Waterfall Distributions and Preferred Returns #1 - Rav Ike Sultan

Rabbi Rabbi Rabbi Willie Rabbi Blus we're going to try to discuss the topics of waterfall distribution preferred returns preferred equity some of those concepts and what does the say about them first I'm going to describe briefly what they are a little bit then I'm going to get into the suga as as fast as I can into about iska and chutfus And then finally bring a few loan documents and go through them a little bit in light of what we learned to decide whether it's us or mut and how it could be fixed or tampered with to make it that would be kasher. Okay. So in the aotted time we're going to try to move quickly. I'm going to share my screen just to show basically what these concepts are. And they've become, I think, popular amongst Jews. Hold on, that's not what I want. Um, because people are looking for different ways of investing their money in ways that are on the on the spectrum, safer, but still give them back a return more than what you'll get in the savings deposit or CD or something like that. So, these are the types of things I'm going to talk about. Waterfall distribution doesn't it's not its own type of investment. It's just a way of dividing money. They first divide money in an order where they first give to investors and then they're going to give as a waterfall. The mushell the waterfall is first they're filling up one bucket until it's full and then they're filling up another bucket. After they deal with the capital or some sort of payment they're making to the investor. Then they're going to give them their profit, their preferred return or internal internal rate of of return like basically interest. And then they're going to give the manager his cut and so on so forth. That's waterful distribution. What the word means. Common stock is just maybe it's ownership, maybe it's not ownership, but it means someone usually gets dividends based on revenue. Voting rights, preferred stock is higher, so to speak, in the totem pole and getting paid out if they liquidate. preferred stocks. Someone who owns those gets paid before the common stock, but they don't get any voting rights. And usually they get a fixed dividend as opposed to common stock, which doesn't get and preferred equity is more in like the private sector as opposed to a big publicly traded company. But it's similar in that no voting rights, but also gets a fixed determined dividend and that much much more problematic in Rubis. Even if we'll figure out ways to material some of the um other things waterfall distribution and preferred stack preferred equity is going to be much more even in the uh finance world they consider it a hybrid between debt and equity not just ownership but actual debt why because it's a fixed return fixed return for your money you put in money and they pro they say they're going to give you a preferred return on your equity that you have even in case where there's no revenue because that will be a major split between some of the other things without without a yes. No and and that may be there may be there may be sometimes in places where preferred equity may be mutter but it needs to be dealt with appropriately. Okay. Okay. I'm assum I'm sort of to speak giving the without using heteriscas would be able to solve and maybe solve more simply than regular loan agreements. Okay. Okay. So this is just in a capital stack just when you have a big traded company whether it's private public you can have something that's debt that pays the least amount but it's very fixed is very specific and until they're bankrupt they have to pay every dollar that that's paid first that's the top of the stack it could be paid the least the least percentage that's debt preferred equity is what we were talking about before is that they're going to get perhaps a revenue a fixed distribution And then come but they don't get voting rights and so on so so forth. Common equity it's like stock or some other ownership and then general partner ownership has to do with general partner means the manager the sponsor the person who's running it. Okay this is what a waterfall distribution is in words and we'll give a chart basically it means there's different tiers. These are just examples but first step is they want to return their investor capital on what they made. Make sure that they pay them back for what they invested. That's the first step. Now, there are a lot of different ways of cutting up a waterfill distribution. There's a million different types, but generally speaking, it's runs something like this. The first tier is to make sure that all the money that they're bringing in is going to go 100% of their revenue. Will make sure to cover their capital. Then it will make sure to cover their preferred return. Let's say would be 7%, sometimes 8, 9%, somewhere in that range. And afterwards, then they're going to give the revenue to the sponsor, to the manager, the person who's doing the work. as part of his incentive is if he does a good job, he's going to be able to cover the basis of paying everybody's capital plus he'll be able to pay their preferred return and then he'll make some money on it. That's what he's looking for. Um carried interest is again it comes out the sponsor, this manager is going to end up getting a percentage of the company and equity into the company. That's carried interest. The word interest there does not mean um ribbis it means stake uh percentage own. Okay, this is just diagrams of the same thing of sometimes we return the capital then preferred returns that's the interest back to the investors then catch up is we you know switch turns and we give back the manager we give him a chance to catch up to get paid for what his job was and then the remaining distributions liquidation is the last step. Um this picture on the bottom right is just as time goes on sometimes capital is being paid back or even if it's not being paid back the distribution of the distribution of capital events changes over time. The manager is let's say the yellow is the let's say the blue in this picture is making more money over time. The first he's making 5% a very small and 5.95 but after some time after they bump it up to step two tier two he's going to be making more on the higher revenues making 15% from 5% to 15% to 25% to 35%. Okay that's as time goes on he's hoping to make more money. Okay, just the way to think of this as a muscle. Somebody if they're trying to collect $50 million of of investments. So, what they're saying is the manager might put up his own $2 million and he gets 25 other 24 other people to put up $2 million or something more or less. And then as they're making money, they're going to pay off everybody their capital. And then they're going to pay them off their preferred return. If they were able to do pass both of those hurdles, then they're going to move on to paying off the manager another piece uh whether it's the catchup or get another piece of the company. And then they split up the uh rest of the revenue after that based on whatever tier they're up to. If they get 5%, if it's 15% or the like given to the manager. Okay. This is from Google's summary of what preferred what water distribution is. I don't think it's particularly accurate and I think it may make a tremendous difference in I'm not gonna base any the I'm not saying anything you ask your rabbi your post your lawyers to figure out the mitsas and then after you ask the lawyers then you ask the rabbi but I one thing in the this phrase and there are many phrases like this when there are articles I've written on blogs or whatever about waterfall distribution prefer return is that there's guaranteed return a lot of times that term guaranteed in our ears of learning is a red flag. This is for sure. But a lot of times their guarantees are not really guaranteed. So that that may make a difference in if their guarantee is really not backed up. Not just that they don't end up they change their mind, but they're not contractually obligated to follow it in many cases. So then that that guarantee uh is not so significant. So just this phrase, what is preferred return? guaranteed rate of return for the limited partner that's the investor before the general partner can receive their share of profits. I put a bunch of other concepts but the guaranteed rate over here the only reason I it's not really a misnomer the guarantee it's the guarantee of this before that but it may not but neither of them might actually happen okay this is just some phrase of some company that there are many people that sell or want people to invest in their preferred equity or in some of these distributions so they get a real estate deal whatever it is so they tell they write if the investor knows that they'll receive a set return regardless of the performance of the asset provide a level of comfort that that'll lead to an increased investment activity. I don't think that's particularly accurate either. I don't think this is a set return regardless of how it's performed. Um, my ignorance, but sounds like Bailey is suckable every minute. Yes. So, if you're ever going to invest in these, don't take the catchphrases that people say about them. It may uh maybe deeper than that. Contractually agree guarantees payment priority. I think if you if you highlight the word priority, I think it's accurate. If you don't, then it's inaccurate. Anyway, this is just an example of where things where there's where the guarantee to speak breaks down is let's say there was $500,000 now where is invested and then they sell the building, the house, whatever it is. I don't get for 500,000 anymore, but then they sell for 400,000. So, they would pay the preferred return. In this particular case, they were drawing out before returned which was 20,000 first and then whatever's whatever's left of the um not returned capital which was in this case they owe 500,000 but they can't pay 500,000 but they'll pay 380,000. So the person ends up losing he invested 500,000 he ends up getting 400,000. That's very easy possibility if the investment was a poor bad investment doesn't have to make any money. Now this is not the same thing as bankruptcy in my understanding. This is this is contractual. This is part of their agreement. This this legally enforceable. Yes. Very legally enforceable. Nothing everything to do with the loan document. Not just having to do with bankruptcy laws. The loan documents do not refer to banking laws. They don't need to in this. That's a different para. Okay. Now we're getting to the and we're going to then come back to the loan documents. Open them up and we'll think about them. This is whereas begins. One of the sources. There's another copy of this if anybody wants the macoros or I sent them out tells us two people invest even though they invested different amounts they split the profit makes a lot of sense but surely if it was necessary for both people to contribute in order for the animal to plow otherwise you can't have an animal that you own a leg you own an arm it doesn't plow very well you have to own a animal has to be alive. It can't be cut in half in order to plow and therefore we should split the profit. But but if you're going to cut the cow in half, we're going to slaughter the cow. So then perhaps I should get whatever I put in. I put in um whatever a third of the money for this cow. So I should get a third of the of the of the limbs of the cow. I should get the money to money. A third of the money that we able to sell this cowgre we always split it down the middle irrelevant of the amount of money they put in irrelevant of the purpose of the buying of the cow. Rashi doesn't comment on but he's commenting on Rabba and I think he gives a hint. I'm going to base on what he said go a step further than what Rashi is saying but Rashi does say what was in the what he was trying what he's trying to tell us basically is we went into the deal thinking we're going to split it evenly and that's what in Rabba's understanding when I went into this I was planning on doing and then we switched and we going to make it when I went in I knew I was going to split it evenly because you need two people to party to make an animal plow. However, when I switched to making, now it's dividable. Now it's funible. Now you could take the profit from it. Still, I continue with the same assumptions I came in from. I walked into this using the assumption. I'm going to be I'm going to come in using the assumption I'm going to switch. I'm going to split it evenly based on Rashi. It's not directly in Rashi. But I think it's much more enfor that that what drives this sug with a certain understanding that you're going to split things and even ramuna is also working with that. Now there could be a lot of motivations and reasons why this might be true but therefore it it's not surprising let's say the Rambam is going to write all these things are if you'll make it tonight otherwise explicitly I don't want to split it evenly so we're not going to split it evenly whatever your TA is it's all now there is a few I put a little chart on the board whatever with what the Gumar is clear about is when I buy something it's I guess the bottom right is a little bit hidden but if when I and it comes out that is very clear there three thank you sorry for bother there's three there are three cases in the garra or the garra stars and obviously they're investing in something doesn't clarify what the case is but that's great that's the next two cases are what raun argue about whether is talk about what if it was bought and we end up doing we knew from the beginning to the very end it's not explicit in the garra so the says maybe the ramban seemingly says this ra the gra is very specific ificant actually only talked about those two cases because if it would be and ends up then automatically I assume I'm getting back the money I invested I invested a third I'm going to get back a third however um the both disagree with this they think no Rashi basically is trying that type of opinion saying the reason gave us that case was he show us and Rabb was commenting on the case of but does he fundamentally disagree he fundamentally disagrees in all cases even starts we knew we could split it up from the beginning to the and we could split it up and still we ignore that and we always go we still do that's how the raan hold okay now I don't think it fundamentally changes how we look at chus but that's just a beginning aspect of this there's another and the riff in terms of what happened when the gar says we're going to do what does that mean we did while we own it for our own barbecue or it means we sold it so the riff says it means we sold it but if we're going to do a barbecue then we should actually split it even according to rabba And the R says, "No, it doesn't make a difference. We always meant to split. Even we're going to make a barbecue. We also meant to split it down the middle." Okay, that's goes with the rift. That's another But again, I don't think it fundamentally changes the calculation. Now, what's the behind this? I put this in the rashi. I was building on the Rambam. I'll say the the ritzvah's language is this is not on the sources but the the rit says a person sometimes is willing to give in I should really and it doesn't it doesn't make sense that we're dividing this evenly I divi I paid twothirds of the I sponsored twothirds of the project why am I only getting paid half that's not fair so says the rich no it makes sense because sometimes you don't even if you have some some amount of you can't finance the entire deal. So you still required somebody to deal to be involved in the project and therefore you were it was okay with you. You wanted to make a partner as long as you agreed to the partner. So you understood that you're going to split up evenly. That's the Ramban and Ritva. I wrote Rambam but I really meant Ramb and they both speak that according to your shami in that vein. The RID says a different along the similar lines. Sometimes certain people are better at business than others and they're smarter and they know how to do certain things better than others. And so I might be interested in getting involved into a is even though I might make less money on my dollar, I'll put in 200 even though other guys put in 100 because I know he's really smart in business, it's a good idea to trade with him. Okay. Or he says another reason I put this on the on the sheet She of I had a great relationship with him. I I didn't really care on the exact amount of money I was going to get back because I've alas I gave it to him as part of a evenly divided deal. Bottom line what it sounds like all the were describing is divided because that's what people assume when they came in. Okay. Now that doesn't involve ribbus yet. Now in terms of what defines a let's get into the sources. Okay. So the riff, I'm going to stop sharing this, but the riff and the rama have a major makus. For the riff, it all depends on who put in the money. And this is one of his two proofs in the gar. And for the ramen, it has everything to do with who's working on it. They need to both be working on it to be afas. Okay, we're going to come back to this soon. I'm going to stop sharing this and we're going to come back to this at some point. Okay. Now in the sources the Rambam he quotes the Gmorra the details of some people make a so he says if you make it doesn't matter you can even make it a very uneven deal where the distribution of is not equal to the distribution of the say if you make it to that one party the guy who invested less he's going to get three of the time reveal the other guys are going to get one quarter And then if there's losses of the rabb the person who was getting threequarters of the profit the 100 person $100 person he's only taking a quarter of the three quarters of one quarter of the other party of course got the raw end of the the short end of the stick. You can do whatever you want when it comes to mama. That's the There he starts telling you a little more details about two people both involved in it. They're both doing something even if one person invested but both are working and then if there's only one person working then even though the money belongs to both of them that's called a that's called an iska of the gam and then we have to deal with the rules of car make sure it cannot be carar now where did the rama get this idea from the raam's The riff has two proofs. One of them is this that is when both people put in money and the other one is and there in the story it sounded like one person's working is and the didn't say anything about two people working. So where did the Ram have this idea that is two people working? It could be has many other sources. I don't really know but I'll tell you he was probably trying to distinguish between well it could be one. We'll come back to that. He may have a proof for his but put that aside. He was trying to distinguish between and the riff noted that the doesn't mention you have to pay is of course you can't make you can't make someone to work in your store unless you pay him. Okay. You have to make sure to pay for anytime you have an you have to pay fair price for his work. Okay. And you could pay as we do even sometimes in the beginning. Wonderful. The Rama says it doesn't say you have to pay anything. They both invested. It works out very nice. You didn't have to pay anything. What's the difference? The rift says the difference is this is called what defines they both put in money. The Rambam thought maybe that wasn't established. Just because they both put in money shouldn't fundamentally change it from an iska. Still it could be if one person's working, one person's not working. is working for free. Why is he working for me? Now, I think is going to have answers when we have an answer. But he might not. The rabbi may have thought me safari. It's very difficult to explain why it's different than this. Why should be any different? He's working for free on my portion. I should have to pay him. It must be that we're both working. Now, there's great when we're both working in a says sometimes people don't make the same salary. You're pay you're getting one salary, I'm getting a different salary. So, that doesn't bother the ra there's no the is both have sweat equity. They're both involved because they're both putting in work. Great. So that could be what drove the rah. It could be some other bottom line that is the ra has to be both working. The riff says no it has to be that they it doesn't have to be they're both working. Um he only have to have that they both put in money. Okay. And his proof is which I'll explain hopefully soon. But that's a the riff in the chuva or in the only actually mentions in terms of you don't have to pay that's very clear as long he doesn't actually say you could distribute the have you want he doesn't say anything about that the grandson the rift is not actually the riff even though the baso quotes it as the riff he says something that's much closer to this concept he says there are two types of shas And he mentions one of them is when people join forces with money that's called af person working one person sponsoring with money that's called is but in terms of you follow your stipulations. Now this line didn't make it into the that's in the shares. It wasn't quoted many I'm sure had the shares. Most people didn't quote this. They quote rather what the quotes from the from the which doesn't have this line. I'll just quote the smog for a moment. It's on the source going to the next page there. The smog actually says anybody put money into it one person. They can split up however they want. wonderful. This is going to be the pen and this is going to solve all our problems. Many of the things we were talking about before could be afold like the smag and the riff not everything but maybe we're going to be able to solve all our problems and then we can m many of the things we talked about. However, inside it doesn't exactly say you could you can make a rather he writes you can make it and anything that you make it tonight it works but you can't make anything where it's doesn't work you can't make a that would include ribb now okay of course the quoted the first doesn't actually say he quoted the shishuas he just writes language which the which the footnotes on the smack says it's similar to the shares. So it could be he's adding on his own or it could be this is what he thought made sense in the in the shares or it doesn't really matter whether he's saying on his own or he's saying in the name of the the bottom line the smag hold your make we're not ribb at all and the shareim doesn't make it as clear as far as you can go he says you can't make that would be ribb so it seems like on the ribbus is not off the horizon it's sh to have and still come to ribbis according to the sh Okay. The doesn't actually describe doesn't tell you on this. He leaves it out. The writes he says that's when we talk about every when one person put in money. If they both put in money then they uh then it's called af. they are he doesn't he doesn't explain in terms of how they're dividing it but the Rama just writes there's no need for this giml it's talking about you don't have to pay dinar from the beginning that's the mafur can I divide it however I like the doesn't quite say but the fills us in based on what it says in the over there says one second you can divide however you want Now the sh is being very loyal to us as what it says. Same words before word it says in the smug. Okay first of all before we get further and deeper into the sh do we hold the sha what did he what what does the sha mean not mean do we hold of the riff? So of course the says the riff but let's talk about for a moment the sardom accept the riff. So the writes look the ram has not disagrees with the riff and the gelanti was in the 1500s uh in your he also held like the rama mar the marikash a few of them held like the ra on this particular which follow the ra which follow the okay there's the inb that the rais we always follow the raom Except when we don't but the possibility is we should follow the rama the says these first he writes that holds the that's how is like as is the regular post we're all passing like the but there's not it's not such a simple cleancut question because first of all you have the but there are further proofs that We should follow the ram invad. Yeah. Okay. No, no, no. Okay. So, if you have if it's you have both working, then I'm back to the same coolers. The rama Well, it could be even bigger cooler and exactly it may even be a bigger cooler. So, holding the rama may not be trouble, but it may still be a problem. It just depends on the case we're talking about. If it's only one person working, one person not working, which a lot of these cases are open to both be working and you still have Yes, that I'm very open to and in fact I think there's great that's correct that'll be correct but I meant the following that if only one person's working one person's not working that for the called and if you say the way the and the all learn that so the would not hold of that when only one person's working doesn't call that he calls that not a and would follow the regular the rules of all the so there quotes like the it's pretty there that he holds like the note that another is that the makes that the he gives you a If you have an a sharecropper working for you, don't need to pay him at all. If he's working for you and he has an usually is a different job. He's working my I'm paying him to work for my job. I had to pay him a dinner or over here. I don't have to pay him as I don't have pay anything. If he's doing where did that come from? Says the well this is the way the ra the rabbia of goes as follows that the of rebel was working for him as part of an Iska. So in the beginning they split the they split ravim 50/50 except the header gave the worker the sharehopper the whole head and his wife heard about this and said wow there's a great deal you know you should become a with he pays you well so he made a sh with him in the next cow and then when they were splitting it up they split the tail and said okay let's split the head I said wait a minute last time you gave me the whole head how come you're not you're not giving me as much I got last time So said last time I had to pay you was because that was an is and if I didn't pay you it would be pay for your but over here now that I don't need to pay you for then the says but now you're working for free and the says to the is so what it sounds like is let's say Rashi sounds like he's learning the garra oh We'll talk about other in one moment. But the way that the rabb learned the gar is we're talking about and there's a special ka cut out for which is usually have to pay somebody even if he has another job along with what alongside what he's working. But if he's an artist, he has tangential benefits based on what he's doing. I'm sorry to interrupt. The sound doesn't seem to be working for any of us online. Oh, one sec. I could just I can do the sound from Oh, no. I can't. How about now? Can you hear us now? Do Can you hear us now? Yes. How about now? Yes, now we hear you. That's better. Thank you. Okay, I was just explaining the locus and how to learn the story is in where the originally was paid the head of the cow because he wasn't that was for working for and then when he became a he didn't pay him at all. He paid him splitting the prophets but he didn't actually pay him on top of the splitting of the prophets and for the way the understood that's well it's explicit in the in the riff that is one of the proofs of the rift whenever you have a you don't need to pay because they have both have a stake in the matter so you don't have to pay him he's working for himself and that's justified it's not the same as villa where it's he has other cows on the side of the cow that he's working for here ming the same exact animal is working and it's a sh they split the money equally invested you don't have to pay any that's how the riff learned the garra the smog learned the garra the raam learned the garra differently he learned the garra saying that you should have to pay for the once he's av once he's aut that's why he didn't have to give him the whole head but he still said why aren't you paying me for the t that was the next question said oh because the mashub to the the balaka once he's masha balak he's getting benefits being part of the field that is so the rabbam learns the suga comes out even an in theory would need to be paid except since as part of the deal it's understood that the is getting benefits he doesn't need to get any other pay so basically for the rabbis is a specific ka in but for the rift this is a gigantic ka in all you don't need a The bas asked the question where did the riff see this in the garbraar his opinion that whenever you have you don't need to pay because the gumar seems to ask that that's the very next question in the garra am I not paying him for his and the gar gives some answer similar like the rabbis have understood the beginning of the gumar was talking about ribbis once if there's no more ribb and the's next question answer was all about gazel maybe he's working for me for free and I had a worker and I didn't pay my worker that's o no says the no no he's mishuba to work for the balikaro so therefore I don't have to pay for the artist bottom line according to The gr the gr notes very carefully there's no source in the gum for the kula of according to the rama the riff's ka was learned from the same gumar that the ram learned a different kula from so it's very shy that they won't agree with each other for the ra the gimmel says on end of he says oh the the is from and that's what the Rama says. The GR doesn't tie the bow and say the Rama writes this and the doesn't but it very much very strongly hints at this which is the Rambam's ka makes it so that there's no source for what the Rama's about. Now is it possible? It's possible in he could have held a bit but there's no reason to have to say it. That's another proof. other places in I put this in the source that and another one is a great deal when the is talking and it tells you you can't be mitarif the car and the rabbis also why would I not be able to the car and the ribbis together well because maybe he'll die maybe there'll be ribbis says the maharal sins the moral sin says what do you mean there is no ribbis on he asked so he says oh bish for the ra this is the goes like the ram so there could be now the problem is I'm not so excited even in that answer because the ram has this exact language according it has both cases and as I think is also going to be correct the ra by also doesn't have ribbis just like if it'll be both people are working for the ra that's defined that'll have the same kulos of that the riff has from when he has a defined if I'm correct in that and I'm going to prove that soon if that's correct then what are the it's so I'm still up a creek so that's why I'm going to give the rest of this year there are Another place where I think there are ribbis by I don't think it's exempt from ribbis the uh the last answer was ribbis I'm not exactly sure what he means but maybe it's similar to ribbis or it's like I don't know exactly what he means but maybe I'm going to say something similar to what his other answer is based on those four proofs or mosha levi he writes that the thatard should pass in the not like the rama based on the was says, "However, Rabbi Maz in the Borum in the back over here, they they argue otherwise." No, we always follow the riff because follow the riff who said like the riff, the smog, the smog and the rift together. Okay. And uh they quoted a chuber of Shiron who who says something similar. I looked it up and that he brings from the very last. either had different gears or a totally different reading that he says aut doesn't have to pay as it says in Aris is mashuba to the balika it's amazing but I don't know exactly how he read the garra but certainly not the bas reading in the garra for the for the sharim anyway says roish hold like this we should follow like this okay back and forth I put on the source of the banish in the next source benai really did think there was some reason to make men and baghdad that they were make on this is awesome moving on so spartim are not necessarily out of the chase for this question Okay. Are there any caveats where so to speak breaks down where it's not really where he or he could so to speak pierce the veil? So I have the marb who has a case someone who invested fiveos of istas. I have no idea what that is with his friend and he gave it two and a half of them as like an isco and two and a half of them as a loan and sorry two and a half of them and he sold to his friend and he didn't make him pay sold him on credit. So the mis mis the mabel has fiveos two of them he bought he didn't pay for them yet and two of them are in is so then they they dealt with the whole case and the question ribbis and do you say it's aus if there's aus here well then it'll be no problem in ribbis says wait a minute there's one person who put up all the money it's true that technically half of the let's call them apples half two and a half of the pounds of apples here belong to the mscel because he bought them and two of them are the iska but since all the money originated with the investor he just sold to him and he sold to him on credit this way he'll buy it become av but that doesn't you know overnight in one second turn everything into so it's still called an isk why because he's still being is still like an isko that he didn't put any money into this so it's not going to be a fundamentally someone else putting all the money for the time being and someone else is working for him to make him a rabbi even though he can make money on his own but he's making money on and if he's making money on and he's being for someone else's for free because he has well then that's okay that's but that's an issue that's basically saying not everything we think is aus has to be aus they didn't actually put in any money just because they engineered it with two different deals so it should look like a um now the bigger topic Okay, we could spend an hour on the rabbi, but I won't. Um, the rabbin says to be quoted even by an iska is and it's a big question when you actually have you thought about how does the apply to like you mentioned the limited partnership, right? Where I'm going to get to that. The limited partners don't really have any power. They just it's really just a money receiving enterprise. It's the general partner that makes 100% of the decisions. Okay. Excellent. Great. So I think a shift or I think that's absolutely still a shift in the riff's understanding. It doesn't matter that he has contractually has no way not a vote. He has no right. He can't even sign documents. He can't make loans for that company. Can't do anything for the company. The limited partner. But they both put in money for the riff. I think it's a mammon. They both put in money. So I think that would be called a shas for the riff even though one person's working. You're saying if the the manager makes all decisions didn't put in any money then oh okay yes then if the general partner didn't put in any money then then we're back to what I would think is an iska b for rama bin for that's an iska and for iska as long as it's structured so to speak in favor of the investor which many of these are preferred return I think almost by definition is that way then it's in his benefit even if it exactly 50/50 it would be unless you make it M you have to make it so it's not carvear you have to pay him there's a way that has to be correct that has to be fixed with let's say with the heter but that needs to be fixed and not simple just by paying by itself if it's still carvear that'll be a problem unless you have a hetera okay so very very important yes that will be a big breakdown whether or not the general partner put in money or it didn't put in any money and it depends um I think for legal purposes for taxes it makes a difference also if he has skin in the game if the general partner put in money that's um more likely considered a partnership for tax purposes than not. But I'm really not an accountant or a lawyer. But that's what I've heard is more often the case, but it doesn't have to be that the general partner put in money. But it doesn't matter. If he doesn't put in money, it will the will depend if he puts in money. If he doesn't put in any money, it'll be if the general partner does put in money, then we're in sh world. Okay, I'm going to go straight through. There's a question. What did Raishia really meant? mean I'm being with an isk that I'm going to give you 6% whatever I want to give you whether or not there's or only when there is okay I originally wanted to read the meaning only when there's and I'm selling the to the beginning of the not the end but the beginning the basic premise of the is that the msel the mabel over here is buying the revenue the possible masle of the of the no the investor he's buying and saying I'm going to give you a fixed amount irrelevant of what this actually makes and I'll keep all the profit depending if I make a little or I make a lot I'm going to pay you a fixed amount every year to buy the revenue from you so just like I could sell this to somebody else so why would it be a problem for me to sell it to the mabel himself the the manager himself that's says a side point asks this is you can't how can I that didn't yet happen. So that in he notes that you can make just there is such a thing as mo you can indebt have a shib on on investment that whatever I have I'll be sold to you later he has his ri by by mo he has a few rias in the garra but I'll put that aside but assuming that the rid and the t say you could sell your portion of the rev the still says It's meas bottom line though I eventually the way my read the as does and I think in the end of the it's more convincing this way that the the is really only answering directly when I'm to give him whatever it is 6% some whether is or isn't any the reason I think that's whatever more convincing is his comparison to and whatever to uh and to not to but the says so it seems that fundamentally if there would be rebutt but the problem is we're safe to give him whether is or isn't okay that's the for sure whether or not I'm right in the pis the and both learn that the rid is talking about him I'm gonna give him a fixed amount I'm gonna give a very fixed amount The priest rebi is going to discuss this tomorrow. So tune in on it what the right reading is in is but it's the also may have an opinion on this. He also quotes in it's inv how to read the sh but his own opinion when they're he says some people want to tell he says the iskas in nowadays that people give money and then they say I'm k to give you a certain amount every year and I'll believe you if you don't make that much money. says some people want to tell me it's it's part of the siren I and some people tell and I think it's okay the so to speak summarizes these three opinions in he says there's three opinions about your k by an iska he says the one option is I tell you no matter what on your iska investment I'm going to give you six% a year whether I make any money or make no money that's asser that's user for the taz that's based on is it ribba? No, it's still not ribba because it's really pic. Okay, there may be other explanations but fundamentally it's not ava that's problem number one. What happens when I tell you out of the rev out of the revenue I'm going to give you a double cut. You'll make 6%. If I made 6%. But if I didn't make 6% I won't give it to you. And if I made more than than 6% I'm only going to give you 6%. that the T says MT and that the thinks the M is like that and that's what the T says and that's what um this was the invo had that included this type of that was no problem though writes some would argue this is a problem and he's quoting the probably quoting the okay they think this is one even when I even though It's only coming from the revenue stream, the 6%. If I made 6% or more, I'm going to give you 6%. If I don't make that, I'm not going to give it to you. Still, it's user because it looks like a it looks like ribbus. Not really ribbus, but looks like ribbus. Um, a different issue, a side issue was the inf tells you you're never any quoted anything because it looks like it's ribbum that the says we're not that's not a problem. We don't actually hold like that. uh is is worried about that but if we hold like that would be a problem many of ouras would be a problem so that's a separate issue if we hold like that t it would definitely put into problem many many of our heteras just because we're just on the outside even if according to the because it's a continual amount that continues every year we're going to pay a certain amount okay Um streamlining this. We have a says even though the says you can you can be the but am I allowed to make more have the the manager have a lot more than the possible is going to get or not know that would be because once you give a lot of to the manager what you're doing is making that part a a mil means that's why he's taking on this. If he takes full aras on that section of money, whatever section of money you're giving him uh that section of money became a part and now you're going to you're making him work for free for the part and not even on that that is again to the same problems that we always had in is of car you're making work for free or forget I make him work for free. So again here even by is a problem basically uneven distribution between the and the for the is a problem even by however his grandson the um disagrees he says that doesn't make sense he says my my grandfather the theos my grandfather couldn't have said that it would be against the smog and he wouldn't have said that against the smog So obviously what he meant is if he makes the following we have more time we explain why is whatever I'll expl I'll I'll do this slide after summary he says fundamentally it's only you're paying me kiso from your own pocket but if you're paying from the should there's no problem in even giving a lot of to the to the there's no problem with that because fundamentally an isk has never has any problem of rib this it doesn't matter how you divide it like the sm said okay more time the likes this the nephew of the not from he also he also passes like this the there are many who go like this the we're talking about banks and credit unions where they do one loan for a different loan if I lend money to them then they're going to lend me money later so he brings in oh but we accepted the and if it's not paying So it's only Beso and if it be a he says maybe whenever you whatever lend money to this bank I it's more similar to credit union but whatever to a bank you're like a so he wants to rely on that opinion the really does like the argument of however the really doesn't he goes more with the right rise goes with I put some of them I can give you any of the cards basically it's a Um the bris Torres sorry the Torres ribbus quotes different opinions on this it's a it's not a simple simple question the men also quotes that not like the way the understood him okay there's a lot more and chu like on this topic let me just bring out one more point then we'll get to the loan documents I wish I had time for the other 10 pages over here says why don't we look at every person who put money in savings deposit as a for the bank and then you're allowed to get ribbons from a ribb. So the fact that the savings account gives me 0.01% 01% whatever it is it gives me is because maybe I'm aut I gave money in the safety deposit I gave money to the bank in my savings account now I'm afra whenever they feel like like the said and he doesn't bring in the but he seemingly negates or not excited about he says of course you can have what we'd call preferred returns he says of course if you make two people make a and Rubin's worried about getting money back and is not so worried so he says in the first year we're going to give all to Ruven second year I'll take all the he says of course you could do that what we'd call preferred returns said that's definitely not a problem of a problem in ribb is byim so he says maybe by bank that's what's going on but then he runs into trouble he says no because there are other things we're going to get new later on and we're going to have to then okay so doesn't get down that road but yes okay so so he says it for a different reason two reasons why he doesn't think it's because we continually add more and okay but many of the contracts we have we we we dilute revenue and capital a lot of times often but okay the other thing he brings in is what happens when we don't make rav what Rabbi brought and so he said fine we're just getting rabb earlier when we'll make ravak then it'll be fair right now I'm just g I'm giving return that eventually everybody will get their portion I'm just giving preferred returns I'm giving it earlier Ruben will get this year will get next You're right. We didn't make any this year, but I'm giving out money. But the problem is he says the problem with this is he says what happens if they don't make until the person wants to take out all their money. He says they should have a claw back and say these five years of your part of our bank, your should in the bank, we lost money. We should take back money. And many of these um uh these preferred terms absolutely do have clawbacks to taking a lot of money back. And we'll get to that. that might make things better, but the banks don't have any of that. And so obviously if you can really call [Music] this he's not saying he thought it was a he thought that was a but basically like this what I wanted to raise is that there's many cases there basically many cases where it's impossible to say that just because we're using the term shus we can m all sort of ribbus in the world for example what's obvious if you give them all the the manager on every penny of it. Obviously, it's not avas anymore that everybody agrees to the quoting. No, no. I was quoting um 1700s the pre he writes that if you would give preferred returns whatever it is on the first year 100% to one party he said that would be a problem even by at some point certain postkim are not excited by calling something autist and giving somebody all the returns for example the time would go through it more carefully he brought saying autis cuts I give I give back revenue no matter what happens. make losses I give you back reb that already is he says it should be an issuances in each cases I wish I had time to describe fundamentally he says that's also an he says it's like eight times it's obvious and it's da there's no question so at some point based let's say the marabach case I started with where all the money was provided by one side even though part of it was on credit and part of it was from an iska but like at some point it's not called a shufas anymore because just because we use the term shufus and it happens to look like two people are putting in money fundamentally it's not a shtus. Now what it really draws to the question is why is it that ribbus is exempt why is shas exempt from risk like that a magic uh you know wand we call it he puts in one dollar you don't need any terrorist because all of a sudden you can do all the ribbas in the world obviously that's not true so what's this so if you're not even a problem because for a is just aart because he's working for himself so if he's working for himself I don't have to pay for his for his working it's in the same animal not fine But in terms of you can't get more and take more by than any other that's very easy to justify why there's no ribbus because you're not really doing anything more exciting than it is an iska there's something else maybe it's not going to be direct because it's whatever the status of an isk is however what if you disagree with you're more like the in his he has he talks a lot about ribbas he has some cases that are similar to this. It does sound like he is disagreeing. He's not he doesn't quote the but seems like he does not accept the there are many who seem not to go with the seems not to go with Pas thought there's grounds lenient against what's the for that so I have three why could it be how could you argue like how could you justify why there's no ribbus so this might be says basically I'm paying it's in the sources I'm not going to read inside I'm paying for one person's skills or one person for person's connections it's beneficially part of the even if we don't split up evenly it's not there's no on the in the on the on the table the reason I'm giving you extra dividends even though I'm the manager I'm taking a lot of I can take a lot of and give you a lot of why says because when you're part of a you're entitled to make money on your money and sometimes it's worth it for you to pay even sometimes of some sort so that to be in connection with this guy. Everybody likes to do business with him. So, it's worth it. So, it's unlike an iska when one person put in money and the other person's working. So, why are they working? He's working for you for free. By they're both working because one person's working because they both have money in this skin in the game. And the fact I'm even giving him an advantage in terms of is explainable because of connections that he has or he does business better than me. That's so I'm paying him for that. the shalom he says it's it's a whole different but it's somewhat do and he say because there's no okay the uh I made these all the this chart which is going to be the we'll see the documents is what happens if I compound my that's from autis is that I say um I'm going to give you on your so if you're saying it's hard to justify because at some point it really looks like it's just a loan um and I'm giving you back interest and I'm giving you interest on your interest but if it's a payment if it's a payment for your benefits that you gave me why should I be giving you benefits for on top of other benefits the first benefits they give me bigger benefits um the shalom maybe yes maybe no if it was created with a loan that was the marab case the when there's a rev is mutter or according to many poster and then there's no should probably accord maybe the might allow such a thing will was talking about something over here we'll finish we'll now look at the I want to look at a few loan documents and just think about this okay I'm going to share can you see yeah you could see this is the last page of the packet um this is just two pagas of uh investment these are from private private placement memorandums, people that want people to invest in their real estate or private equity investments and they tell them all the things they're going to promise to give them in distribution. So these are 69 pages. I picked out one p two paragraphs in this loan. Now two I printed two loan documents for but we'll go over those after more in depth that I have Rabbi Reese's on these two these two I have in the packet are public ones. I don't have Rab Rabbi Reese's on this one where I'll read some of them. Okay, this is the Rockstep home one, hometown one. This is in the document page 19. Any net cash of a company whether generated by or by ordinary operations of the company or sales exchange or other investments of assets basically however much money they're making after paying expenses of funding reserves will be distributed as if and when determined by the manager as files. Basically, there have a lot of other clauses that doesn't always get paid. But what how is it paid when it's paid? first to the members pro rata according to the perspective unpaid preferred return until each member receives an amount equivalent to 8% of your class A B C whatever this is preferred return okay I is preferred return okay and does this accumulate the answer is yes the way that you say is acrewing on a cumulative non-compounding basis so they don't include compounding if this year we don't make 8% or 9% we're not going to give it to you we'll give it to you next year but did you lose all your money is it gone forever. No, it's not gone forever. It's cumulative. It'll acrew for next year. We'll pay it to you next year. But are we compounding it? No, we're not going to compound it. So this agreement and then they have other people they give to the promote holder is the is the manager. Okay, they that's his incentive to make money and then afterwards they split it according to equity and that changes okay according to the tier basically based on what I was learning until now. If this is a shas where both people the man the general partner and the limited partner put in something then this is like a from which it could be would not like this but many would allow in terms of in terms of the other the quotas and there's many other opinions in between the was was but they only answered have been but it was only only I'll give you when there is according to so even though it could be some the thinks even then I think more accurately reads the marsh as saying he would matter in that case so thought there is reason to matter this type of agreement now noted and and there are other whatever there are other problems you have to deal withar very carefully sometimes it says if we take a loan out of the bank everybody else in the in the company as a guarantor for the paying off the loan and if if one person pays it off on somebody else that'll be a loan to everybody else in the company with interest well then that's rubisuta that type of line needs to be removed or needs had to risk up that is included just being a guaranter to begin with but anyway kufine for being of kablan separate topic um those type of issues can be dealt with could be removed could be fixed but this type of distribution fundamentally could be mut according referring to not all postkin but some postkin in my understanding. The second one I had over here was preferred return the wararchchester one first from any distributable cash members will receive a preferred return from their contributed but unreturned capital on their quarterly basis according to their respective positive capital account balances. The ver return is not guaranteed meaning that the preferred return will not be paid and particular quarter loan does not have significant sufficient cash available to pay it as by the manager and sold discretion. This is the part that I really needed. If anybody is trying to be m on these you could pick these to invest in the preferred return is also non cumulative cumulative. This one says if we make we give it to you and if you don't we won't even give it to you next time either. According to this one I think even the would be excited to invest in such a thing. you might not make as much money, but um they're not they're telling you we're capping your if you'll make we'll make 28% this year. We're only going to give you six or seven or eight whatever we're going to give you a certain amount. But if we don't make any money or make less than that, we will not give it to you. So that I think is um according now I have two other things I want to show you to more carefully investigate. These are the ones that Ray Reese looked at just to show one that an extreme just so they're not all identical. This is preferred equity not the prefer last two documents I was talking about is preferred returns and waterfall. This is preferred equity. Preferred equity is is much closer to then here's just an example of why here in their distribution the way they say it is I think this is going to be also according to Kulyama but let's see if it's true. distributions until the repayment in full available cash was distributed to the members as such. Da da da. First to preferred investors and then the special investment return. Second preferred investors. We give them all fees and expenses. Third to preferred investors. Preferred investors have received all all and acrude all acred and unpaid preferred investment return. Basically, we're paying making sure we pay our investors capital preferred returns and any other expenses that they have. And let's say we can't make it next paragraph preferred return investment return to the extent that's insufficient available cash on any distribution date any monthly payment of the acred. So first of all it cruise it continues till next time. So it's not non-cumulative it is cumulative but further then it's going to be paid with such da da da and then it continues common member shall as commencing of the next distribution make a contribution to the company. they can ask any other common member of their company to have to make a capital call to pay the company to pay off the preferred returns of the of these uh preferred equity investors. So they are guaranteeing that they're making even if there's no rev ever not from the beginning to the end they're going to then call up some of our members and say please give us money so then we can pay off plonial money so he can get his investment return certainly for he what certainly there's heaps and certainly for he so on this one I don't think there's mckum I think this is a problem oh it didn't come on the screen all right one second let me show you what I was reading but um this is the documents this is The document I was just reading from over here is the preferred equity one. Um those I would generally think is going to be user for a Jew and Jew getting involved with depending on the particular case but this case I thought it was for sure user without a question. These are two other cases waterfall one and three I have over here I was oh it doesn't yeah it shows them. These are the ones that are Reese read um and and uh he made a collect between the two of them. These are both operating agreements of real estate investments both with waterfall distributions and if I had time I go through like 10 different things and they have in them but let's just go to the main thing um in ter in terms of they often do include some sort of management fee. This one's 4% of revenue is going to be given to him. That's before anything else. So the manager often does make money. If they made any money the manager gets some fee that's for A um in terms of distribution available cash um Liam Mezer who helped me go through a lot of these things he called this one more hamish just the way this was structured and set up but uh it says over here how we going to distribute it first to members of unpaid preferred returns pro rat in proportion to their unpaid preferred returns until their unpaid preferred returns are reduced to zero so basically we're going to pay them for the preferred return second to members of unreturned capital they reverse the order of some of the things that we've seen before but doesn't really make a paying the uh paying the return then the capital it's all the same for this part and then thereafter 25% 75%. Okay, let me just look carefully where they define preferred return in the second page over here. Preferred return to any member whatever 6% per annual not so aggressive cumulative but not compounded. Okay. So that is um in Rabbi Reese's understanding there was reason to matter this without any risk because there was given to the po to the worker but you didn't even need that because it really is a both people invested and it was given from and it's not it is cumulative not if it was non-compounded wonderful this is this is not sorry this is not compounded this is cumulative so it's not in the but there is the because given from we give you promise give you 6% this year we make no ra we're not going to give it this year we're going to give you next year 12% six year from this year and six from last year so this it's only ever paid from rava and it comes out all 10 years or whatever of the investment it makes no then then they won't have to pay it okay you go to the Right. Okay. So that Okay, good. So there was there is something to say for this case. However, the other one is a little more aggressive investment. Okay. I'm sure someone has thought I'm sure someone has thought of it. the market prefer preferred equity in in the Jewish world is there's a lot of people a lot of Jews in this business preferred stock there um so this was the other um agreement that Rabbi Ree looked over and here it said one second it's H yeah distributions first are given to each member as a loan a member loan that's a separate point and this really was a problem was if someone made a loan to the company then they give them 9% on their loan that's a separate thing um just I'll make the point over here which is a lot of almost everything we've been discussing is even says when there's or not and he says it's um he says about six times says eight times the lady thinks they just mean it's still only it looks like it's reb because fundamentally it's still like an iska they can't use it for anything else and uh there other reasons might be there's no to make it so it's not now if you hold like the Moshe that when it's LLC it could be it would match some of these cases the Moshe who holds many of these cases we're talking about LLC is someone with limited liability general partner the the word general means has to be unlimited liability for tax purposes limited partner means is limited liability. The general partner has unlimited. But what they do as a cover up is the general partner is often himself LLC. So it ends up one person nobody's taking any she go. Yeah. Yeah. They do that. They do it because it's cheaper for tax purposes to make it a partnership than making it just one big LLC. Um, but our purpose if you hold basically if you held it purely a remotion that you're allowed to take interest when the borrower's LLC a lot of these cases the partners are LLC that could be moed but if you if we're I'm assuming not like him not like Raot so then some of these are an issue. So one more time in this last one I had over here third to limited members who invested cash in the amount equals 7% return on their capital. Basically there should be a comma over here but it means anybody has has invested cash we're going to give them 7% on their capital contribution compounded each year means if we didn't make we didn't make money I'm going to give you uh 7% this year even though we didn't make any money now I can't give it to you this year I'll give it to you next year but I look at as your capital as though has increased 7% and next year I'm going to give you 7% on a not $100 but $107 so I'm going to give you compounded that The only okay so Rabbi Ree thought he wanted to make a between hold on oh unpaid amount shall acrew so the first Rabbi Ree thought it should be user based on the word acrew if something acrews it means we owe it we're saying we owe money whether or not we made any money over here cumulative just means we decide how we're on fine that's cumulative I decided arbitrarily 6% this year next year 12% because I didn't give you the six% But when I say compound when I say acred it means I really owe you. How can I say I really owe you? That's the marish. He thought it was user. Then after a long discussion um with a few several a lot of people looking at these documents I thought that even acred fundamentally comes out similar to cumulative in terms of dollars and cents. It means the same thing but and many documents use the exact used in the same sentence. But one one thing was not willing to go back on was compound. Meaning if it would have been compounded, some of them don't have on the ACR compounded on the crude. That he thought is problematic. Meaning if it wouldn't be compounded, some of them are just cumulative acred but not compounded he thought once it's compounded sounds like it's a problem. I can imagine someone someone had told me um that that the certain was mater what certain types of these distributions I could imagine based on I could imagine certain how you could mater because fundamentally a lot of this is still it's not like preferred equity we're going to call people up to have to pay back fundamentally it's only coming me it's coming from the generalist correct fundamentally it's somewhere and it's only coming from and when we liquidate and we don't have any we won't have to pay it even if it was compounded that could have been even by compounded uh we try to try to learn these different topics and it's not simple but one thing for sure to take away is you can't possibly passen on these without having seen the exact language because it's me very very delicately carefully between each and every case okay insurance coupling. They don't they're not worth the people selling the preferred are trying to get everybody in the world to buy their thing, but but they don't they don't they don't make as much as they sound like they're making. They tell the reason I think a simple reason they want to do it is they're just not going to make any they're going to make very little money. If you're looking to structure this and do it, but even if it's enforceable, they're going to they don't want to lose from their making if they're really if they're only making 6% and then they're going to start losing another That's what they did. If you're looking, you don't need an insurance for most of these things. The way they look at is the bottom last dollar is $135 million. $135 million until I'll lose my revenue. So, like they're pretty confident. You don't need insurance companies. Built into the system is a lot of guarantees. I'm calling on you to provide more. No, that one that one sounds that doesn't that sounds risky. [Music] I what I've heard is that's a very Jewish business. The preferred equity. It's a very small business in the world because an insurance compan Yeah. They actually limit. They don't let anybody buy these things. You have to be an accredited uh investor to buy these things because they think someone who's a fool is going to buy them then get upset. That's why I said they have to go back to Barb suckers born every minute looking for suckers. I don't know if it's a bad idea. You have to ask financial advisor if it's good. security and that's it. Okay. Thank you. All right. We didn't get to everything. We started the conversation. I didn't read every If it's not written properly, I'll show you. I wasn't asking the law. I was asking to the heart of what this really is giving you interest. They call it except this is no more than a real if you really understand. Oh, I'm not I unless I missed something without reading it, but I'm never going to have to take a negligence. We will not charge any interest on anything. by we won't charge as long as long as they call something I didn't read but they understood it as supposed to do. No, they also have to pay from your capital. I'm losing my capital because likes justific and then it's clear there's no there's no she would other than whatever I put into the school reason. There's no reason it's easy to do everything. And why did anybody before the mar simplest thing in the world and by the way I haven't read but there's a whole series in there's has a magazine there are lots of things but that it's basically it's very interesting you know whatever the business problem was lots now in addition they're having for a couple of weeks already a different column doesn't have organ name on it doesn't have Cohen's name on it and it's ribbons and mortgages just telling you it's there's I read things I didn't understand things I don't even remember them anymore I don't I hope they got them in Casus right they got them in Cus right they will be done how the mortgages are structured how they're not structured oh no everyone else No, the mortgage is more just you and I for business. But most also some of them have like a you have to start by 100,000 like they don't even take investors. They're not going to take you. It's not for us. But lots of people you and us, we have mortgages on the house, right? I don't own a house. I don't own one either, but that's not it's very common. Yeah. I mean, I think the people that do this are people who are investing in This professional. You're not. You and I don't think so. These are professional investors. They're really Bali ribbons. They're looking for they do ribs for for a living. They make no way too much. No, but maybe that maybe is the issue though. Yeah, I'll sell it. mostly like whatever you