Structuring and Establishing a Small Syndication

[Mathius Gazi]

Hi All, 

My business partner and I have done a few successful multifamily deals in our area in the past, and we now have a group of family, friends, and associates who are eager to join us in a syndication where we replicate our multifamily investment strategy in this local metro. We've spent a lot of time looking at deals and potential structures - literally 15-20 hours per week for several months - however, we sill haven't pulled the trigger and done anything because we are afraid of the registration and licensing process. We have trusted attorneys and agents, however, we are thrown off by the need to establish a "Reg D" offering with the SEC and the costs associated with that. At the same time, we know that our LPs will want us to have a system of preferred returns, promotes, etc. to ensure that we uphold their best interests and perform, and we'd like to charge a small amount for managing the entire deal. Are there any tricks to establishing this legal entity, or do we need to just accept that this is how this part of the industry operates, and either get with the program or find something else to do? Any advice is very much appreciated. The total number of LPs would be no more than 6 or 7 and the total capital would barely cross half a million. Thank you!

[Brian Burke]

"Would you say that looking back, going through the legwork of establishing a Reg D entity was worthwhile for you on that deal in comparison to just establishing a basic LLC structure with multiple members?"

This is an impossible comparison for two reasons. First, there is no such thing as a "Reg D entity." Second, "just establishing a basic LLC structure" only tells the part of the story that you aren't concerned about.

Any time people get together to compile their resources in this context there is a partnership. It's very common to formalize such partnerships as LLCs. This means that all syndicates (that use the LLC structure) are "basic LLC structures." Or complicated LLC structures in some cases.

But if someone is contributing money to such an LLC where the performance of the investment is dependent on the efforts of someone else, the investment is considered to be the sale of a security.

In your example, you and your partner want to buy property and raise money from investors. That is the sale of a Security. To sell a security the offering either needs to be publicly registered, which is usually cost prohibitive, or needs to qualify for an exemption. The most common exemption is Reg D rule 506(b) or 506(c).

All this is to say, create the LLC and follow the rules of the exemption, which dictate how you can market for investors and what investors you can admit. This is where following the advice of competent legal counsel will keep you out of jail. This is not a do-it-yourself project. But it's also not that difficult if you have a good lawyer and do what they say.