LLC - Equity Deal Structure

10 Replies

I'm going to form an LLC soon in Georgia and I want to focus on offering equity to investors in lieu of (OK...occasionally in conjunction with) private lenders. I want to structure the deals so that the investor receives a percentage of the free cash flows generated by each property monthly based on their investment. They will also receive the same percentage of the sale price when the property sells. Do I need to set up my LLC in a different way to account for the liability of the investor & myself? Any advice is much appreciated!

Originally posted by @Account Closed :

I'm going to form an LLC soon in Georgia and I want to focus on offering equity to investors in lieu of (OK...occasionally in conjunction with) private lenders. I want to structure the deals so that the investor receives a percentage of the free cash flows generated by each property monthly based on their investment. They will also receive the same percentage of the sale price when the property sells. Do I need to set up my LLC in a different way to account for the liability of the investor & myself? Any advice is much appreciated!

 Michael, you are talking about a syndication deal here, and in doing so, you are offering securities to your investors.  While this is a very standard way of doing things, you have to be very careful about doing the deal correctly.  Please consult with an experienced securities lawyer who has handled real estate syndications before.  It's not complicated, and an experienced lawyer will be able to handle it for you, but if it is not done correctly, you can be in a lot of trouble with the Securities and Exchange Commission.  Please tread wisely here.

@Account Closed Keep it simple. Create an LLC. For each deal, create a new LLC where LLC#1 and Money Guy LLC have joint ownership. Don't mix multiple investors into your LLC and you can avoid the syndication issue.

If you take on multiple equity investors, at different points in time, then you have the enormous challenge of valuing the company at each point a new investor comes in.  Yikes.

You can also offer investors fixed returns.  Make sure you know what works best for you and them vs. forcing them into a partnership they may not really want.  A lot of money guys just want solid returns with some security.

If you have any investor who invests with you where you are doing all of the work creating the return and they are expecting a return you have security, 1 investor or 1000 investors.  

There are instances where you do not have to jump through a full blown exempt offering, but as was stated, speak with your own securities attorney. 

As for your proposed structure. Your private lender will lend to your equity LLC, (you may have to personally guarantee the loan) but should not be a part of the LLC. They are just a debt investor.

Now, if you wanted to, you could create a lending LLC where you sell notes to different investors (yes this is a security) and then you can lend the money from the lending LLC to the equity LLC that is holding the property. That way you can have investors who like debt in your projects as well as investors who like equity in your projects.

I agree with the 1 LLC per project situation (on the equity side) just because of the issue that Rick brought up in terms of valuations. But on the debt side, you do not have that issue because you would be offering a fixed note potentially backed by a number of different properties, that would actually give the investor more collateral potentially to back the notes.

@Jonathan Twombly @Rick Baggenstoss @Eric Tait

Thanks for the advice! I've been on Excel trying to find a model for valuing my LLC if I were to do syndication deals. I like the idea of opening up different LLCs for each deal where the investor would like equity while having a separate LLC for investors that just want to diversify their portfolio and want steady returns. Of course, I would request that the prior contribute more to each deal; the latter option seems like a bridge I would cross when I get to it as I want to have more than enough assets to back their investment. Two things are for sure: I'm creating an LLC & looking for deals. Just confirming that I didn't have to set up my original LLC in a specific way in order to give fixed returns further down the road.

Originally posted by @Account Closed :

@Jonathan Twombly @Rick Baggenstoss @Eric Tait

Thanks for the advice! I've been on Excel trying to find a model for valuing my LLC if I were to do syndication deals. I like the idea of opening up different LLCs for each deal where the investor would like equity while having a separate LLC for investors that just want to diversify their portfolio and want steady returns. Of course, I would request that the prior contribute more to each deal; the latter option seems like a bridge I would cross when I get to it as I want to have more than enough assets to back their investment. Two things are for sure: I'm creating an LLC & looking for deals. Just confirming that I didn't have to set up my original LLC in a specific way in order to give fixed returns further down the road.

 Before running off and creating LLCs for no reason, you should consult with a lawyer to tell you what you really need and how to structure it.  

As far as doing one LLC per deal, if you are doing syndications, you have to do it this way. In fact, the banks will insist on a single LLC per deal, especially if you are doing CMBS debt for your deals. You must have a single LLC (a "single purpose entity" in the bank lingo), and if you put other assets into the LLC it will breach your covenant with the bank and you will be in a world of trouble. But there is no need to run off forming LLCs, which come with various costs, until you have an actual deal.

@Jonathan Twombly

I will consult my RE Law Professor & Atlanta RE lawyers prior. A lot of deals I see require a proof of funds and LLC paperwork before they'll even look at your offer. I'd like to have a primary LLC that I can market to investors, buyers, and sellers in the hopes that it looks like Two Bridges one day. Out of all the books I've read & classes I've taken, I can't seem to find any info on this subject - you all and BP in general are lifesavers!

Simple advice. If you do not know what a PPM is, I would avoid syndication. Talk to your attorney about alternative ways to structure the deals individually with your different investors.

Originally posted by @Rick Baggenstoss :

@Account Closed Keep it simple. Create an LLC. For each deal, create a new LLC where LLC#1 and Money Guy LLC have joint ownership. Don't mix multiple investors into your LLC and you can avoid the syndication issue.

If you take on multiple equity investors, at different points in time, then you have the enormous challenge of valuing the company at each point a new investor comes in.  Yikes.

You can also offer investors fixed returns.  Make sure you know what works best for you and them vs. forcing them into a partnership they may not really want.  A lot of money guys just want solid returns with some security.

 This is incorrect. It doesn't matter if it's one investor or multiple, if it meets the definition of a security, it's a security. Don't just go DIY this on your own. If the deal goes bad (that's when the lawsuits start flying), and you didn't comply with the securities laws, you may owe the investor the entire amount of their investment + fines + attorney's fees + interest + court costs etc. 

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