CW 1109: Modern Monetary Theory, Listener Questions & Finding a Quality Sponsor for Opportunity Zone Investments

If 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.

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Welcome, listeners from 165 countries worldwide. This is episode 1109. 1109. 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 Opportunity Zone scams, syndication scams. Whether it be Opportunity Zone 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 guest during the intro had noted yesterday, and I'm welcoming him back for part two here. Adam, how you doing this morning?

Oh, I'm doing great. Got my workout in ready to go.

Good. And your workout consisted of a one and a half mile walk, I believe. And on your Garmin. Oh, you got another workout in. You got a real workout in besides the walk.

Well, that one's coming up later today.

Good stuff, good stuff. Well, 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 gonna save a bunch of money because they're inexp. My last dog that passed away cost $52. My current dog, who will be one of 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 CocoHartman1. She's quite the famous dog. She has a lot of people that aren't even friends with me are her friends, and she's got her own following.

Was there already a Coco Hartman on Instagram and you needed to put the one, or did you just do that?

I think so. I don't like Instagram very much, and I know all the young folks love it. They think it's way better than Facebook. I think they're crazy. 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 Hartman1. And on Instagram, I'm Jason Hartman1. And that's the number one on both of those. So, yeah, follow her. But Coco will be one of our speakers at Meet the Masters. She comes to almost all of our events. She was not at our Hawaii event a couple months ago. Prophets 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, you know, so they're very cautious about that. But she's at all our other events, and most of you have met her and she'll 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 getting that done today.

Well, thanks. It's where I get my economic podcast listening in.

Oh, yeah? Whose podcast do you listen to?

I listen to yours. Aren't on the walk, yours are at home. But I listened this morning to a Planet Money podcast by npr.

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 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.

And they had done one mmt, we had a guest on that. And it was that guest 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 flawed. 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?

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 and can issue it can never 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 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. I mean, you don't tax money into creation because money has to be created before it can be taxed.

Right, Right. 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 bug 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 for the last 5,000 years. But currency, in other words, dollars, Euros, yen, Brazilian reals, whatever it is, whatever currency it is, Zimbabwe dollars, that's just currency. That's just a symbol. It acts as money only by fiat, and fiat means by authority, by the government. So it's not money that is being created. It is currency. And the currency is a much more fluctuating thing. It's only a symbol. It doesn't have intrinsic value, but it does have value. Okay.

Yeah, I would argue 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.

Really, to 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.

Yeah, good luck with that. Exactly. Try to pay them with bitcoin too, and see how well that goes over. You know, you'd have luck at more.

Places than you would with your gold.

You are right about that. You are right about that. And we don't, you know, we don't have time to get into crypto currency 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. People say, well, the dollar isn't backed by anything. It's just fiat money. Oh, how many times have we all heard that stupidity. 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 the most powerful entities the human Ra has ever known, governments and central banks. So the dollar is not fiat. 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 the first thing you hear, whenever you hear people say you can create as much currency as you want is what would you say the first argument would be?

You know that you're going to have inflation, right?

You're going to have massive inflation.

You create it out of thin air.

Right? But the counter argument to that is, from what I understand now, as I'll put a caveat, that I am completely new to this and 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 for the government and the central banks because the only thing the IRS will, 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 yachts, gold, whatever. You know, they'll take anything at that point, but at first they want it.

In dollars, so it creates a demand through taxes. But then also taxes are just 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.

Right. That was a really good overview, Adam. Thank you for that. So here's the thing. Look at this discussion is something we could discuss for three years days. It is a long discussion. Go to Jason Hartman.com, type in Modern Monetary Theory in the search bar there and listen to that episode that I did with.

Mike Norman, who is a real evangelist for this. I mean a real evangelist. And I don't think 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 and the central bank way too much. And it's also just to me, it's kind of fantasy land because it all makes it seem so easy that you can spend as much as you want and just create some more money and everything will be fine.

But that's not the theory. It's not that everything will be fine. Everything will be fine if it's managed properly. And it's episode 888 if people are interested.

888, that's the good Feng Shui number for wealth is eight. Wow. 888. That's perfect. So check out that episode. Thank you for that, Adam. That's very good. In the interest of time, Bezos divorce. So of divorces, you know, I always say if you're getting a divorce, time your divorces for when the market is right. Because divorces force people to liquidate assets. And one of the reasons they're so costly is not because they're worth it, as the old joke says, Right. 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 will 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 B. $75 billion each. Because the way it looks is it's going to be about a 50, 50 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 is 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. No, 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 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 for 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. You know, my good friend Alicia complains about it all the time. And, and you know, that's just the way it is. 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?

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 your 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 Erin, she had Education. She was already a nurse. You know, she was on her way to being a nurse. So if we got divorced, would any money she made nursing be ineligible 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 the realization that, as a lot of people say, you 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 were talking about the potential prenup or are you talking about a. See, 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 a good.

Yeah. You know, he's, you know, he of course wants to maintain controlling interest, and that's. That is a big deal. You know, that could really affect the company. So we'll see how that works out. But all I'm saying is, look, 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 idea 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, I don't know if 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 50, 50 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 a 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 50 50. It's a community property state. That's the essence 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 inopportune times if you're getting a divorce, and hopefully you don't get a divorce, but if you're gonna get one when the market is down, forcing you to sell assets at low prices, Go to counseling. And for, hey, for $75 billion, can't you work it out? Jeff and Mackenzie? I mean, that's an expensive, expensive divorce.

It's going to be. Anytime you have to liquidate $75 billion, something's going to hurt.

Yeah. So there's Something's not going to be a good opportunity at the time to liquidate. And, you know, the stock prices and. 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.

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 six conventional loans and is in the process of buying her seventh property with a 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. Now, 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 being a trustee stop him from being eligible?

And then what did Soji say about asking the lawyer?

She may have said that her lawyer didn't know the answer, so she was coming to you.

I love this. So the lawyer doesn't know the answer, so you ask 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, too, 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 10 loan issue. And what the reference is 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 a client and you're working with one of our investment counselors. I can't remember which one, but you can go to jasonhartman.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, too. I have a trust that I set up several years ago and it's complicated. It's hard to deal with a trust, an LLC or a corporation. Much easier and simpler, at least for me. I think trusts 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. And that's a long discussion. So we won't bother with it here. But the answer to your question is I don't think you're going to 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 23rd in beautiful Newport Beach, California, my old hometown. So location, venue, it's all confirmed. Now when you register@jasonhartman.com masters, it will reply back with the hotel booking information. We got a great room block. I think that's only 169 per night, which is a great deal for a, 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 discounted room block rate and all that kind of stuff. So Jason hartman.com masters for that. And let's talk about Opportunity Zone scams and make sure you protect your hard earned money. Here we go.

You know, Mike, I have been rather famous in my little world for my ten commandments of successful investing. And I later years later made a second 10 Commandments. So there are really 20, but I think I'm gonna 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. As 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, agreed.

Yeah, I'm in 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, cannot have a hotel facility, cannot be a racetrack. Cannot sell or consume alcohol on premises. So just, just to clarify, this is intended for good projects, not to promote bad behaviors?

Yeah, got it. There's a. No, no, no sinning. So good. What else should people know? I'm looking at the outline that we went over before the show a little bit. So who it's good for? Get the advice from a professional. Anything else on Opportunity Zone or Opportunity Zone funds? And then I want to talk about funds in general.

If you're considering an Opportunity Zone syndication or Opportunity Zone fund, you should most certainly look at the sponsor and their track record in projects in general. You're underwriting the sponsor at that point. Also, do they have specific consultants, CPA legal advisors, to run the fund in a compliant manner with Opportunity Zone and the project itself. 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 Opportunity in an Opportunity Zone because it's 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 complexities of compliance with opportunities, zone rules. There will be a lot of mistakes made. So that's my two cents.

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 ten foot pole, you know, I mean, I just wouldn't do it. But 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. It was a pitch, this and that. This person wants to borrow money. They'll do debt or equity and 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 I just don't like getting ripped off anymore.

Who does? Yeah, well, thank you for sending some of those deals across. I've taken a look and I always take a look at the stuff that you sent me and the few deals I looked at the typical scenario where the sponsor of a deal doesn't even communicate properly. They call something debt. When in reality they're raising equity, they're trying to raise all the money plus their fees. What happens is they want investors to take 100% of the risk fund 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 in their pocket on the back end if they succeed. Now, it doesn't mean there aren't all bad sponsors. There's plenty of really good sponsors. But that process of vetting deals, understanding deal structure, understanding what they're 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'm a fund manager. We screen a lot of deals. And 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 you pay for. It looks easy. If it's well promoted. Pretty pictures, a sponsor with great theoretical track record, and you don't do your due diligence, you'll wind up with a crappy deal and the money will be stuck. It's one of the problems with, by the way, syndications. Your money is stuck until there's an exit strategy. Just to be very clear, if you haven't realize 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 your returns are crappy, but they're still charging the fees. It doesn't happen all the time, but it can be aware.

Okay, so talk about this one deal, if you remember, and I know you're looking at a lot of stuff. Yeah, I remember the deal 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, 5, 0% fee for running the deal. They put no capital in the deal. They simply find a deal, create a syndication and get half. My God, I think I should go into that business. That's pretty rich. And not for the investors, but for the sponsors or it's a great deal, right?

Yeah. So let's talk about the deal you just had. Essentially acquisition of land for 5 million bucks. Then there were land improvements that run a little over another million. And the sponsor was trying to raise over 6.5. So again, the sponsor was trying to raise more than they put in and more than they need to put in to take the land to the exit point. First of all, it's land. It's a very high risk deal by definition. The upside was there to sell for 9.5 million after the improvements are made. It's a highly speculative deal with investors putting up all the money. The sponsor did offer Pretty good 12% Rate of return on the money, plus some points and 50% share of the profit. The structure of the deal by itself was not catastrophic, but the sponsor had no skin in the game. To me, it is high level of risk. And the deal itself, the land deal.

Land deals are very risky, very speculative. Yeah, because that goes back to my saying, how do you know if something's an investment? It's so simple. Investments produce income, Period, End 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 speculate and 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 got to 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 gambles, 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'm worried about the return of my capital.

That's correct.

And you know, that deal looked good. Yeah. 12%, 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 deal's 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, you know, and that's what they do.

A lot of sponsors charge a acquisition fee, right?

Yeah.

I've actually looked at multifamily sponsors, self storage sponsors again. Now, a 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 so. So deal. So what's the value of their work? I mean, they found the deal and you're paying. As an investor, it's really important to understand the function of a sponsor. And what is 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 under some deals.

Yeah.

Give you an example, we invest from a fund. Many deals that have 12% pref, which is generous, may have 70, 30 split against 72 to us, to investors, 30% of response until we get 18% annually and then 50, 50 split. By the way, that kind of a structure is generally fair because if you got investors 18% and the 50% of the upside goes to the sponsor, so much power to the sponsor. So deals like that are fair. There are deals that have 9% pref, 8% pref, 10% pref. And after that from that point they go 70, 30. These are reasonable deals if the projects themselves are strong. But I do like the deals with at least 8% pref, 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 year 1, 2, 3, 4, 5 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 back end sale.

Oh sure, yeah.

They're just estimating that the cap rates are going to be low. They don't care that the interest rates are rising. And then they make offering documents so pretty because they wrote exit cap rate at 6 when we know, or at least it's very likely that the exit cap rate will be significantly worse than that.

Right, right. Okay. So just remember listeners, 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 leveraged 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 pref return, etc. But look, for that structure to materialize in real life, the underlying deal has got to be good or it can't 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. Right?

Yeah.

There's nothing to divide, there's no profit.

What's funny is if there's a loss, right. The sponsor is not going to take a piece of a loss. Investors do, right?

Yeah, 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 deal. When it's not your money, isn't it?

That's right. So, you know, for comparison's sake, I'm going to mention our flagship fund, Tempo Opportunity Fund. And we have 7% pref. And depending on type of units folks have, if they invest in a units, they get 80, 20, 80% of the upside. We get paid 20% performance fee. So we have to perform. I like the deals where the sponsor gets paid mostly on the back end. That's the critical piece. If 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 and to run it, they buy crap.

Right?

Remember, no matter how nice somebody sounds or how good their pitch is, at the end of the day, it's always what we heard come out of the Watergate scandal from many years ago when deep throat said, follow the money. You always gotta follow the money. The money tells the truth, it doesn't lie. It shows where everybody's motivated is. And you got to have an alignment of interest. An alignment of interest, that is a key component. Do you want to speak to alignment of interest? Just for a moment, Mike.

So deal structure, syndication structure or a fund structure is alignment of interest, syndication deals that have heavy upfront fees, problematic funds that charge things up front when they invest in a deal before the deal performs. It's a problem. Alignment of interest is effectively getting the project sponsor or a fund manager to receive performance fees rather than asset acquisition fees, 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. 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't get paid until the asset performs. Two, we do deals, we charge points. The points, hard money loans, they flow to the fund, not to us. We don't get paid anything upfront. We only get paid to the performance 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 a point for acquisition on 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 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 fees. By the way, the back end 50, 50 split may be totally acceptable if they meet some kind of a decent pref like 12% and that back end performance fee. As much as it feels like, hey, you're giving half the farm to the investor, well, to the manager, it's not a big deal. If you got paid 12% preferred return and then you're getting 50% of the upside, you're online to the interest and your interest are co aligned.

Yeah, absolutely. Hey, 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, 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 some other things. So 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.

Yeah, I appreciate folks, if you want to get a hold of me, there's a wonderful website called bigmicfund.com. remember the name bigmicfund.com and if you mistype it, bigmicfund.com it is not a kinky site. You'll still wind up in the same place.

Sounds good. Hey, thanks, Mike.

You're welcome.

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