USING SYNDICATIONS AND LIMITED PARTNERSHIPS TO RAISE $5M

What is a syndication

      Formalized partnership used to raise equity capital for a real estate project

 

Legal form

     Limited Partnership

     Limited Liability Company

     Both registered with Secretary of State Texas

     LP - $750.00

     LLC- $200.00

 

LLC has greater flexibility

    No general partner unlimited liability

    Manager managed - non managing members passive income

    Membership interests do not have to equal capital contributions

    Membership income distribution does not have to be proportional to ownership interests

    Taxed as partnership ( partnership return informational only)

    Profit and loss is pass through

 

Why we use Limited Partnership rather than LLC in Texas

Passive members of LLC are subject to State Franchise Tax (4.5%) on profits. Limited  Partnerships are not

Case law stronger for Limited Partnerships

 

Sale of partnership units is exempt transaction from securities laws if

    Sale of interests are not advertised or promoted to the general public and

    Amount raised less than $1 million and

    Sale of memberships to less than 35 investors or unlimited number of accredited investors

   

    If all above hold except amount is $1 million - $5 million then

    transaction still exempt but formal exemption Form  D must be filed with SEC

    and State Securities Board

 

    If all above hold except amount is over $5 million then 35 investors must be “sophisticated”

 

Texas Intrastate offering

    Offering only to Texas residents

    Sale of interests not advertised or promoted to the general public

    Limited to participation by 35 investors or less

    Unlimited Amount of capital can be raised

    Not registered with Texas Securities Board but still subject to fraud provisions

 

Costs of setting up Syndication

     If exempt from securities registration legal fees $500 - $20,000

     If not exempt legal fees $30,000 - $50,000

 

Why use a syndication

    Debt financing unobtainable

    Less risk than debt

    As an equity base to attract debt financing otherwise unobtainable

    To do larger projects

    To diversify investments

    Management and/or Syndication fees for Organizer

    Passive investment for limited partners

 

Structure of Syndicate

     Ownership % for capital

     Ownership % for putting deal together

     Income % for managing deal

     Income % for capital

     Capital may get preferred return before any income for syndicator

     Capital may get return of capital before profit split

 

 

Syndication may be used to finance and structure almost any real estate transaction

     Property acquisition

     Building

     Speculation - Flip

     Loans

 

Syndication must be successful so that syndicator earns positive reputations making subsequent syndicates much easier to sell

 

Specific examples of how syndication could work for real estate deals

 

Investors due diligence

     Visit and research property

     Research experience, ability and honesty of general partner

     Potential profit, high, low, most likely

     Risk of loss

     Exam contingency plans

     Tax situation

     Property valuation

     Costs of partnership - up front and continuing

     Profit split between limited and general partners

 

Responsibility of General Partner

     Fiduciary duty to limited partners

     Find the Deal

     Analyze the deal

     Package and sell syndication

     Manage the asset

     Record keeping/Legal

     Sell the property