Updated: Jul 4, 2020
There are risks when investing in any asset class but Peoples Capital Group uses every tool available to protect their investors hard earned capital. This episode reviews the numerous ways PCG protects their investors and how they have been doing so for the last 10 years.
The Passive Cash Flow Podcast is for beginner or experienced investors. Learn how you can diversify out of the stock market, own a part of an apartment building & start earning Passive Cash Flow! Peoples Capital Group has been helping passive investors build wealth in NJ real estate for 10 years. Visit www.PeoplesCapitalGroup.com to find out if you qualify to start earning passive income and pay less taxes via investing in real estate. IRA's and 401K's are accepted. -- https://www.facebook.com/peoplescapitalgroupnj/
Aaron Fragnito: All right, ladies and gentlemen, welcome back to the Passive Cashflow Podcast, episode number 10. Today we're going to talk about, what does PCG do to protect investors. All right, so it's so important that when you're investing with a syndicate and you're working with operators that are calling the shots day-to-day, they might be great at what they do, they might have done it a hundred times and know exactly what they're doing but you want transparency and you want things like safety net clauses. You want to understand who's personally guaranteeing the mortgage. You want to understand what happens if one of the operators passes away or gets injured and can't work anymore. What happens if the building burns down? Also, what about the management company? Are they properly insured also, because they get sued first generally. We're going to go over all that today. We're going to talk about how we protect our investors by those measures and we're going to break right into it right now. First of all, if you want to learn more about how you can get invested in our buildings and learn more about our company, how we buy apartment buildings in New Jersey and work with passive investors, our website is peoplescapitalgroup.com. You can go there and check out more videos and subscribe to our podcast for new video every Friday at 8:00 AM. How do we protect investors here? At Peoples Capital Group, the main thing we do, one of the first things we do is, we have something called a safety net clause in our operating agreement. This allows the investors protection against bad operators. Okay, of course this has never happened. This clause has never had to be executed, thank goodness. However, you want to ask your syndicators and your operators, what happens if there's gross negligence? What happens if there's theft? Maybe there's another operator that steals from the operating account. What happens if their building goes into foreclosure because the operators are not doing their job right? The answer is often in syndications, nothing. The investors are along for the ride. In our case we don't think that's fair. What we have is a safety net clause. If there's gross negligence, if there's theft too from one of the operators, if their building goes into foreclosure because we're not doing our job right, obviously paying the mortgage on time is a pretty important thing here and an operating apartment building, then we actually relinquish control automatically to the investors. The passive investors become the active investors and the decision makers. The operators, Seth and I, would then become the passive investors. We would have to take a backseat to our investors then. Because at that point we hadn't done our job right. There's gross negligence, there's theft or the building's gone to foreclosure. That would then click on the safety net clause and that would unfortunately relinquish control from us over to the investors. That's a good thing for the investors to have. That's something that you want to make sure if something goes majorly wrong, the investor can protect their investment and then decide maybe to hire a broker and sell the building, hire a new management company or do whatever it takes to fix the issue and make sure the investors protect their investment. Of course, this has never happened. This is called a safety net clause. This is not something that we ever expect to happen but that's an important thing to put in there. Because we don't expect it to happen and because it's so unlikely, we're comfortable with that being in there. If the building goes into foreclosure, we didn't do our job right. We should not still retain our equity or our management control, our ability to call the shots day-to-day. At that point you really haven't done your job right so there has to be a way to fire those operators and that's exactly what we allow for in our operating agreement and we make it very straightforward, very black and white. If there is gross negligence, theft or the building goes into foreclosure, then in that case the powers of operations go back to the investors; go to the investors or the passive investors. That's a great way to protect your investment at worst case scenario. Again, that's never happened here. We don't plan on it happening either. The second thing we do to protect our investors is, we personally guarantee the mortgage where our investors don't have to. Normally, if you're buying a piece of real estate and you're getting a mortgage on it, if the mortgage is below three or four million dollars you're going to have to personally guarantee the mortgage. Now, we do that so our investors don't have to. A personal guarantee of a mortgage stinks. It means that you owe the money whether you go file bankruptcy, you lose the property to foreclosure. All these scenarios, you'd still personally owe the money. You can close down the LLC, you can file personal bankruptcy, you can't get rid of that debt. A personal guarantee of a loan is a very, very strong document that unfortunately means Seth and I are in it to win it. We owe that bank loan no matter what happens with the property, no matter what happens with the investment. At the end of the day, you better bet that we are going to do everything in our power to make sure everything goes according to plan because if it doesn't we're on the hook for that debt. Again, none of this has ever happened, we never run into situations where the debts call or anything like that but you want to have these safety nets in here, these clauses, these rules that protect the investors. It's so, so important when we draft our operating agreements, we think, "What would the investors want?" We're talking to investors. We're talking to dozens of investors so we know what they want. They tell us what they want and we try our best to put it in there as long as it's fair to everyone. We have to have our rules, we have to be able to operate within certain grounds, and be able to paint the hallway whatever color we want, and lease out to the tenants we want, and operate the building as we need to, but if we don't do our job right, and that's clear in one of those t