Multifamily Lawsuits, Variable Debt & Legal Risks Every Investor Must Know

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In this conversation, Dylan Silver interviews Matthew Fornaro, a business law attorney specializing in real estate law. They discuss the increasing regulation in real estate, the importance of legal guidance for investors, and the challenges faced in commercial property transactions. Matthew shares insights on tenant due diligence, the need for proactive legal involvement, and the trends of attorneys investing in real estate. The discussion highlights the complexities of real estate law and the necessity for investors to be well-informed and prepared for potential legal issues.

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Matthew Fornaro (00:00)
You know, I can tell you what my goal and my hope is, is that, you know, the, the, you know, business end of it in the business people, I wish that they would get involved with their attorney from the inception of a deal forward. But a lot of people don’t do that because, you know, they’re eager to get into deals. They want to do, you know, whatever they think that legal is just a hold up or not necessarily expense, whatever. And then they come when instead of being proactive,

to avoid issues, they come when it’s time to be reactive to solve problems. And I would say it goes anywhere from in between from, I mean, I get plenty of people who show up before a deal goes down or I get people show up like when the apocalypse hit and it’s time to, you know, ⁓ figure out which way is up and, you know, get them out of the situation. So, I mean, I would love to see people at the beginning, but I understand a lot of people, you know, for whatever reason.

Dylan Silver (02:29)
Hey folks, welcome back to the show. Today’s guest, Matthew Fornaro has been a business law attorney serving South Florida since 2003. He’s also licensed in the District of Columbia. Prior to starting his firm, he worked at two prestigious AmLaw 200 law firms focusing on

Matthew Fornaro (02:33)
you

Dylan Silver (02:44)
civil litigation. practices complex commercial litigation, including contract disputes, also practices construction law, intellectual property law, homeowner and condominium association representation, and assist business owners in choosing and drafting all legally required documents. He’s also involved in mentoring new attorneys. He’s both a graduate and instructor of the Coffin Foundation’s Fast Track New Venture Program. And he’s also a graduate instructor at the Jim Moran Institute for Global Entrepreneurship Small Business Executive

Matthew Fornaro (03:02)
you

Dylan Silver (03:13)
program at Florida State University. You can find them online at fornarellegal.com. Matthew, great to have you on here tonight.

Matthew Fornaro (03:21)
Thank you, Dylan, I’m glad to be here.

Dylan Silver (03:22)
Now, when we talk specifically about the intersection of law and real estate, think a lot of people right now are seeing ⁓ even maybe at a level where they might not have previously seen it. And I’m speaking also from my perspective as a realtor in Texas. It feels like every area of real estate is becoming more regulated. There’s more eyes on it. I come from the background of wholesale off-market deals. And I know in so many

areas, there’s a lot of pressure there for regulation and then also for people to be licensed if you’re going to be doing that type of thing. So it does seem like wherever you are in real estate, you’re definitely going to either have to know the laws in your area for sure or be working with an attorney who’s going to be able to assist you at some point in time in your investment career.

Matthew Fornaro (04:14)
Yeah, it’s true, Dylan know, things are definitely no matter what, you know, regime is in power at the state or federal level, know, things are definitely probably more regulated and getting more regulated now or more formalized, I should say, than they were previously because there’s a lot of lax practices in real estate and lot of lax practices and deals and a lot of, you know, not dotting eyes and crossing T’s and a lack of due diligence that’s now, you know, kind of

⁓ being ⁓ reactively responded to by increased scrutiny, increased laws, increased regulation, because things were generally, they’re not terribly lax, but they were much more lax than they are now, and they’re much more formalized and much more regimented, particularly because of the influx of technology and things like that, where everything is…

You know, you can see all your documents and everything online. You can look up all your public records and everything. So things are just much more formal now and much more, I would say, precise than they were previously. And they’re just getting more so as time goes on.

Dylan Silver (06:05)
Yeah. And when we talk specifically about how this is impacting people, mean, you have to as an investor, be prepared to shift. This is what I’ve seen, whether it’s meaning, hey, you’re going to have to have a budget set aside for legal fees or that that can mean entirely, hey, we have to have a plan B in case our strategy is no longer viable. Like in the case of short term rentals, for instance, you know, if your whole play was to be a, you know, under 30 days stay investor in Dallas.

Matthew Fornaro (06:18)
you

you

Dylan Silver (06:35)
where I’m licensed, that’s no longer a viable strategy. You have to do midterm or year to year leases. And so when you’re talking with investors and they’re looking at a five year hold, let’s say on a commercial multifamily property, for instance, how often are those conversations about potentially strategy as well, other than just strictly ⁓ legal documentation?

Matthew Fornaro (07:02)
You know, it’s always, you know, no matter what area of practice it is in real estate or whatever, there’s always, you know, business advice and strategy that goes into the legal portion and drafting the legal documents and figuring out, you know, all your contingencies and various weird things that can happen in business, whether it’s, you know, real estate or another area, but particularly in real estate, because things can get really, ⁓

can change in a hurry and get really complicated really quick, particularly what you’re talking about with variable term rates on trying to do rentals on multifamily units. I can tell you a story I’m working on right ⁓ now. I’m representing a investment group out of Canada who rented out a, ⁓

Dylan Silver (07:36)
That’s right.

Matthew Fornaro (07:51)
like an entire ⁓ high end apartment complex in this place where I am in South Florida over by Palm Beach called Singer Island. It’s a very nice area. ⁓ so now the dude who they rented it to was rented it in his individual name, but it was supposed to be on behalf of like a soon to be formed LLC, but the guy apparently never formed the LLC. So it’s all in his individual name and it’s probably about 15 units. And he was gonna, he was gonna

Devey them up into like Airbnb or verbose or whatever. And then he just kind of stiffed my clients and rented them out and kept the money. So now we’re involved in this crazy commercial litigation dispute because technically they’re commercial, but even though they’re residential and then there’s an eviction portion and all this crazy stuff. yeah, those, mean, obviously nobody planned on that happening, but now I have to deal with it on the legal end.

Dylan Silver (08:48)
Yeah.

Matthew Fornaro (08:48)
So

I mean, things like that just happen in real estate deals. mean, they, no one wants a real estate deal to fall apart or whatever, but when you have so many moving pieces, like you’re talking about in your example, it can happen and you kind of want to proactively figure out how you’re going to be able to solve it when it does happen. And in my case, my guys, you know, came to me after this was all done and we didn’t get a chance to set it up properly. And so now I’m kind of left to pick up the pieces, which is what I’m doing.

Dylan Silver (09:15)
You know, when people talk about, you know, what can go wrong, the thing that I hear as a ⁓ real estate operator is, well, know, worst thing that can happen is you get sued.

Now I wouldn’t say that’s the worst possible situation. If you’re a real estate syndicator and you’re potentially defrauding people, that probably is worse. But when you’re dealing with, as you mentioned, moving pieces and you’re dealing with lenders and you’re trying to acquire properties and you’re underwriting deals and you’re with lenders and you’re dealing with title, right?

What I’ve seen in specifically the syndication space and working and speaking with ⁓ multifamily investors is that there seem to be ⁓ a perfect storm of negative things that happened. You had variable rate debt that doubled. You had cost of materials that ⁓ tripled in some cases for a two by four. And then also you had an influx of new construction in some markets like in Texas where I’m licensed, you know, in Austin. ⁓

example of where you had so much multifamily development that rents could stabilize or go down. And so when all of these factors are taking place, at what point in time are people reaching out to their attorney? Is it when their back is up against the wall and they’re missing payments or is it when they’re being foreclosed on or is there typically a more proactive approach from syndicators and fund managers ⁓ working with a legal professional when they

hey, we might not be able to hit our pro forma.

Matthew Fornaro (11:25)
You know, I can tell you what my goal and my hope is, is that, you know, the, the, you know, business end of it in the business people, I wish that they would get involved with their attorney from the inception of a deal forward. But a lot of people don’t do that because, you know, they’re eager to get into deals. They want to do, you know, whatever they think that legal is just a hold up or not necessarily expense, whatever. And then they come when instead of being proactive,

to avoid issues, they come when it’s time to be reactive to solve problems. And I would say it goes anywhere from in between from, I mean, I get plenty of people who show up before a deal goes down or I get people show up like when the apocalypse hit and it’s time to, you know, ⁓ figure out which way is up and, you know, get them out of the situation. So, I mean, I would love to see people at the beginning, but I understand a lot of people, you know, for whatever reason.

don’t do it. you know, just as long as you get an attorney at some point when you’re in an adverse situation like that, it’s better late than never. But the earlier you get an attorney involved, the better your result is going to be most likely, I would say, because your problems are going to be narrowed in I don’t want to say eliminated, but mitigated by having legal guidance. But yeah, I mean, it goes anywhere from, you know,

from the beginning to it’s foreclosures coming down, lenders coming down, tenants problem, it’s anywhere in that spectrum.

Dylan Silver (12:56)
Now, when folks are looking at commercial deals and they’re underwriting properties, one of the things that I’ve often wondered about, haven’t asked anybody yet, is how do you underwrite tenants? When people are buying a pre-existing commercial property, are they typically going in and are they looking at, what’s the profile, the avatar of these tenants? Or are they just looking at rent rolls? Hey, are people paying on time? Because my thinking is, if you’re just looking at rent

Matthew Fornaro (13:07)
you

Dylan Silver (13:25)
roles, then you might not be looking at, who are our tenants? Are these people that are, you know, transitory? Are these people that are here, you know, by, you know, kind of a workforce housing element? Do you know how often, you know, multifamily investors are doing that type of due diligence and really trying to identify who their tenant pool is before they go buy a property?

Matthew Fornaro (13:36)
you

The answer is not enough. mean, the average level of research that they do is they just look at the rent rules and the payment history and full stop end of story. They’re not looking at underlying tenant financials or sub tenant financials or anything like that. They just care about was the rent paid? Yes. What’s the rent? When’s it due? When’s the lease up? That’s it. Full stop end of due diligence. And

Some people actually do do you know, the due diligence and want to get tenant financials and stuff like that. But at the same time too, you know, they may be limited because depending on what the lease is with the original owner or whatever, I mean, it’s, you know, what’s the tenant care? They know they’re not going to show you the finance. They don’t have to. It’s not part of their lease or their obligation of getting to the current owner. So what are they going to show you their bank accounts for show you their

you know, their 1099, their W2 or whatever, or, you know, a bank statement or whatever. So the average due diligence stops at just looking at the spreadsheet bottom line numbers. Some people try to get more due diligence. Well, like I said, unless it’s required, the tenants not going to, the tenant doesn’t care. They’re not going to give you those financials because what are you going to do to them? You’re not going to do anything to them. So yeah, you would think that there’s a lot more due diligence and research than there is, but there isn’t.

Dylan Silver (15:05)
You know, when we talk about that, I mean, the…

prime strategy for people that are acquiring, you know, existing multifamily housing is to raise rents, right? And so, you know, if part of that, and I think this was one of the issues too, part of that pro forma was we’re going to raise rents by a certain percentage each year. And while that was happening, you also had rents in greater markets. Of course, this isn’t going to be true in New York or Boston, but in, in the sunbelt in general, if your strategy was to raise rents,

three to five or 10 % a year over a five year period, and that’s not panning out, now you’ve to see, what are we going to do? And so now you’re looking at appreciation and these properties weren’t appreciating as heavily as you thought they might, right? So now you’re dealing with not a distressed asset, because the asset itself could be practically new. Now you’re dealing with a distressed operator.

Matthew Fornaro (16:39)
you are and obviously you know not only is the cost of money go up but inflation and you know variable rates or whatever go up and you know the money you’re borrowing is costing more money for you to hold on to over time and you’ve got no way to recoup that because you got no set off because if you raise your rent you’re gonna have no tenants so you know you have to find you know it’s kind of a tacky term but you have to find the sweet spot as to what

in the market that you’re in, the geographic market, the socioeconomic market, whatever is specific as you want to get, what the market will bear in order to figure out what you can get away with increasing your rent percentage wise. And a lot of people, you know, just kind of throw a number out there and say, you know, it’s going to be 3%, it’s going to be 5%, it’s going to be whatever percent. And sometimes it works out and sometimes it doesn’t. So there’s a lot of, you know,

Actuarial kind of analysis that you need to put into that that a lot of people don’t do

Dylan Silver (17:36)
pivot a bit here and we are coming up on time but I do want to ask you ⁓ about folks who are getting into the legal profession or are in the legal profession and are also looking at investing in real estate. One of the things that I’ve noticed that seems to be maybe counterintuitive for me but I guess from someone who is a legal professional this may seem like yeah that does fit the avatar of know legal professional is that most of the attorneys that I’ve spoken with on the show feel like they’re the outlier in that they’re interested investing in real estate because it may be risky

year or time consuming. But to me as someone who’s an operator in the space, I’m thinking who better to invest in real estate than the people that understand all of these 12 page contracts and even just buying a home these days in so many areas is going to be a lengthy contractual process. And so our newer attorneys and our folks in their first five or 10 years in the legal profession, often looking at getting into real

Matthew Fornaro (18:23)
Woof! Woof!

Dylan Silver (18:34)
state investing or is that a less common ⁓ potential hustle or career path aside from their legal career?

Matthew Fornaro (18:35)
you

As

you can hear, my dog wants to answer this question. She’s very excited. I apologize. It depends on the attorney. There’s a lot of entrepreneurial attorneys who you don’t want to call it a side hustle. They just have money because they make a lot of money or they have a lot of discretionary income and they got to do something with it. And getting 4 % from a CD or getting 6 % from the market isn’t good enough and they want to get into something where the potential…

is much higher until they get into real estate. And yeah, there’s a lot of real estate investors who are attorneys, particularly here in South Florida where I am. I know a lot of them and they’re very successful. They’re not necessarily outliners. a ⁓ pretty good percentage of attorneys out there like entrepreneurial attorneys or whatever.

Yeah, they get into real estate investment, whether it’s residential commercial, whether they pair up with people and have like a fund that they go buy stuff with, or they buy stuff by themselves. But a lot of people start out owning like their own office building and going from there. And, know, they just get the real estate bug and they start going and they’re real estate investors. And before you know it, a lot of people start making more money from the real estate thing than from being an attorney. So yeah, it’s.

It’s inherent in a lot of attorneys DNA that they have, you know, discretionary money to invest or they have the money, you know, not even discretionary money invest, but money that they want to invest that they want to get a higher yield on. And obviously over time, nothing does better than, you know, real estate other than maybe Bitcoin and gold, but you know, real estate’s always there. So yeah, a lot of attorneys get into that, particularly here in South Florida. There’s tons of attorneys I know who are real estate.

speculators, investors, whatever you want to call them.

Dylan Silver (20:29)
We are coming up on time here, Matthew. Any new projects that you’re working on, and then as well, what’s the best way for folks to get in contact with you?

Matthew Fornaro (20:36)
Sure, you know, I’m always dealing with, you know, from the real estate perspective, I’m always dealing with a lot of real estate litigation. just told you about a case I’m working on that I filed last week regarding the, you know, Canadians trying to sue the dude who tried to subsidize out the stuff. So I always got real estate litigation going on. Glad to help any of the real estate people out there or whatever. And, you know, that’s it. Just feel free to reach me at finarelegal.com. be glad to answer any of your questions. Got all my…

contact information on my social media but you know I not be around because I’ll be punishing my dog so I don’t know if I’ll be able to take your calls right now after the show but later on I will.

Dylan Silver (21:17)
Matthew thank you so much for your time today. Thanks for coming on the show.

Matthew Fornaro (21:20)
Thank you, Dylan. I appreciate it.

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Multifamily Lawsuits, Variable Debt & Legal Risks Every Investor Must Know

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