Deal structure

8 Replies

Can anyone give some insight on structuring a deal that would contain multiple investors (about 10) that would be putting up around a million of capital for various fix and flips and some commercial holdings? How much (%) should go to the investor pool vs with the partners in the LLC. Any good info out there for this?

If these investors are passive investors they you are creating a security and there are all kinds of rules to be followed.  In other words if the investors are not actively involved with the management of the company or project,  you have to follow securities laws. 

Securities laws have changed quit a bit recently.  Do a search here and you will find a lot of info to get you started.

You might want to search on "Reg D" offerings. As Ned said, if they are passive, it's a securities offerin. The only way around that is to bring them in against specific deals in that case they would actually be named on the deed and the LLC would issue promissory notes. They become your bank, lending you money for the Operation.

We are planning to bring them in and be named on the operating agreement for the LLC which, would own these properties. I was unsure what the distributions should typically be for these investors - many of them only make 3-4% on their money now.

Thanks.

Distributions can be set up in a variety of ways.  There are tax considerations too and you want to make sure that LPs aren't having to recognize gains without a corresponding distribution to cover their tax liability.  

You really need to work with a securities attorney on what you're proposing.  You could also use some guidance from an experienced syndicator or operator doing what you're trying to do to make sure the offering is viable in the market.  At a minimum you need to make sure it will sell to the 10 investors that you're already working with.  

Would this be a reg-d issue even if the investors are owners in the LLC?

It sounds to me like what you're are putting together is a syndication; many real estate entrepreneurs are unnecessarily afraid of syndicating a deal and that's probably due to the same factors anybody is afraid of anything; lack of understanding, and experience.

By the way, syndicating is a game of kings. It's how Magic Johnson raised $2billion to buy the Dodgers. It's how most private businesses stay private. Syndications are used to buy thoroughbred race horses and yachts, to finance movies, and TV shows, and all kinds of other ventures.

A syndication by definition is simply organizing a group of investors with a common goal.

It becomes a security (another unnecessarily scary word) when you have one or more investors, members, share holders, or limited partners who's only contribution is financial and you assume all management decisions for their money.

But guess what... If you file some proper paperwork you can register your company (no matter the legal form) with the SEC and the states you are either operating in or taking investment capital from.

You can set up your business in any manner you see fit but I would encourage you to think about your customer first - and your customer is your investor.

What does your customer need and want out of being a part of your organization? Is it purely financial? Do they want to learn? Do they just want cocktail party stories about how many houses "they" are flipping?

How you determine your investors return on investment should start with a risk reward analysis.

Fixing and flipping houses is one of the highest risk investment activities in all of financial vehicles. You just never know what you will find in those walls or below the soil.
But that is why fix&flip has one of the highest rewards- and your investors are going to know that and want to be rewarded for exposing their money to this risk.

Your track record will also play a factor at how much risk they will assume they are taking.

My first syndication I gave my investors 80% of the company (LLC back then) and I retained 20%.

I knew having a win under my belt was more important than trying to keep all the profit for myself.

My latest development deal I sold 25% of the company to my investors for 100% of the equity raised; but these investors will make over 30% on their money in about a year with relatively no downside.

Hire an experienced syndicator to walk you through your first raise.

Then go out and talk to your potential customers/clients first- find out what they want/need and then create your business upon that.

Next hire a reasonable Securities Attorney to take care of the paperwork. Remember, a securities or contract attorney's job is not to help you market, sell, get funded, nor do they care how you plan to operate your business. Their job is to keep your *** out of a sling if/when things go bad.

You don't buy your car based on your auto insurance brokers advice just like you probably aren't going to design your business around your attorneys advice for safety.

You need to design a high performance vehicle and then add in the safety features.

The inherent nature of business is taking risks in exchange for reward.

The inherent nature of an attorney is to protect you (not your investors, by the way) from risk.

Design your plan and your operation to meet your needs first, then your customers, and then get an attorney to make sure you're in compliance.

A good syndicator consultant will walk you through all of these steps. And their primary objective should be designing a viable business model and getting you funded.

Bombsaway.

Thanks for this information. It does appear that syndication is what we are proposing. I will look around this region to find someone that can walk us through the process - especially since this is somewhat new to us. I have seen other groups go down in flames because they were not properly registered with the SEC. 

Originally posted by @Matt Skinner :

It sounds to me like what you're are putting together is a syndication; many real estate entrepreneurs are unnecessarily afraid of syndicating a deal and that's probably due to the same factors anybody is afraid of anything; lack of understanding, and experience.

By the way, syndicating is a game of kings. It's how Magic Johnson raised $2billion to buy the Dodgers. It's how most private businesses stay private. Syndications are used to buy thoroughbred race horses and yachts, to finance movies, and TV shows, and all kinds of other ventures.

A syndication by definition is simply organizing a group of investors with a common goal.

It becomes a security (another unnecessarily scary word) when you have one or more investors, members, share holders, or limited partners who's only contribution is financial and you assume all management decisions for their money.

But guess what... If you file some proper paperwork you can register your company (no matter the legal form) with the SEC and the states you are either operating in or taking investment capital from.

You can set up your business in any manner you see fit but I would encourage you to think about your customer first - and your customer is your investor.

What does your customer need and want out of being a part of your organization? Is it purely financial? Do they want to learn? Do they just want cocktail party stories about how many houses "they" are flipping?

How you determine your investors return on investment should start with a risk reward analysis.

Fixing and flipping houses is one of the highest risk investment activities in all of financial vehicles. You just never know what you will find in those walls or below the soil.
But that is why fix&flip has one of the highest rewards- and your investors are going to know that and want to be rewarded for exposing their money to this risk.

Your track record will also play a factor at how much risk they will assume they are taking.

My first syndication I gave my investors 80% of the company (LLC back then) and I retained 20%.

I knew having a win under my belt was more important than trying to keep all the profit for myself.

My latest development deal I sold 25% of the company to my investors for 100% of the equity raised; but these investors will make over 30% on their money in about a year with relatively no downside.

Hire an experienced syndicator to walk you through your first raise.

Then go out and talk to your potential customers/clients first- find out what they want/need and then create your business upon that.

Next hire a reasonable Securities Attorney to take care of the paperwork. Remember, a securities or contract attorney's job is not to help you market, sell, get funded, nor do they care how you plan to operate your business. Their job is to keep your *** out of a sling if/when things go bad.

You don't buy your car based on your auto insurance brokers advice just like you probably aren't going to design your business around your attorneys advice for safety.

You need to design a high performance vehicle and then add in the safety features.

The inherent nature of business is taking risks in exchange for reward.

The inherent nature of an attorney is to protect you (not your investors, by the way) from risk.

Design your plan and your operation to meet your needs first, then your customers, and then get an attorney to make sure you're in compliance.

A good syndicator consultant will walk you through all of these steps. And their primary objective should be designing a viable business model and getting you funded.

Bombsaway.

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