Landlording & Rental Properties

Should You Syndicate Apartment Building Deals (Even Smaller Ones?)

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
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This past week I received several questions along the lines of “what if I raise money from friends and family and my apartment building deal is smaller, do I still need to be compliant with SEC regulations and do the whole private placement memorandum (PPM) thing?”

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First, let me say that I’m not an attorney and you should, of course, consult your legal professional regarding anything I say in this article to determine how it affects your specific situation. OK, now that’s out of the way -;)

The purpose of going through the trouble and expense of a PPM is that complying with SEC regulations protects you as the sponsor if things go badly. Let’s say you need to declare bankruptcy and your investors lose part or all of their principal. Those investors might not be vey happy with you and some of them might want to litigate to recover their investment, or, at a minimum, to inflict justice on you.

In that case, they might also contact the state or federal SEC to file a complaint against you. The SEC may initiate an investigation and discover that the required disclosures and forms were not filed. This may result in prosecution by the SEC, and who knows where that might lead.

On the other hand, if the SEC does have the required disclosures on file and find that you complied with securities laws, then at least you don’t have to worry about the SEC breathing down your neck. And chances are that the litigious investors may not have a strong case against you, either, since the risk of losing ALL of their capital is plainly stated in the disclosure documents.

So that’s why we try to comply with SEC regulations when syndicating apartment building deals.

The question is: do we need to do this for smaller deals with friends and family investors? The answer to this depends…

3 Factors to Consider:

  1. How big is the deal, and how likely will the state or federal SEC launch an investigation against you? I don’t have the answer to this, but common sense tells us that if we lose millions of dollars of investor money, the SEC is more likely going to investigate than if we lose $50,000. But where is that threshold? I have no idea.
  2. What is the make-up of your investors? If your investors are friends and family, then they may be less likely to start suing you in court if the deal goes bad. How likely are your investors going to want to litigate if things don’t go as planned?
  3. What is your risk tolerance? As real estate entrepreneurs, we take risk every day. It's not about avoiding risk, but managing risk. The question is, how much risk are you comfortable with in this regard?

Related: Syndicated Apartment Building Deal: a Case Study

One other data point for you: I invested some money with a real estate developer who succeeded in losing over a million dollars of investor money. Some of the investors sued, won, and got a judgment but never collected a dime because the developer was dead broke. Some contacted the state SEC and they did launch an investigation because the developer was not compliant with the regs. They fined him $6,000 and told him he couldn’t raise money in the Commonwealth of Virginia for the next 7 years.

In the scheme of things, not so bad perhaps!

My Rule of Thumb

If the deal will bear the additional $6,000+ expense to create the PPM and other required SEC filings, then do it. Larger deals will obviously support such an expense, the question really is for smaller ones. If it’s a smaller deal with friends and family investors, you may be comfortable with the level of risk.

I hope this provides you with some things to think about as you raise money for your apartment building investing deals!

I’d love to hear about your stories about deals with other investors that maybe didn’t go as planned! What happened?

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
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    Michael Germinario Real Estate Investor from Point Pleasant Beach, New Jersey
    Replied over 5 years ago
    Hi Michael, this is a very interesting topic that I admittedly know nothing about. Quick question that hopefully you can help me out with…specifically how many units in the apartment building is considered too small to file with the SEC? For example, I purchase a 4-unit with a family member and we structure the deal as an LLC with a 50/50 equity split. Since it is only 4 units it is considered a residential property. I’m inclined to believe that you don’t need to file anything with the SEC here, am I correct in my assumption? Now same example, but 5+ units which is now in the commercial category. Where is the line drawn when it becomes truly necessary to register? Thanks for sharing this great content, Michael!
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 5 years ago
    Hi Michael – an attorney will tell you that any LLC in which you sell equity will require a PPM and SEC filings. But then again, the attorney’s job is to ELIMINATE any risk and liability for you. So at the end of the day, like I write in the article, it’s your call how much risk you’re willing to take.
    Jay Boyle Real Estate Investor from Mendham, New Jersey
    Replied over 4 years ago
    Mike G, If your family and friends are actively engaged with the acquisition, management and decision making then they can be considered partners. Especially if they have previous multifamily experience. For example I closed recently 36 units with two family members actively involved with no PPM. Our current project has 164 units and definitely requires PPM for the protection of everyone involved. Sincerely, Jay