Starting Private Fund where I lend to small builders-HELP

[Mark Oviatt]

Hi BP, I'm looking to start a private equity fund where I intend to take accredited investors money and lend bridge/construction loan to small/mid sized single family builders. 

1.As I stated before, i will only use accredited money only, so a PPM is not law, but I plan on using one as an insurance policy. The PPM will outline fund operations mostly and define basics. Project/loan maturity periods will only be 12 months. Since I'm looking at many projects at a time, defining "one" project, or even five at a time would be too costly to produce project specific PPM's. This would also be a close-ended fund. The question is: Do I declare this a 506B?C? and just produce one master ppm which just really defines everything about the fund except the project? Or do I define just my lending strategy in this master ppm?

2.Is it cheaper to go external with accounting? I know it plays better with investor transparency. How much does this cost? Any recommendations on a reputable firm that specializes in fund accounting?

Thanks for any help. 

2.

[Mark Oviatt]

I guess I should point out that I have read advice to put each loan into an LLC. I will create that structure on my end as the general partner. However, this advice also instructed me to put as many investor as it takes to fund a new house (1-3?) also into an LLC. This seems slow and cumbersome if I had say 10 loans going?

[Greg Dickerson]

@Mark Oviatt are you proposing to lend on the debt or equity? 

If you are lending debt to take down the lot and or provide construction funding then you simply record a note and deed of trust depending on your state. Your fund is simply a lender. 

The LLC, PPM and subscriptions documents would be for the fund not the builders. The builder is a borrower not a member.

Yes you should always use a third party fund administrator and accounting firm to audit and preform all the accounting and back office duties. This is payed for as part of the management fee charged to the investors.

[Mark Oviatt]

Thanks Greg. We are on the same page with your response. 

I would be lending on the debt.

I neglected to say that my questions regarding the PPM is entirely protection from investor (and SEC) backlash. I know, consult a securities lawyer and I will. I prefer to have a game plan before I sit down in front of a $500/hr lawyer...Apologies (I tend to do that with questions.) I'm familiar with my builder relationship protocols.

[Matt Wills]

@Mark Oviatt with regards your question concerning whether to utilize the exemption under 506(b) or 506(c), this really comes down to whether you want to be able to advertise the offering or not.

There are a number of trade offs between 506(b) and 506(c). Under 506(b) you can raise capital from both accredited and sophisticated investors (up to 35 sophisticated investors), but the catch is you cannot solicit investors and can only raise capital from investors with whom you can demonstrate a substantive pre-existing relationship. However, with 506(c) you can openly advertise the offering but you can only raise capital from accredited investors. 

An accredited investor is someone with a network of $1m+ excluding their principal place of residence or someone whose income was $200k+ single ($300k household) in each of the last 2 years and expects to maintain a similar level of income going forwards.

Hope this helps.

[Tj Hines]

@Mark Oviatt,

Do I declare this a 506B?C? (If you plan on taking in nothing but accredited investors the 506C designation is what you're looking for) and just produce one master ppm which just really defines everything about the fund except the project? Or do I define just my lending strategy in this master ppm? (I would consult with one of the best SEC attorney's in the game that specializes in working with a ton of syndicators @Mauricio Rauld)

2.Is it cheaper to go external with accounting? (Having a knowledgeable bookkeeper in regards to your specific model is key) I know it plays better with investor transparency. How much does this cost? (Pricing can vary from one company to the next) Any recommendations on a reputable firm that specializes in fund accounting? (Someone can tell you what firm works best for them, but it doesn't necessarily mean that it will work for you or your business model. Gather as many referrals as you can, then start to peel back the onion by interviewing them one at a time. @Joe Fairless wrote a great article on this and what questions you can ask to determine if they would be the right fit. You can find this blog article on Joefairless.com)

[Jay Hinrichs]

@Greg Dickerson good point Greg the OP is mixing up who is the lender and who is the borrower.. there is no need for each loan to be in a separate LLC that's silly.

the fund that limits you to 1 mil  would be too small in my mind..  non accredited investors are tough to manage also in my experience..  so I would not bring in those folks not worth the brain drain.

Also I would make the loan terms 18 months in todays cycle.. 12 months is going to come and go and then your having to do extensions and your borrowers will push back on paying extensions fee's etc..  that's what my bank is doing now all our loans are 18 months.. less work for everyone. 

the PPM is basically a blind pool since you will not know which loans you will fund until they come in.. it can be a lucrative space the bigger HML are just now getting into the space.. but more of them are joining the fray.

[Amy Wan]

Having done this type of work before, I should say there is a lot of nuance here. You can create one large fund that outlines the overarching plan. That does not dictate whether its a 506B or C--your investor strategy and marketing strategy dictates which exemption you should use.

[Mark Oviatt]

Ok, I'm about to create some LLC's for fund structure....

GP

My research has shown me that as the General Partner(GP), I should create two seperate LLC's. One we will call "GPmgt llc" to collect management fees (and any other defined fund fees) and one called "GPequity llc" to collect any other profit splits/promote. Do I need any specific instructions on how I wish to be taxed (Sole Proprietor) on these llc's or any other "must haves" when filing for the LLC's?

LP/GP

My research has shown me to create one single "Fund llc" that will essentially be the hub for funds. Since I plan on operating like a blind pool and making residential loans with investor funds, do I need to state all that in the LLC application filing? Along with the waterfall, clawbacks, carried interest splits, ect......Specifically, in the Articles of Operations? (This is an optional document in Michigan.) I'll have it stated in 506(C) term sheets.??? So, do I just create the LLC's and let my PPM/Term sheets spell out the operations? Am I over thinking this? Thanks

(I will consult a lawyer, but would love to hear from experience.)