Apartment Deal Structure Advice
Property Manager · Dayton, OH · Member since 2014 · 38 posts · 11 votes
I have some friends, family and peers that would like to begin investing with me in apartment buildings. Looking for any advice on the best way to structure the deal. I want to make sure I get paid since I will be the one finding and managing the deal. How is everyone structuring their deals with investors on multifamily properties where it is advantageous for all parties?
Thanks for all the help!
@Austin Fruechting I think a lot of people on this site and many more that are not on this site uses and even touts the structure that you are describing (or even structures where the investors don't vote). Heck, I even did it the first few times I raised money from a small number of people that I'd known for long time. That doesn't make it right, as I look back I know I wouldn't do it that way again and I'm glad that things worked out well. What if the deal went south? The now former-friend goes to see a lawyer and the first thing that lawyer does is look for anything that would give them the right to go after you. The second thing would be to report the venture to the SEC or state department of corporations. This puts law enforcement behind them and I'd imagine that it would sound really good to the jury in their civil suit if they could say that there was an enforcement action by the feds. Ugh!
But I also understand why so many people try to avoid the securities laws. Paying securities counsel to prepare a Reg D offering and file blue sky in each state where they have investors gets expensive. I'm paying $7K to $15K per offering for the legal docs (which is fairly cheap, I've been quoted $25K to $40K by some firms) plus the blue sky, depending on how many states the investors came from, of $1K to $15K. If most people on BP are raising money for deals under $1 million or so, which means raising less than $500K, this cost becomes prohibitive. So they take shortcuts and defend it by saying that "it's not a syndication". But, it is...
But you bring up a couple of interesting things. First is the reason why I always preach to get legal advice before ever raising money from investors. Each person will get individual advice and that legal advice varies. Your counsel has given you guidance, and you've followed it. Whether the advice is right or wrong no one can fault you for getting good advice and doing what they've said. Well, I guess a future plaintiff could, but you then would place that back in your counsel's lap and ask them to defend the structure they created. Hopefully they'd be successful (and they might, I don't know).
The second thing you bring up isn't a legal point. It's that you are investing with a small group of people you know well and you can go to them quickly and get a consensus on major decisions. And I'm sure that for the most part that probably works out pretty well. For anyone thinking that this is a great way to structure a larger raise with more investors, I caution you to think twice about it. It'll be far more difficult to manage your deal, plus it'll be harder to raise capital. The second part of that statement probably comes as a surprise to most people reading this because at first most people think that voting rights are something that most people want.
While it's true that most people want to be able to vote on these "major decisions", the irony is they don't want the other investors to vote. For example, if you have 30 investors and 16 don't want to sell and 14 do, and your recommendation based off of your market knowledge is that now is a good time to sell, you'll have 14 upset investors. Or let's say that you need to spend $20K on a new roof on a building and 16 investors say no. As a result, the roof leaks and causes $50K in water damage. Now everyone's upset and they'll all be blaming you even though you were powerless to act on your own (here goes that whole securities law suit again...). A lot of investors will recognize this risk and just not invest in the deal.
Long story short (too late), your structure is working for you and may or may not work for others. So to each, get your own legal advice. :)
Mike.
What we do is put everyone in the same LLC as managers.
You get 30% of the deal for doing all the work and putting no money in the deal. The other partners fill 100% of the funds required for the project and get 70% of the profits from the property.
Be careful because if you are the only one doing the work and they have no input into how the property is run or managed then this is a syndication and not a joint venture. Then you're having to deal with the requirements of a syndication and a lot of family members will probably not qualify anymore.
@Mike Mefferd it sounds like you are syndicating. This means you would set up a company for the property and you would be the general partner and your family/peers would be the limited partners. You will want to contact a securities attorney to have this set up.
@Michael Le it correct that this is considered a syndication. If you file as a 506B they can qualify as a sophisticated investor and be passive in the deal.
@Antoine Martel I am not following this statement. "What we do is put everyone in the same LLC as managers." If they are passive investors, they would not be in as managers.
Check with @Amy Wan she is working on a online PPM that can reduce the costs of a syndication attorney.
Thanks for all of the replies. Most of them will not qualify as accredited investors for a syndication project.
If I was to bring them on as limited partners of the LLC, any recommendations on how to structure the money side of it? I'm trying to figure out a way to make it not very complicated but also make sure that I get paid for doing the majority of the work. My partners will have a say, but they will not be the ones spending time finding the deal.
Setting it up as an LLC is fine with all people being members. Then you're the manager of the LLC with a list of responsibilities for the regular operations. Then there's a "major decision list" that requires votes. That list includes things like selling, refinancing, taking additional loans, spending over a certain dollar amount, replacing you as the manager, etc. Structured that way it is not syndication because they do have input into the running of the property, albeit just the major things.
Setting it up as an LLC is fine with all people being members. Then you're the manager of the LLC with a list of responsibilities for the regular operations. Then there's a "major decision list" that requires votes. That list includes things like selling, refinancing, taking additional loans, spending over a certain dollar amount, replacing you as the manager, etc. Structured that way it is not syndication because they do have input into the running of the property, albeit just the major things.
Very interesting. I wonder what some of the SEC attorneys think about that. I like it in concept but not sure if it passes the test.
@Amy Wan
Hi all - If you are taking in money, you are the promoter, and the investors are expecting profits, artificial "management" by the investors will be seen through by the SEC and state securities boards.
I know a company that tried just this artificial form of involvement and it didn't end well from a securities perspective. I would advise against trying to skirt securities laws. I hope this helps.
Setting it up as an LLC is fine with all people being members. Then you're the manager of the LLC with a list of responsibilities for the regular operations. Then there's a "major decision list" that requires votes. That list includes things like selling, refinancing, taking additional loans, spending over a certain dollar amount, replacing you as the manager, etc. Structured that way it is not syndication because they do have input into the running of the property, albeit just the major things.
Very interesting. I wonder what some of the SEC attorneys think about that. I like it in concept but not sure if it passes the test.
@Amy Wan
For what it’s worth, I use two lawyers, both partners at a major firm, both specialists in their field (one business contracts/agreements and one real estate). I feel they are overly safe in all the deals we’ve done, which can be sometimes frustrating because they are very pricey for me. All my deals, both real estate and just business, are one or two zeros short of the size of deals they usually deal in, but I want the best and not have to worry about anything.
So I don’t think there’s any issue or they wouldn’t of let me do it. Syndication the cash people are fully limited partners with no real rights and no say in anything. Just having a designated day to day operations manager of a partnership is very different.
Hey @Austin Fruechting - I hear what you are saying, however, you didn't mention the use of a securities attorney. I am sure, that based on the pure reading of the law, they are absolutely correct in their guidance and they are probably great corporate and real estate attorneys. However, I do not want this advice to stand out as the end-all-be-all of advice.
Based on my extensive experience of dealing with both state securities boards and the SEC and clients who attempted to skirt the law, when an investor was "wronged," these entities saw the situation quite differently. Remember, the SEC and the state securities boards are used to enforcing the law, particularly the law that applies to their interests. So therefore, they will do what they can to prove you otherwise and that their law applies.
I am certainly not trying to give you a hard time, but I don't want to give others reading this thread that this method is a good idea.
At the end of the day, you will probably be fine and nothing will happen. However, it's the poor guy who tries this and then gets caught that will ultimately pay the price.
Hey @Austin Fruechting - I hear what you are saying, however, you didn't mention the use of a securities attorney. I am sure, that based on the pure reading of the law, they are absolutely correct in their guidance and they are probably great corporate and real estate attorneys. However, I do not want this advice to stand out as the end-all-be-all of advice.
Based on my extensive experience of dealing with both state securities boards and the SEC and clients who attempted to skirt the law, when an investor was "wronged," these entities saw the situation quite differently. Remember, the SEC and the state securities boards are used to enforcing the law, particularly the law that applies to their interests. So therefore, they will do what they can to prove you otherwise and that their law applies.
I am certainly not trying to give you a hard time, but I don't want to give others reading this thread that this method is a good idea.
At the end of the day, you will probably be fine and nothing will happen. However, it's the poor guy who tries this and then gets caught that will ultimately pay the price.
For sure I appreciate your position and understand and correct, they are not SEC specific attorneys. And I appreciate the response to help me and others reading. That is what’s awesome about this place and I would be a fool to think you’re trying to give me a hard time by providing sound caution!
I would absolutely agree that if you push this idea too far (such as networking for fundraising, making the members incredibly limited with no real power, etc) it would definitely be looked at as a syndication. But I do believe if you are structuring things with family and friends where you're just the manager of the LLC, what I am talking about is more akin to a joint venture. Are you not allowed to have a joint venture where one person provides the cash and the other finds/runs the deal? That's more the effective structure I am talking about and if that's not allowed a LOT of people here are in trouble because that's a very common structure everyone touts. Perhaps it's the number of parties involved? The most I have in any one is 2 partners that provided the cash, but maybe if you used 10 peoples cash that don't know each other and/or are doing things listed above is when it crosses the line?
.
I want to add to all my comments here; I am not an attorney, and not giving legal advice. Everyone should seek their own advance.
@Austin Fruechting I think a lot of people on this site and many more that are not on this site uses and even touts the structure that you are describing (or even structures where the investors don't vote). Heck, I even did it the first few times I raised money from a small number of people that I'd known for long time. That doesn't make it right, as I look back I know I wouldn't do it that way again and I'm glad that things worked out well. What if the deal went south? The now former-friend goes to see a lawyer and the first thing that lawyer does is look for anything that would give them the right to go after you. The second thing would be to report the venture to the SEC or state department of corporations. This puts law enforcement behind them and I'd imagine that it would sound really good to the jury in their civil suit if they could say that there was an enforcement action by the feds. Ugh!
But I also understand why so many people try to avoid the securities laws. Paying securities counsel to prepare a Reg D offering and file blue sky in each state where they have investors gets expensive. I'm paying $7K to $15K per offering for the legal docs (which is fairly cheap, I've been quoted $25K to $40K by some firms) plus the blue sky, depending on how many states the investors came from, of $1K to $15K. If most people on BP are raising money for deals under $1 million or so, which means raising less than $500K, this cost becomes prohibitive. So they take shortcuts and defend it by saying that "it's not a syndication". But, it is...
But you bring up a couple of interesting things. First is the reason why I always preach to get legal advice before ever raising money from investors. Each person will get individual advice and that legal advice varies. Your counsel has given you guidance, and you've followed it. Whether the advice is right or wrong no one can fault you for getting good advice and doing what they've said. Well, I guess a future plaintiff could, but you then would place that back in your counsel's lap and ask them to defend the structure they created. Hopefully they'd be successful (and they might, I don't know).
The second thing you bring up isn't a legal point. It's that you are investing with a small group of people you know well and you can go to them quickly and get a consensus on major decisions. And I'm sure that for the most part that probably works out pretty well. For anyone thinking that this is a great way to structure a larger raise with more investors, I caution you to think twice about it. It'll be far more difficult to manage your deal, plus it'll be harder to raise capital. The second part of that statement probably comes as a surprise to most people reading this because at first most people think that voting rights are something that most people want.
While it's true that most people want to be able to vote on these "major decisions", the irony is they don't want the other investors to vote. For example, if you have 30 investors and 16 don't want to sell and 14 do, and your recommendation based off of your market knowledge is that now is a good time to sell, you'll have 14 upset investors. Or let's say that you need to spend $20K on a new roof on a building and 16 investors say no. As a result, the roof leaks and causes $50K in water damage. Now everyone's upset and they'll all be blaming you even though you were powerless to act on your own (here goes that whole securities law suit again...). A lot of investors will recognize this risk and just not invest in the deal.
Long story short (too late), your structure is working for you and may or may not work for others. So to each, get your own legal advice. :)
@Brian Burke - appreciate the detailed response, thanks for taking the time to write that. I agree in the assumption that if you have 30 investors, and even if they have some “voting rights”, that is still going to be viewed as a syndication and I would never recommend that.
The question is when does it cross from a legit joint venture to syndication? Because I’m assuming two people can partner together where one person puts up cash and the other finds/runs the deal, but is that incorrect? Is that a syndication too? Are all joint ventures where one person is the cash and other runs the deal or flip actually syndications? If not, what and where is the line between the two? Is it dollars or # of people?
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Edit to add on the point of the roof; set your dollar amount for major decision list above any issue like a roof or HVAC, or you have clauses about things like that can be done at the discretion of the manager, or........ but this part isn’t really the issue of discussion, just wanted to point out there are many ways to handle those things. But if you have 30 investors you’ll probably be viewed as a syndication anyways!
I used to have a client in Texas. He used to do joint ventures too until the Texas Board of Securities came knocking.
The rules are not easy, but for everyone reading this post, let's make them a little more simple:
If investors invest money, expect profits, there are more than ONE of them, and you are pretty much in charge, you are selling securities and you need to follow the law.
At the end of the day, you're required to make proper disclosure to the investors. This means telling them all of the material facts and disclosing the risks.
Securities attorneys are expensive. It's true. It's a specialized line of work that takes certain skill. We, generally speaking, charge between $5k and $15k and we are inexpensive for the experience we have. I get that it seems silly to spend this kind of money with two or three investors you consider close friends and family members. Heck, I take leftover penicillin to avoid paying a doctor when I think I have strep throat - the risk is pretty low and I save some cash. However, it would be stupid of me to do my own appendectomy.
Austin Fruechting if you don’t mind me asking how much I’m legal fees does a typical deal like that cost?
I understand it probably varies on deal size and what not, so feel free to be overly conservative.
I’d like to get into those types of deals when I’m older.
The first one cost me about $5k. The ones after $1-2k because we can use the first one as the starting point
:
If investors invest money, expect profits, there are more than ONE of them, and you are pretty much in charge, you are selling securities and you need to follow the law.
Thank you for that answer! It's great to know that it crosses from joint venture to syndication at that low of a threshold of more than just one investor. I do have a partnership that crosses this, but that is with my dad and brother, so hopefully they don't come after me! My others are just with one other person per investment/LLC.
Truth be told, if you came to me and "I am doing a deal with my bro and dad," I wouldn't take your money.
Truth be told, if you came to me and "I am doing a deal with my bro and dad," I wouldn't take your money.
And the only reason I didn’t set up different ones there is my brother wanted to invest, was a missionary in Ethiopia, has 5 kids, so he didn’t have enough money to do the deal by himself, so my dad put in the other cash... so hopefully my pastor/missionary brother doesn’t come after me for securities fraud! Lol
I used to have a client in Texas. He used to do joint ventures too until the Texas Board of Securities came knocking.
The rules are not easy, but for everyone reading this post, let's make them a little more simple:
If investors invest money, expect profits, there are more than ONE of them, and you are pretty much in charge, you are selling securities and you need to follow the law.
At the end of the day, you're required to make proper disclosure to the investors. This means telling them all of the material facts and disclosing the risks.
Securities attorneys are expensive. It's true. It's a specialized line of work that takes certain skill. We, generally speaking, charge between $5k and $15k and we are inexpensive for the experience we have. I get that it seems silly to spend this kind of money with two or three investors you consider close friends and family members. Heck, I take leftover penicillin to avoid paying a doctor when I think I have strep throat - the risk is pretty low and I save some cash. However, it would be stupid of me to do my own appendectomy.
Hi @Jillian Sidoti
You mention that it will be considered a syndication if the partners expect a profit. I guess that if they are only debt investors (hold a note for an X% return with no other upside on the deal), this is not consider a syndication, am I correct?
Thank you!
A profit to THEM. In other words, any return on investment. So yes, this also applies to debt investors. Profit does not mean profit on the project/company. It means any return made by the investor.
Thanks for all of the replies. Most of them will not qualify as accredited investors for a syndication project.
If I was to bring them on as limited partners of the LLC, any recommendations on how to structure the money side of it? I'm trying to figure out a way to make it not very complicated but also make sure that I get paid for doing the majority of the work. My partners will have a say, but they will not be the ones spending time finding the deal.
They don't have to be accredited, they should be sophisticated. From what I understand, sophisticated basically means they understand what they are investing in. Examples would be a commercial broker, previous real estate investment experience, possibly a financial adviser, accountant, RE attorney, etc. Talk with you securities attorney about how you can "qualify" non-accredited investors.
I have some friends, family and peers that would like to begin investing with me in apartment buildings. Looking for any advice on the best way to structure the deal. I want to make sure I get paid since I will be the one finding and managing the deal. How is everyone structuring their deals with investors on multifamily properties where it is advantageous for all parties?
Thanks for all the help!
If you want to avoid syndication, set it up as LLC, where major decisions require a majority vote. You can place items in your Articles of Organization so that you're not completely limited on the day-to-day operations. For example, put a $2,500 ceiling in purchases, that way you don't have to request and grab a majority vote for a $15 repair.
DISCLAIMER: I'm not one and you definitely should consult an attorney. :)
https://www.biggerpockets.com/blogs/8160/67620-purchasing-our-first-apartment-complex
Mike, the advice above is great and iI would definitely consult a securities attorney.
To get back to your original question, 30/70% split is fairly common from what I've seen. You should also charge a 2-4% one-time acquisition/syndication fee for your efforts in finding the property and putting the deal together. In addition to that you should charge a small yearly asset management fee as well as a property management fee if you do the property mgmt in-house. (I would not recommend it unless this is your specialty and you are equipped to do so)
There are a ton of different kinds of fees that you can charge when doing syndication deals, but those are probably the most common and most palatable for other investors especially when you are getting started.
I've never yet syndicated any deals or formed a partnership with a bunch of equal partners to take down a deal. I have participated passively on a number of deals.
But is interesting to me how little difference there can be between these two things. And one is a security and one is not. And in one scenario, one party gets a 20-30% cut of profits plus fees and in the other they do not.
If this were not an antiquated system, would not all of the parties involved be compensated in relation to their financial, management, and potentially other contributions?