SEC Costs for Syndication? - What is your cutoff?

Question

As most of you know, there is a large expense ($10k-$30k) when putting together a larger syndicated deal.

I'm curious to know, at what point do you decide to only bring on a few investors and make them part of the GP to avoid the costs for SEC attorney/docs?

What criteria do you look at when making this decision?

Todd Dexheimer · Answer

I think others have basically covered it. If the investor is passive and not involved in the day to day, then you are still selling securities. Even with one passive investor you should use a Securities attorney. If they have voting rights and are apart of the "day to day," then having them as a partner will be ok. I think you just need to look at the bottom line to see what the attorney fees do to your return. If the raise is over $1mm then the $10k+ won't effect the bottom line much.

Ned Carey · Answer

@Dan Handford your post implies there is a dollar number or number of people. You let people join the controlling entity with authority to exercise control because they bring skills to the table that you can benefit from.

If you will not clearly benefit from others being part of the business; then spend the money to create docs to make them passive investors.

Along the lines of what @Ben Leybovich is saying, only give control to people who are smarter than you or more experienced than you. Of course it is better still to simply pay for that expertise and keep control yourself.

Maxwell Manatt · Answer

This is a good question.

Obviously your relationship to your potential partners is important. Does everyone know their role and what is expected of them?

Do the operational partners have the liquid capital, net worth and background to close? Will you need "silent" money/pedigree partners? Probable if you have more than 4-5 people at most and lots of "silent" partners if would be much safer to formally syndicate.

If those two factors are in line might make sense to draw the line at a certain purchase price, Unit count or expected NOI. For our group it is a purchase price of 1.5 to 2 million dollars, around 40 units in our markets (moving target obviously, depends on the properties current NOI and potential upside). Much under that we will self fund. But likely our deal criteria will move upwards to qualify for syndication as we gain more experience. We want to syndicate now to build a track record of returning capital even if we wont make that much money for all the hard work. In the future as we value our time more we will likely only syndicate 80-120 plus unit deals with 5 million dollar plus purchase prices.

Ben Leybovich · Answer

Who said anything about not including people into the GP? But:

A. If all you have is GP, then why would you spend $15,000 on legal for a limited partnership? All you have is a democracy, which is a big no.

B. If you are syndicating, the a limited partnership is the way to go. And if so - pay an attorney.

Basically, your question was - how can I avoid paying the big legal fees. And my answer is - if you are pooling capital - never.

Robert Borr · Answer

@Ben Leybovich you make excellent points. Syndicating is all about control. @Ned Carey raises an important perspective weighing the benefits of what someone brings to the deal skill wise - but the actual duties performed by these "partners" are another consideration. As @Maxwell Manatt points out- does everyone know their role and what is expected from them - because unperformed duties do not raise someone to the level of a sponsor/issuer and may create the presumption that the specific person is indeed an investor who actually purchased a security.

@Dan Handford, in my experience legal fees tend to become hefty when there is another general partner/issuer level entity joint venturing and that JV agreement has to be laboriously drafted because the syndicator and the separate entity both require control, but are unable or unwilling to partner within the same management company of the syndicate. Also, as the amount of the raise increases, the level of exposure to the firm's E&O policy necessarily increases which may warrant a premium on legal fees.

Ben Leybovich · Answer

At no point do you do that!

Brandon Abbott · Answer

@Ben Leybovich can you give some reasoning behind your stance on not including investors in the GP? I would be interested to get your viewpoint.

SEC Costs for Syndication? - What is your cutoff?

I'm curious to know, at what point do you decide to only bring on a few investors and make them part of the GP to avoid the costs for SEC attorney/docs?

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