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. :)
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
He doesn't need the law...he'll send you to nether regions.
Thanks @ Garrett Hogan. When I was researching it, I have seen that same advice. In that scenario, are you giving your investors a preferred return or just giving them 70% of the cash flow each month and 70% of the equity at the end? Also, when it is a value add complex, how do you handle all the money for the rehab? If you are providing a preferred return, do you collect the rehab money first and pay a return for the total money invested?
Sorry in advance for all the questions.
@Jillian Sidoti @Michael Le @Brian Burke @Austin Fruechting First, thank you all for commenting on this topic. I'm in the beginning steps of searching for my next deal and I'd likely want to work with someone in a new market.
If I read between the lines a little from all of your comments, the line seems to be drawn at active participation? For example a partner(s) just putting money in and wanting to be completely passive would mean it's a syndication whereas, if there are a small handful of people all actively participating in decision-making it's not a syndication?
@Account Closed Jillian would be best to answer but from my understanding of her previous explanations the answer to your question is... it's a combination of both. If it's just a single passive individual that seems to be okay. If it's more than one passive individual then it's is a security and is under SEC regulations. If you have a small handful of people who are making decisions then that could just be a partnership or joint venture.
@Mike Mefferd to echo what some have said I would get a securities attorney to create you a PPM, operating agreement and LLC's. We create two LLC's for each property we purchase or develop. The property goes into the first LLC then we have a managed member LLC. The investors deposit their funds directly into the LLC the property is in.
I believe the structure should be deal specific and it should benefit both you and your investors. I want to build long term relationships with our investors so we usually split the deal 80/20. Many syndicators will charge an acquisition fee that gets paid when the deal closes and a capital transaction fee paid out on the back end of the deal. You can also collect an asset management fee for managing the asset. If you start putting in a lot of fees or taking more and more of the deal people could become apprehensive to invest with you because they feel like they are getting nickeled and dimed.
For the pref question I'd typically advise against it unless you are doing a large deal. $20MM and above. We are working on a large development project now and this will be our first pref. The only reason we're instituting a pref is there are a lot of upfront development fees that we do not want to carry ourselves.
You asked about repairs, I would recommend putting together an extensive capex budget and either having the loan cover the repairs or raise additional funds to cover the repairs. A potentially big mistake is thinking that your operating income will cover your expenses. Especially, if you start doing distributions your investors will become accustomed to the distributions then they stop for a couple quarters to pay for repairs the investors could get frustrated with you.
As far as distributions. This will be up to you and investors. Once you have consistent cash flow with minimal repairs I'd recommend every quarter. Before you get to cash flowing on a normal bases I'd try to push off all distribution so you don't have to have a cash call down the road. The only distribution I'd recommend before you are consistently cash flowing is if the property has realized income then I'd do a distribution to cover the investor's tax liability.
I'm completely lost. I've never done a JV, Synd.
At the moment I am cash poor, but lead rich.
what happens in this scenario?
I find the project.
To acquire, my fam/friends/bros/whatever kick in the down payment and rehab costs
who should be on the loan? everybody, or just me?
do I disburse funds (profits on rent) monthy or yearly? Make it a percentage based on their input $$?
upon sale, disburse profits based percentage of ownership?
and what should my ownership share be? the 30% as mentioned earlier?
I want to do deals, but I don't have any idea where to start with an equitable sharing of ownership/costs.
I can do Realtor stuff. That's easy. This investing stuff is hard. lol
Greg, how much are you trying to raise?
@Greg Hamer - @Michael Blank (he is on BiggerPockets) has some really good free and inexpensive education on raising money for MF projects. I've been listening to a lot of his podcasts and YouTube videos. Google his name and you'll find him.
The investor stuff isn't really that hard. And once you do 1 deal, more will follow. That is called The Law of the First Deal :)
This is a good forum post too. Lots of good input here. Err on the side of caution seems to be the underlying advice here.
All the best!
If a deal sponsor were to raise the necessary equity through a single, passive source, such as JV equity from an insurance company or family office, would that structure then be considered syndication?