Modern Monetary Theory and Opportunity Zone Investments

Jason Hartman and Adam start the episode discussing Modern Monetary Theory and if it applies to our economy today. They also discuss Jeff Bezos’ impending divorce and answer from Souji about transferring conventional loans into a trust.

Then Jason finishes his talk with Mike Zlotnik about investing in Opportunity Zones. The two implore the listener to vet your sponsor before investing, not invest just for tax purposes and aligning your interest.

Investor 0:00
You’re that kind of person and you’ve got the capital and you’re a great negotiator. You’ve got great people skills. You could probably be a successful flipper, but it’s like a job. Right? If you’re not flipping, you’re not making money. And that’s why I prefer income property because you just make money every month.

Announcer 0:17
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. Now, here’s your host, Jason Hartman with the complete solution for real estate investors. Welcome listeners from 165 countries worldwide. This is Episode 11 own

Jason Hartman 1:14
nine. And this is your host, Jason Hartman, thank you so much for joining me today. As we dive into part two, we did part one yesterday, talking about opportunities, own scams, syndication scams, whether it be opportunities owned, direct investing, or investing through a fund. These deals are not so great, even direct investing with the tax benefits that are actually relatively minor are not that great. There’s just a lot of promoters out there promoting these things and I don’t want to see you get burned. It’s a situation where you’ve got a good name for something opportunity zone. Sounds good. Well might be the opportunity to lose some money. So don’t take that opportunity. Not every opportunity is a good opportunity, as my guests during the intro had noted yesterday, and I’m welcoming him back for part two here, Adam, how you doing this morning. I’m doing great. Got my workout in and ready to go good and your workout consisted of a one and a half mile walk I believe on this on your Garmin Oh, you got another workout and you got a real workout in besides the walk.

Adam 2:24
Well, that one’s coming up later today. Good stuff, good stuff. Well,

Jason Hartman 2:27
you know, I like to walk. If anybody out there struggles getting in shape. You know, walking is just easy. It’s really easy. And what I always say is get a dog. Now don’t buy a dog from a breeder, rescue a dog like I have done five times. I’m on my fifth rescue dog and just go to the animal shelter. And number one, you’re going to save a bunch of money because they are inexpensive. My last dog, that pathway cost $52 my current dog who will be one The speakers at meet the Masters many of you have met her and that’s Coco Hartman. You can follow Coco on Facebook and Instagram. On Facebook. She’s Coco Hartman on Instagram. She’s Coco Hartman one she’s quite the famous dog she has a lot of people that aren’t even friends with me are her friends. And

Adam 3:18
she’s got her own following with their already a Coco Hartman on Instagram and you needed to put the one or did you

Jason Hartman 3:23
do that? I think so. You know, I’m not like Instagram very much. And, you know, I know all the all the young folks love it. They think it’s way better than Facebook. I think they’re crazy, I think. I mean, listen, I don’t like Facebook either, because I don’t trust Mark Zuckerberg as far as I could throw him. But as far as a software platform, I think it’s just a much better platform. It’s easier to use. It’s more comprehensive. It just does a lot more, you know, but yeah, Coco Hartman, I think there was another one so we had to be Coco Hartman, one teen on Instagram. I’m Jason Hartman one and that’s the number one Both of those, so yeah, follow her, but Coco will be one of our speakers that meet the Masters, she comes to almost all of our events. She was not at our Hawaii event a couple months ago profits in Paradise, because it is very hard to take a dog to Hawaii, they discriminate against dogs over there. So that’s the way Island life is they don’t want you to bring any new diseases and you know, so they’re very cautious about that, but she’s at all or other events, and most of you have met her and she will be there. But if you want to get fit for the new year, you know, get a dog and it’ll it’ll force you to walk. You know, walking is a very kind of Zen like thing, or at least it can be and it’s kind of meditative, helps you sort your thoughts and get some exercise and I just think it’s a really good thing. So Adam, congrats on on getting that done today.

Adam 4:47
Well, thanks. It’s where I get my economic podcasts listening in. Oh, yeah.

Jason Hartman 4:50
Whose podcast do you listen to?

Adam 4:54
I listened to yours aren’t on the walk yours or at home, but I listen to this morning to a Planet money podcast.

Jason Hartman 5:02
Yes, the left wing agenda on NPR. Yep, yep. Planet money. I love how they totally edit things. So they really only show their agenda. As you can tell, I’m not a huge NPR fan. But well, this

Adam 5:15
was the first planet money I’ve listened to. And I listened to it because as you know, I’ve been learning more and listening up on modern monetary theory.

Jason Hartman 5:22
Yes, I have done one. mmt we had a guest on that. And it was that guests hung up on me, as he was talking about modern monetary theory, but I got him back on the show. And it was a good interview. It really was a really good interview. But I don’t know, I think that whole thing’s kind of flood. You want to talk about that for a moment before we talk about the Jeff Bezos divorce and answer a listener question then get to opportunity zone scams, part two.

Adam 5:48
Yeah, sure. So the basic theory of mmt is simply that a government who prints their own currency and who does everything in their own currency can issue it can default on their, quote unquote, debts that they have outstanding, and that every all of the money is simply created. I mean, that’s all it is a couple of keystrokes, and money is in the economy and that taxes actually have no impact on the amount of money that can be available, which is simply a fact mean, you don’t tax money into creation, because money has to be created before it can be taxed.

Jason Hartman 6:27
Right. Right. And and, Adam, I want you to change your vocabulary on one thing here. I don’t want you to call it money. I want you to call it currency. The concept of money is that it actually has real intrinsic legitimate value. So the gold bugs and the precious metals folks, although I don’t agree with them, either. I don’t agree with anybody. I’m such an outlier. They would tell you that gold is money because it has intrinsic value, you know, for the last 5000 years, but currency in other words, dollars, euros yen you know Brazilian reality whatever it is whatever currency it is in Bob way dollars, you know, that’s just currency that’s just a symbol. It acts as money only by Fiat. And Fiat means by authority, right? by the government. So it’s not money that is being created it is currency and the currency is much more fluctuating thing. It’s only a symbol. It doesn’t have intrinsic value, but it does have value. Okay, yeah. It has a lot more value than gold because it has a government behind it. Well, you know, I’ve made that same argument many times and in me slaughtering the arguments of the gold bugs. And now the cryptocurrency freaks I say some of this stuff was

Adam 7:48
all the gold bugs I say go out to your local grocery store and try to pay them in your gold chunks and see how well that goes over.

Jason Hartman 7:56
Yeah, good luck with that. Exactly. Try to pay them with Bitcoin to and See how well that goes over? You know, you don’t look at more places than you would with your goal. You are right about that you are right about that. And we don’t you know, we don’t have time to get into cryptocurrency discussion. We’ve covered that many times. But all I want to say is that yes, you’re right, you’re correct. currency is a better choice of word, currency is the right word. But let me just finish on the gold thing. You know, people say, well, the dollar isn’t backed by anything. It’s just few money. Oh, how many times have we all heard that stupidity? You know, yes, it is backed. It’s backed by aircraft carriers, nuclear missiles, and the biggest brand the human race has ever known. And that brand is called America. And, you know, the most powerful entities the human race has ever known governments and central banks. So the dollar is not fiato it is backed by something. Okay, and arguably, it’s backed by much more than gold, and certainly much more than any cryptocurrency anyway, go ahead with modern monetary theory. So

Adam 8:55
the first thing you hear whenever you hear people say you can create as much currency You want is what would you say the first argument would be you know that you’re gonna have inflation right you’re gonna have massive inflation it created out of thin air right. But the counter argument to that is from what I understand now as I will put a caveat that I am completely new to this and I’m, I’ve heard about it for a few years, but I haven’t really studied it. The counter argument is simply that’s what taxes and interest rates are for. The two key purposes of taxes are number one, it creates a demand for the currency I have to pay my taxes in US dollars. There’s no other choice. Isn’t that a convenient little ecosystem that is awesome

Jason Hartman 9:36
for the government and the central banks because the only thing the IRS will accept until they come to your house, knock on the door with guns and handcuffs is actual dollars. When they knock on your door and seize your assets. They’ll take your gold whatever, you know they’ll take anything at that point but it first they wanted in dollars.

Adam 9:55
So it creates a demand through taxes, but then also taxes artists a way of removing money from the economy. And so that is the way you regulate it is. And then since banks are the proxy for loaning money from the government to the people, the way they control what comes in and out is through interest rates. And so the argument is simply, we can create as much currency as we want. But it is constricted by the amount of inflation that it creates. And the way you can regulate that is through taxes and interest rates. So that’s the overall very macro view of what mmt is.

Jason Hartman 10:31
Right? That was a really good overview. Adam, thank you for that. So here’s that. Here’s the thing, look at this discussion is something we could discuss for three days. It is a long discussion, go to Jason Hartman, calm type in modern monetary theory in the search bar there and listen to that episode that I did with, you know, yeah, Mike Norman, who is a real evangelist for this and mean a real evangelist, and I don’t It works. I think it’s a delusional idea, but it’s damn interesting. I’ll tell you that, you know, it really depends on a very managed economy, you’re putting power in the hands of the government in the central bank way too much, you know, and it’s also just to me, it’s kind of fantasy land because it all makes it seem so easy that you know, you can spend as much as you want and just create some more money and everything will be fine. And that’s not the theory.

Adam 11:28
It’s not that everything will be fun, right? But it will be a self managed profit and it’s Episode 888 if people are

Jason Hartman 11:34
888 that’s the good folks way number four wealth is eight. Wow. 88 That’s perfect. So check out that episode. Thank you for that Adam. That’s very good. In the interest of time beezus divorce so of divorces, you know, I always say if you’re getting a divorce, time here divorces for when the market is right, because divorces forced people to liquidate assets and One of the reasons that are so costly is not because they’re worth it as the old joke says that snarky joke is because it forces people to liquidate assets at inopportune times. And that can be very costly. So Jeff Bezos, and Mackenzie Bezos are getting a divorce after 25 years of marriage, this will be by far the most expensive divorce in world history. Okay. And we’ll leave Mackenzie Bezos as the richest woman in the world by a huge margin. So, you know, it’ll come down to probably about 75 billion billion with a be $75 billion each, because the way it looks is it’s going to be about a 5050 split. And they’ve been married 25 years. And that’s pretty much about how long Amazon’s been around. And so the claim is that by many years that she would deserve half right, and they both worked in the business but obviously he’s the CEO and He’s, you know, been more involved, arguably. So I think it’s fine and she should get a lot. But she wasn’t there for the first 25 to 30 years of Jeff’s life, when he became the type of person that could qualify to create an Amazon. I mean, he was I can’t remember his background, but I certainly read about it. He was a I think he was a hedge fund manager or some sort of maybe it was, you know, he was in private equity. I think he was a private equity guru. You know, it’s kind of like the same things as the Tiger Woods divorce. I mean, look, you know, Tiger Woods is obviously a bad character. He cheated like crazy. I mean, you know, he was just couldn’t keep his pants zipped up, right. awful, awful story. But his now ex wife was not learning to golf, and spending a lot of her life learning to golf at age four. He was, so it’s not just the time that they were married in my opinion. It also is the resume that was developed before the marriage. And this goes on either side Look, I have many female friends who are paying alimony to their, you know, sort of slacker husbands. Okay. My good friend Alicia complains about it all the time. And and, you know, that’s just the way that she was really the sort of career motivated person, you know, was the biggest breadwinner in the family. You know, it works both ways. So this is not a male female discussion. It’s just a fairness discussion. Adam thoughts?

Adam 14:33
Well, I would say that in this case, I kind of agree with you. And I kind of disagree because by the time by the way, they got married in it looks like 94. And he created Amazon in 93. So Amazon wasn’t really a thing, but it was kind of a thing whenever they got married, but in regards to you’re saying she wasn’t around the first 25 to 30 years of his life. You could say that for anybody then like when I married Sarah, right. She had education. She was was already in her, you know, she was on her way to being a nurse. So, if we got divorced would any money she made nursing be eligible for me if we were to split? It’s a hard, hard line. And that’s why you need to go into the marriage with realization that you so a lot of people see have to look towards the end. If you’re in a state that says communal property, everything is split in half, you have to decide, is it worth it? And do I need to protect myself going in? And in his situation, if he had founded Amazon already, I would say if he hasn’t protected Amazon, he made a big mistake. You’d more talking about the potential premium? Are you talking about a seat? One of the things that may really affect Amazon stock is if she ends up getting half is he may actually not be in control. Right. that would that would be wrong. Yeah. You

Jason Hartman 15:53
know, he’s, you know, he of course wants to maintain controlling interest. And that’s that is a big deal. That could really affect the company. So we’ll see how that works out. But all I’m saying is luck. You know, everybody comes into a marriage with something and everybody should leave with something. And they were married a long time. But he had quite a career before that he wasn’t some dude with an ideas sitting in his basement that said, oh, let’s sell stuff online. I mean, he really was a highly qualified, highly educated person agreed, and most a lot of most states, but I know at least I can only speak in regards to Texas, and Texas has their law says, Whatever you came into the marriage with is yours. And it’s split 5050 from when you’re married to when you get divorced. So I don’t know what the law is like in his state. But he’s Washington State, it’s community property state. So outside of arguments by both sides lawyers, and any prenuptial agreement that might exist and I don’t think they have one but I’m not sure. You know, it’s a 5050. It’s a community property state. That’s the best sense of the law but of course there are mitigating factors. So interesting. Okay, So enough about divorce but the rule is time your divorces and don’t be forced to liquidate assets at in opportune times if you’re getting a divorce and hopefully you don’t get a divorce but if you’re going to get one when the market is down forcing you to sell assets at low prices, go to counseling and for hay for $75 billion can’t your work it out Jeff and

Adam 17:28
Mackenzie that’s an expensive divorce. It’s gonna be anytime you have to liquidate $75 billion, something’s gonna hurt.

Jason Hartman 17:35
Yeah, so something’s not going to be a good opportunity at the time to liquidate you know that stock prices in there. Yeah, boy, that’s that’s just crazy expensive divorce. Wow. Okay, let’s get to a listener question. I think you got soji right.

Adam 17:49
Yes. soji from Dublin, California. All right, says that she really likes hearing your podcasts and gets a lot of knowledge out of them. So thank you for that. My pleasure. Now, she has 16 missional loans and is in the process of buying her seventh property with the conventional loan. And in trying to do some estate planning, her attorney said she’d have to transfer the deeds under the trust name. And both she and the trustees names will be on the deed to these properties. And her question is, since her husband is one of the trustees named, once she reaches her 10 conventional loans, will her husband be able to qualify for his 10 as well or will be in a trustee stop him from being eligible?

Jason Hartman 18:30
And then what did surgery say about asking the

Adam 18:34
lawyer he may have said that her lawyer didn’t know the answer. So

Adam 18:39
I love this.

Jason Hartman 18:41
So the lawyer doesn’t know the answer. So you asked the less qualified person, yours truly. Okay, great. Well, let’s take a stab at this. So first off, always, the disclaimer is I’m not a lawyer. I’m not a tax professional. So you know, seek out the appropriate counsel, if you can find it. There’s a lot of dumb lawyers out there to folks As you will learn if you haven’t dealt with lawyers yet, but there’s a lot of smart ones too. So I don’t know the answer to this question, but I don’t think it will matter. Look, the loans are in the name of the person that applied for the loan, you do have to be careful with transferring loans because the lender could at least in theory, call the loan due under a due on sale clause. Now, the due on sale clause was upheld by the Supreme Court, way back in I think, the late 70s. And it just basically says that if you transfer title, the lender can call the loan due. But when you’re transferring to something like living trust, an entity that is, you know, obviously your entity, it’s just for estate planning purposes, that doesn’t really qualify as a real transfer, in my opinion, so I wouldn’t be too worried about that part of it. And that’s a part you didn’t even raise and I don’t think it would affect the team. loan issue. And what the references is that Fannie Mae currently only allows 10 loans per spouse. And so I think you can just proceed to each get your 10 loans. But you know, you should ask that question of is one of our lenders, and we’ve got several great lenders in our network, just contact your investment counselor, I know you’re already client, you’re working with one of our investment counselors, I can’t remember which one, but you can go to Jason hartman.com. If you’re new to our group, and just go ahead and reach out and our investment counselors can put you in touch with any lenders and lots of other resources you might need. The answer is I don’t think this is going to matter. Now, one other thing I want to say is that a living trust is simply for estate planning purposes. It does not provide any asset protection, other kinds of trusts can do that. And that’s a more complicated discussion to I have a trust that I set up several years ago, and it’s complicated, it’s hard to deal with it. Trust, an LLC or a corporation much easier and simpler, at least for me, I think trust are complicated and costly. But the Living Trust is not complicated and costly. Those are simple. It’s the other kinds that can get difficult. You know, that’s a long discussion, so we won’t bother with it here. But the answer the question is, I don’t think you’re gonna have any problem with this. Talk to one of our lenders. I think you’re going to be okay. That’s my opinion, my humble opinion as a hack advisor. There’s my disclaimer, okay. But thanks for listening to the show. And thanks for the question. So, Adam, are we ready to talk about opportunity zones? I think we are ready to talk about opportunity zones. Okay, good. Well, hey, let’s dive into part two of opportunity zones. By the way, it is official meet the Masters is coming up the weekend of March 23. In beautiful Newport Beach, California, my old hometown. So, location, venue, it’s all confirmed now. When you register at Jason Hartman comm slash masters, it will reply back with the hotel booking information we got a great room block, think that’s only 169 per night which is a great deal for, you know really high quality venue in Newport Beach, California. So check that out. And for those of you we have many I think about 50 people or more have already registered, we will be emailing you the hotel booking information within the next week or so you can get our good room block, discounted room block rate and all that kind of stuff. So Jason hartman.com slash masters for that. And let’s talk about opportunities, own scams and make sure you protect your hard earned money. Here we go.

Jason Hartman 22:47
You know, Mike, I have been rather famous in my little world for my 10 commandments of successful investing. And I later years later made a second 10 commandments So there are really 20. But I think I’m going to add some more and one of them is going to be, don’t let the tail wag the dog. And that’s exactly what happens is these promoters are out there promoting these tax benefits. People are making bad investment decisions. I see it all the time. Just because they’re trying to get a tax break. It’s like, Okay, I get the idea, you know, stick it to the man, you know, meaning the IRS, the government, Uncle Sam, but don’t make yourself a bad deal. Just to get a tax break. The deal should make economic sense. Before the tax benefit. Okay. Agree. Yeah,

Mike Zlotnik 23:39
I mean, a complete agreement with you. Another important consideration just for the sake of it’s kind of funny, but I want to mention that these investments in opportunity zones cannot have a country club or Golf Club as a primary use cannot have a massage parlor. not have a hot tub facility. cannot be a racetrack cannot Sell low consume alcohol on premises so just just to clarify this is intended for good projects not to promote the behavior yeah got

Jason Hartman 24:08
it there’s no no no sinning so good. What else should people know um, you know, I’m looking at the outline that we went over before the show a little bit so you know who it’s good for, get the advice from a professional, you know anything else on opportunities own or opportunities, own funds, and then I want to talk about funds in general,

Mike Zlotnik 24:27
if you’re considering an opportunity to zone syndication opportunities own fund, you should most certainly look at the sponsor and their track record in projects in general, you underwriting the sponsor that point. Also, do they have specific consultants CPA legal advisors to run the fund in a compliant manner with opportunities own and the project itself that if you’re doing a project, at this point, I would absolutely stay away from the funds. If anything, I would look at a single project opportunities, you know, in an opportunity zone because it’s easier and easier to understand and it’s easier to manage The funds just have enough complications running a fund. And we have to combine that with complexity, little compliance with opportunity zone rules. There will be a lot of mistakes made. So that’s my two cents.

Jason Hartman 25:11
Yeah, I think that’s good advice. Be careful, don’t let the tail wag the dog. A lot of these and you know, we didn’t even really talk in any real degree about the quality of the areas or the investments. You know, I downloaded the list from the IRS website. And a lot of these areas, I just wouldn’t touch them with a 10 foot pole. You know, I mean, I just, I just wouldn’t do it. They’re just blighted, blighted areas that you know, who knows if they’ll come back? I don’t know. That remains to be seen, but I’m not really going to dive into that component of the talk. That’s a whole different show. Mike, let’s talk a little bit about funds or syndications or deals in general. You know, I send a lot of deals to you that come across my desk because you’re so good at evaluating them. And I got one maybe a week ago I forwarded the email to you, you know it was a pitch this and that this person wants to borrow money they’ll do debt or equity and, and you know come to find out that this is so over leveraged, they want way too much investment. It just doesn’t make sense these deals just don’t make sense. And I can’t believe these people can go and promote this stuff with a straight face. I really can’t. There must just be so many naive investors out there with money burning a hole in their pocket. Or maybe I’m just too risk averse and too conservative because I’ve had too many deals go bad over the years and, you know, I just don’t like getting ripped off anymore.

Mike Zlotnik 26:41
Who does? Yeah, yeah, I Well, thank you for sending some of those deals across. I’ve taken a look. And I I always take a look at the stuff that you sent me in the few deals I looked at the typical scenario where the sponsor of a deal doesn’t even communicate properly. They call somebody That when in reality, they’re raising equity, they’re trying to raise all the money plus they fees. So what happens is they want investors to take 100% of the risk, fund the acquisition fees to the sponsors, get some money in their pocket to start get some money in their pocket as they go and get some money on that budget that on the backend if they succeed. Now, it doesn’t mean that I’m all that sponsors is plenty of really good sponsors. But that process of vetting deals, understanding deal structure, understanding what they investing into what kind of risk the deal entails. What is the upside? What are the cash flows takes work? It’s professional work. I mean, I’m a fund manager, we screen a lot of deals and it’s if you don’t have those skills, and you invest in those deals, just because this great marketing promoting the deal. Well, you’re going to get what sort of you pay for it looks easy if it’s well promoted, pretty pictures, sponsor with, you know, great theoretical track record and you don’t do your due diligence. You will wind up with the crappy deal in the money will be stuck. It’s one of the problems with the way the way syndications, your money stuck until there’s an exit strategy. Let’s be very clear. Yeah, if you be if you haven’t realized what’s going to happen, you can park your money thinking you’re going to get out in two years. Well, good luck, because the sponsor is milking the deal. And you returns a crappy with digital charging the fees doesn’t happen all the time, but it can just

Jason Hartman 28:25
blow your way. Okay, so talk about this one deal. If you remember it, I know you’re looking at a lot of scams that I sent you. But then I want to talk about one that I sent you about a year ago. And we talked to the promoter, very nice guy, super smart and knowledgeable. But he was charging a 50%. Half, five zero percent fee for running the deal. They put no capital in the deal. They simply find a deal. Create a syndication and get half

Mike Zlotnik 28:59
Mike God,

Jason Hartman 29:00
I think I should go into that business. That’s pretty rich. And not for the investors. But for the sponsor. It’s a great deal, right? Yeah. So

Mike Zlotnik 29:09
let’s talk about the deal. Ah, you just sent had essentially acquisition of a lamp, or a 5 million bucks. Then there were Linda improvements that run little over another million. And the sponsor was trying to raise over six and a half. So again, the sponsors trying to raise more than they put in and more than they need to put in to take the land to the exit point. For siletz land, it’s a very high risk deal by definition. The outside was there to sell for nine and a half million after the improvements have made since a highly speculative deal with investors putting up all the money. The sponsor did offer sort of pretty good sort of 12% rate of return on the money plus some points and 50% share of the profit. So the structure of a deal by itself was not catastrophic. But the sponsor had no skin in the game. Yeah. And to me, it is, you know, high level of risk In the deal itself, the land deal.

Jason Hartman 30:02
Land deals are very risky, very speculative. Yeah. Because that goes back to my saying, you know, how do you know if something’s an investment? It’s so simple investments produce income, period, and of discussion. If it doesn’t produce income, it’s not an investment. It’s simply a speculation or a gamble. And you know, listen, I don’t want to say never speculated never gamble, certainly you can hit some home runs doing that. And I don’t want anybody to be super conservative like I am and miss out on those deals. Okay, but you gotta have some money. Your risk capital should only be you know, maybe 15% at the most of your net worth, right, if you can afford to lose it. You know, it’s okay to take some Gamble’s okay, because some of them will hit occasionally. But on the deal like this, Mike, it reminds me of the old saying, you know, I’m not worried about the return on my capital. I know Worried about the return of my capital? It’s correct and you know that deal looks good. Yeah. 12% right, you know preferred return which is awfully generous By the way, it’s probably not going to happen. But the guy has no skin in the game the deals over leveraged. It looks like a you know what it was reminiscent of. It was reminiscent of way back in the late 80s. The Charles Keating, SNL Lincoln savings and loan scam. He was doing these deals that were just massively over leveraged, where people would buy the property and get money back on the deal just for buying it.

Mike Zlotnik 31:39
And that’s what I

Jason Hartman 31:40
do, right? Yeah, a lot of

Mike Zlotnik 31:41
sponsors charge acquisition fee, right? Yeah. I’ve actually looked at multifamily sponsors, Self Storage sponsors again. Now small fee of finding a good deal of 1% may be fair, but I see sponsors charging 4% to the investors just because they found a deal and the deal is a solo deal. So what’s the value of their work? I mean, they found the deal and you’re paying as an investor. So it’s really important to understand the function of a sponsor. And what does a quality sponsor the quality sponsors typically don’t promote, they go to a single source like us, we get them all the money they need. So we basically negotiate terms that are much more fair. So we talked about 50% promote response on to some deals. Yeah. Give an example we must from a fund many deals that have 12% per half, which is generous, may have 7030 split again 72 to us as investors 30% response until we get 18% annually and then 5050 split by the death kind of a structure is generally fair, because if you got investments 18% and the 50% of the offset goes to the sponsor, so much power to the sponsor. So deals like that affair, that are deals that have 9% profit, percent profit 10% proof and after that, from that point, they go 7030 these are reasonable deals with the project’s themselves a strong, but I do like the deals with at least 8%, preferably 10 to 12 and low, possibly no annual fees, maybe a little bit half a percent to 1%, potentially project management fee if the numbers are right. So it’s really important to understand the project for the whole life cycle, what are the cash flows, your 12345, and so on? And what is the exit strategy? And by the way, one of the problems in today’s environment, big, big problem that I see today, many sponsors make very aggressive assumptions on a backend sale. Oh, sure. Yeah, they just estimating that the cap rates are going to be low. They don’t care whether the interest rates are rising. And then they make offering documents so pretty, because they wrote exit cap rate of six, when we know or at least, it’s very likely to the exit cap rate will be significantly worse than that,

Jason Hartman 33:56
right? Okay, so just remember listener Whenever you’re looking at a pooled money investment, a syndication or a fund, or a stock or anything like that, right, there’s really sort of two major layers. I mean, there are many layers, but there’s two major layers to the deal, right? One is the underlying asset, it’s or assets themselves, right? What is the deal? what’s underneath the deal? So when we talked about that one over leverage deal on the raw land, which obviously is highly risky, just because it’s raw land, that underlying deal was a bad deal. Now, the second major layer is the structure of the syndication or the fund. And in that case, it wasn’t that bad, right? Nice preffer turn, etc. But look for that structure to materialize in real life. The underlying deal has got to be good. Free camp fund this great structure. So you can talk all day long about a generous deal, a generous structure for the fund or the syndication. But if the underlying asset won’t create the return, you’re dead in the water,

Mike Zlotnik 35:16
right? Yeah, there’s nothing to do right? There’s no profit. He, what’s funny is it is a loss, right? The sponsor is not going to take a piece of a loss investors do

Jason Hartman 35:26
right now. That’s the best deal ever, you know, you use someone else’s money, go out, get into the marketing business. It’s really nice, very low risk feel when it’s not your money, isn’t it?

Mike Zlotnik 35:37
That’s right. So you know, for comparison sake, I’m going to mention our flagship fund camp Opportunity Fund, and we have 7% pref. And depending on type of units folks have if the investment a units to get at 20 80% of the off site, we get paid 20% performance fee so we have to perform. I like the deals where the sponsor gets paid, most University That’s the critical piece, right? They don’t perform, they should not get paid. That’s the key element of the whole equation. They can have a little bit to keep the lights on. But the moment they are motivated to just buy into running, they buy crap.

Jason Hartman 36:14
Right? Remember, no matter how nice somebody sounds, or how good their pitches at the end of the day, it’s always what we heard come out of the Watergate scandal for many years ago, when Deep Throat said, follow the money. You always got to follow the money. The money tells the truth. It doesn’t lie. It shows where everybody’s motivation is, and you gotta have an alignment of interest in alignment of interest. That is a key component. You want to speak to alignment of interest just for a moment, Mike.

Mike Zlotnik 36:49
So deal structured syndication structure, or fund structure is alignment of interest syndication deals that have heavy upfront fees Automatic funds that charge things up front when they invest in a deal if before the deal performs. It’s a problem. It’s alignment of interest is effectively getting the project sponsor or a fund manager to receive performance fees rather than asset acquisition fees, or origination fees and other fees. I’ll give you an example. And again, I’m not trying to promote a fund but I know the difference where we started this fund to be extremely investor friendly. We don’t charge the fund ever any asset acquisition fees, we buy an asset we can get paid until the acid performs to we do deals with CHARGE points, the points hard money loans, the flow to the fund, not to us, we don’t get paid anything up front. We only get paid to the performance of waterfall. So deals with that kind of structure or very light fees. I’m not trying to say that small fees are unfair. Some small fees, half a point maybe point for position when a great deal can make sense. But if the deal is average or worse, what are you paying for you could go buy the property yourself, not not let somebody else, buy it and then just milk you. So from that perspective, alignment of interest, you definitely want to see deals with minimal acquisition fees paid to the sponsor, light annual fees, and good performance fee. So by the way, the backend 5050 split may be total acceptable if they meet some kind of a decent price like 12%. And that back end performance fee, as much as it feels like you’re giving up half the farm to the investor well, to the to the manager. It’s not a big deal. If you got paid 12% preferred return, and then you’re getting 50% of the offset and are aligned to the interest interest the core line. Yeah, absolutely. Hey,

Jason Hartman 38:50
you know, share the wealth. You know, let let let someone make some money. If they make you money, you just it’s just the way that’s going to happen or not. happen is if you have an alignment of interest. So good stuff, Mike. Hey, let’s wrap it up. Thank you for the very interesting discussion. We’ll look forward to seeing you at meet the masters. And I think we’re going to have you up on stage talking about this and, and some other things. So that’s it’s going to be great. And of course, we’ll have you back on the show in the future. Thanks again for joining us.

Mike Zlotnik 39:23
Yeah, I appreciate it. Folks. If you want to get a hold of me, there’s a wonderful website called Big Mike fund.com. Remember the name Big Mike fund.com. And if you miss type it Big Mike fund. com. It is not a kinky site, you’ll still wind up in the same place.

Mike Zlotnik 39:41
Sounds good. Hey, Thanks, Mike.

Mike Zlotnik 39:44
You’re welcome.

Jason Hartman 39:46
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