BiggerPockets

I am looking to offer an equity position in a large commercial real estate acquisition to an investor who will cover the upfront due diligence fees. The normal reporting fees are for appraisal, engineering and environmental and possible retainers for legal/accounting fees. The amount of these fees will range from $2,500 to $25,000 depending on the lenders requirements and are remitted directly to the vendor.

The size of this deal will range from a minimum of $2.5M up to $10M. I would be open to negotiate the equity offer on a deal by deal basis and would consider an equity position of 25 to 40 percent. I can offer the option to reimburse your investment at closing and give a straight interest payment for the ROI. I can also offer to collateralize your investment until closing by offering a lien on our existing property.

My bigger issue is with the fact that he'd give a 25-40% equity position in a minimum $2.5M deal just for bringing $2500-25,000 upfront.

Anyone who would give $500K in equity for a $2500 upfront investment is either a scammer or a REALLY BAD investor...and I don't know any investors who are THAT bad...

My take on scenarios such as these is this. If you need another entity to cover the DD fees for a loan the chances of it ever closing as slim to none. A real lender is going to uncover the fact you're broke, and once they do, it's either going to lead to a loan denial or have you scrambling for more funds to prop up your balance sheet, but since you've given so much equity away for nothing, who's going to give you more money?

Sounds like a course taught syndicator who may have clients to pitch a deal to, but has no money to control the deal. Or he has a client that is trying to get out of a deal(s) which may or may not be worth investigating.

It would be nice to have some details.

Perhaps he does not know how to state what he has.

On the other hand shopping for up front DD, based on various properties 2.5 mm to 10 mm certainly sounds like a scam.

I see why everyone is skeptical, believe me!

The CPA thing has me intrigued!

Ouch! I wouldn't go around claiming that Gary. Asking for money and general solicitation in the same sentence is asking for SEC trouble.

Admittedly I didn't read every word of all of the responses carefully...but how would your proposed transaction be set up if you could find some LPs to put up the cash?

Bryan,

Thanks for the advice. I definitely can't afford to pay a criminal defense attorney. But just out of curiousity if I only place one investor per deal would that still be a violation?

Anyway to answer your question I was thinking that a single asset LLC could be established for the property and the LP could be a member. If you have another structure feel free to make a suggestion. Thanks.

Joel you're right about some of these lenders and their upfront fees. I wouldn't subject investor funds to those fees. I'm only talking about third party fees like appraisal and engineering inspections. Also the rare occassion when an environmental may be required. I refuse to deal with lenders that want $10k or more just to process the deal.