife and I are approaching our three- to five-year plan is, we’re intentional about buying at least one property with just us each year. We typically do two or three, and one property in a joint venture arrangement with a good friend of mine who brings the capital to the table. We conduct the operations, renovations, legal work, marketing, and property management. He gives us the money, and he gets to participate in the deal. We like to syndicate a deal, one or two per year.
We’re not trying to build a huge real estate empire or a huge operating company, but between that and optimizing our firm and prepping it for sale somewhere down the road, that’s our approach. We invest a little in stocks, bonds, and mutual funds, but real estate is huge for us. It’s been a fun journey. It’s typical on these shows to talk about Rich Dad Poor Dad, Robert changing everybody’s paradigm.
My wife grew up in the “pay down all your bills, have no debt, invest in stocks, bonds, and mutual funds” mentality. For me, having owned real estate, I bought my first property at 20. When you see how depreciation works and apply it to your financial model, it just makes sense. In the first few years of our marriage, we lived in one house, moved to another a mile down the road, rented out the first, and used the personal residence exemption to sell both non-taxable. That funded what we’re doing now. We made about $250,000 in equity from the sale, which we used to fund additional real estate purchases. We bought our office where we operate our law firm, and it’s appreciated by about $500,000 in the last three and a half years.
In the area we invest in Colorado, it’s a honey hole that people are starting to discover. Our first investment property, we deployed capital rather than using the personal residence exemption. I want to share these numbers because it was the aha moment for my wife. We bought a three-bedroom, two-bath house in Canyon City, Colorado, for $155,000, with 15% down. We furnished it, and in year one, all in, we were at $30,000 to $35,000.
With short-term and long-term furnished rentals, we grossed $50,000 in year one, netting around $30,000. With depreciation, our return was 65%, 75%, even 80%. Compare that to stocks, bonds, mutual funds, where people are happy with 6% to 8%. In the last three years, that property appreciated so much that we pulled out $120,000 in equity for other deals, not even including the refi.
So that natural progression turned into a duplex purchase, and then we got into what I really like to talk about—our historic buildings. We found this really neat little niche. There are a handful of people doing it, but it’s pretty niche and it does take work. I’d like to walk you through one of the deals, which I actually posted in the show notes. This is the Oratio Building. We found this property right next to the duplex we had purchased. It was a two-story mixed-use building that had a brewery and a motorcycle club on the first floor. The two commercial spaces were rented, but the second floor of the property had been vacant since at least the 1960s. It was at one point an 18-bed hotel.
We took a look at the National Historic Registry. The building is in a district and is a contributing property on the National Historic Registry. So what does that mean? If you jump through a couple of hoops by submitting a Part One and Part Two application to the NPS, your renovation budget, as long as your renovation and scope of work take into consideration these NPS standards, you can recoup up to 55% of your construction costs in tax credits.
On the surface, that’s great if you have passive income to offset and can apply those tax credits. The beautiful thing is there’s actually a market for these. You can sell those tax credits on the market for 90 cents on the dollar and get that capital return to you. This particular project, we bought it on an owner-carry note for $300,000. We put $60,000 down and had a balance of $240,000. The renovation will be about $1.7 million, but we will get about $850,000 in tax credits back, which we will then sell for a capital injection of $750,000.
So, with that capital, we’re going to pay off the owner-carry note, furnish four of the nine apartments, potentially pay back some capital, and then pay down the debt. Now we’re walking into a building worth $2.5 million, and we owe about $700,000. It’s a crazy program, but it’s amazing. We’re doing that, and we’ve got four projects using the exact same business model. It’s really cool.
Yeah, you know, I love it. I think this is really underestimated by people, but there’s so much creativity that goes into real estate, right? It’s really all about your imagination. I’ve seen everything from people putting in pet parks and then charging additional fees to valet trash service, to adding additional parking spots and bumping up rates. There’s just so much creativity in this.
We also talk in our strategy about how important financial education is and getting smarter about these kinds of things because this is not the advice you’re going to see on CNBC. You can only get this type of information from podcasts, books, and people who’ve spent lifetimes figuring out these strategies and how to deploy them. I always really encourage people to learn as much as they can, and if you can niche down into something like you’ve done there, that’s really awesome.
Yeah, it’s so fun. Just literally bringing these old buildings back to life. This little community down here that we invest in has a shortage of housing, which you have pretty much everywhere. We’re adding nine new units to the inventory with that building, another 11 with a building that’s a block and a half away, and we just closed last week on another that’s going to add another 10 units to the inventory.
It’s just these neat, quaint little towns, and people are super appreciative. It’s really fun to see as these things progress. You’re actually building something. This is what I wanted to do as a kid. I wanted to build stuff, but I can barely change a light bulb without a YouTube video or an instruction manual, so this is where I get to play—figuring out how the money works, finding the deals, and working with the general contractor. It’s just a lot of fun.
Awesome. So if you could give one piece of advice to our listeners about accelerating their wealth trajectory, what would it be?
I think you don’t have to be an expert, but you have to conceptually understand how taxes work and the various sources of capital. What I mean by that is, when I was growing up, we weren’t wealthy. The son of a single mom, she was a wonderful woman, but we didn’t have a lot of money. The notion of being able to buy buildings and buy real estate was always very frustrating because I never had the balance sheet.
But if you learn the different sources of capital, how to use other people’s money, how to get creative with tax credits, how to get creative with certain things, you can do almost anything. You’ve got to spend the time understanding how capital works and, again, taxes. I gave the example of the personal residence exemption and the historic tax credits. Another thing that has really been amazing to me is the real estate professional tax designation.
I don’t know if you guys have covered this ground before or not, but it’s probably worth looking into. In the last three years, I’ve been able to use that tax classification to reduce my taxable income to almost nothing. It’s really powerful stuff if you can understand how to navigate those waters.
Yeah, and just as an overview for folks, that’s basically if you’re doing real estate-related activities, I believe it’s 750 hours per year, Byron. As long as you’re doing real estate activities and have documentation to justify that, you can essentially offset active income with passive losses.
Typically, in these deals, we’re taking passive losses to offset passive income, but with this designation, you can actually offset active income as well. I know a lot of doctors, dentists, or people who are exiting businesses and transition directly into real estate so they can get this designation.
Yeah, it is so powerful. With good tax planning, like I said, we acquire numerous properties in a given year, but we’ll take a look ahead at our taxable income on the ordinary side. I can estimate based on my military retirement pay, my wife actively serving in the Army Reserve, and our firm income from payroll and end-of-year distributions.
We’re trying to think about that dollar amount, and given the properties we have, if we do a cost segregation and accelerate that depreciation, we can reduce our taxable income to almost nothing. If you understand the concepts and plan ahead instead of reacting at tax time, it can save you tens of thousands of dollars.
Yeah, that resonates with me. I’ve fired four different CPA firms over the years of running businesses. One part of it was the unpredictability of understanding tax implications. It would always be March or April, and you’re scrambling because you have a large six-figure tax bill that kills your cash flow. You thought you had a great year, but once I finally moved to a proper tax planning strategy, I now do a December forecast. I know exactly what my year looks like, and I can change things within the year if needed. You’re right, it’s very clear. I think people don’t realize this: with real estate, some of these assets and techniques can get your taxes to zero.
You can completely get them to zero. That should be a big focus. It doesn’t just happen—you have to get smarter about it. Taxes are your number one biggest expense, so wouldn’t it behoove you to spend some time getting a little smarter? Even if you could make a 10% or 15% reduction in your taxes, think about what that would mean on a perpetual basis, freeing up additional capital.
It’s so powerful. I’m in a military mastermind with real estate investors, and I try to speak to this. A lot of you have spouses who aren’t working right now. It applies to your spouse as well. If your spouse doesn’t have a W-2 job but is helping to manage your real estate investments and doing activities, 750 hours is easy to meet. It has to be over 50% of your time, so when people ask what I do, I say, “From the IRS perspective, I spend 49% of my time practicing law and 51% doing real estate investment activities.”
If you have a spouse who’s not working, it’s easy to meet that threshold, and it applies to both your incomes together. It’s simple to track. We manage our own properties, so I use a mileage IQ app to track drive time to visit properties. It easily meets the 750-hour threshold.
Awesome. Byron, I really appreciate you coming on the show today. I know there was a ton of value here for the listeners. Thanks again for that. If folks want to reach out to you, learn more about what you’re doing on the real estate side or with Three Pillars, and I’ll give a plug as well—Byron is one of the attorneys we use at Three Pillars, and it’s been a fantastic experience. Looking forward to continuing that relationship. Really appreciate that. How can folks reach out, connect with you, and learn more?
Thanks for that, Dave, I really appreciate it. As Dave mentioned, our firm is Three Pillars Law. Email’s great: [email protected]. Our website also has a query form to ask questions, and we’re intentional about following up. On the legal side, those are the ways to reach us.
On the investment side, it’s [email protected]. If you’re interested in anything I talked about, both on the investment side and tax stuff, I get fired up about these conversations. I love it, and if you ever want to have a discussion, we don’t charge consult fees. I love talking to people and hope we add enough value that if you need legal work, you’ll consider us.
Awesome, thanks again, Byron, really appreciate it.
Yeah, thank you, Dave.