Apartment Deal Structure Advice

[Mike Mefferd]

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!

[Brian Burke]

@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.  :)