Syndication/Opportunity Zone 506 (b) funding advice

31 Replies

Experienced syndicators!

Our team is in the midst of finalizing our Opportunity Zone Fund based in SPOKANE, Wa. We are looking to raise $30M, with the total project being worth $80M ($50M leverage). We own the dirt, and we are at the final leg of legal and accounting (operating agreement, PPM, subscription agreement, etc...)

The property is in a prime location abutting the main city park, and over looking the river which cuts through downtown. An added bonus is that adjacent to our property, the city is in the process of building a state of the art 180,000 sqft. sportsplex. We really lucked out with the OZ location designation.

The project will be 2 towers. One will be a 6 story mixed use building with retail/office/apartments. The second and larger tower will consist of 6 floors of parking with office and hotel directly above. The tower will be comprised of 12 stories total.

My role will be investor relations- essentially seeking capital contributions from investors and managing those relationships as the asset matures.

After speaking with our legal counsel we have opted for Regulation D Rule 506 B. My question for the forum is- Since we cannot use general solicitation or advertising to market our fund, what are the most effective and creative way you have raised funds in this space?

Myself and our team has a respectable “Rolodex”; however, we have been told by legal that even friends or friends cannot invest in our fund since there isn’t a “preexisting substantive relationship”.

Is there a work around? How do you market? What do you say when asked about your project? Can someone that hears about the fund promote it to friends and family? Can that same person promote it during an interview?

Any insight would be greatly appreciated.

Thank you in advance!

@Derek Raivio these are questions for your SEC attorney. Most people do not know the law when it comes to raising capital and are doing it incorrectly.

 I’m curious why you would not go with a 506C? With that exemption you can advertise and do general solicitation of accredited investors. 

The only advantage of doing the 506B is that you can have 35 non-accredited sophisticated investors but for a project requiring 30 million equity that is going to be an insignificant number.

I would be happy to discuss. Feel free to shoot me a pm and we can set up some time to talk.

@Derek Raivio the requirement for you to have a pre-exitsing substantive relationship with your investor goes beyond merely being friends and/or relatives. It requires you to know and understand their investment goals and strategies and even how much capital they are able to invest. You need to be able to demonstrate you have built up this level of relationship before you present a specific deal to them and it is something that is developed over a period of time.

If the deal went sideways and a complaint was made to the SEC, similar to having to justify any tax deductions to the IRS, the burden of proving you had a pre-existing substantive relationship would fall on you. This would require you to keep detailed and contemporaneous notes of your meetings and dealings with any investors. If you haven't already considered this, you may need to start thinking about leveraging a CRM system to help you with this requirement.

Originally posted by @Derek Raivio :

Experienced syndicators!

Our team is in the midst of finalizing our Opportunity Zone Fund based in SPOKANE, Wa. We are looking to raise $30M, with the total project being worth $80M ($50M leverage). We own the dirt, and we are at the final leg of legal and accounting (operating agreement, PPM, subscription agreement, etc...)

The property is in a prime location abutting the main city park, and over looking the river which cuts through downtown. An added bonus is that adjacent to our property, the city is in the process of building a state of the art 180,000 sqft. sportsplex. We really lucked out with the OZ location designation.

The project will be 2 towers. One will be a 6 story mixed use building with retail/office/apartments. The second and larger tower will consist of 6 floors of parking with office and hotel directly above. The tower will be comprised of 12 stories total.

My role will be investor relations- essentially seeking capital contributions from investors and managing those relationships as the asset matures.

After speaking with our legal counsel we have opted for Regulation D Rule 506 B. My question for the forum is- Since we cannot use general solicitation or advertising to market our fund, what are the most effective and creative way you have raised funds in this space?

Myself and our team has a respectable “Rolodex”; however, we have been told by legal that even friends or friends cannot invest in our fund since there isn’t a “preexisting substantive relationship”.

Is there a work around? How do you market? What do you say when asked about your project? Can someone that hears about the fund promote it to friends and family? Can that same person promote it during an interview?

Any insight would be greatly appreciated.

Thank you in advance!

Please, don't take this the wrong way but it doesn't seem like you are ready to raise $30M because these are very basic questions (not saying you shouldn't ask them). Raising $30M is a big commitment that only a few handful of syndicators in the country are able to do. Without a successful track record and extensive rolodex of people in this area, you will be swimming upstream. 

I am assuming that you are a junior analyst with a developer (and that they have a more extensive track record). If so, why not rely on their relationships within the broker-dealer community?

 

@Derek Raivio

Hi Derek,

Seems like a great project.

Just a couple of questions.

What made you choose mixed use

And you mentioned “preexisting substantive relationship” issues. Posting the deal details openly in a forum.... (you have to be careful of General Solicitation issues).

Also, overlooking a river seems like a good marketing point too. A lot of people enjoy having a nice view.

Good Luck!



@Derek Raivio

I'd say, you're little bit late to the party. If you're planning to leverage 506b regulation and don't have the pre-existing substantive relationships built, then it will be challenging to go through the capital raising process. The relationships building process is lengthy and takes time and consistency and the track record. This process should have been started long ago. At this stage, I'd agree with one of the comments above to work with a broker-dealer for this offering to ensure you can raise. 

I also think 506c would have been a much better option for this deal. 

Note, I'm not an attorney and this is not advice rather my opinion. You should definitely consult with a securities attorney.

Perhaps either @Amy Wan or @Mauricio Rauld can give you some recommendations.

How far along are you in the entitlement process? I don't love office, but we should talk. My firm is capable of funding the entire equity piece. That would solve all of your problems :) 

@Derek Raivio   ok this is just me: If I had that kind of collateral in a deal like that, I would find one partner with some real horse power even if that partner will take more of the pie than a group of investors. The deal will happen sooner, you will realize your money faster and off to the next deal a good year faster than raising money one investor at a time.

May want to solicit general contractors that builds exactly what you are looking to do.. built it, rent it and sell it. Partnerships that are designed to end with everybody walking away with money seem to go smoother in my own experiences.

Good luck 

@Derek Raivio

I would get very nervous when the person in charge of raising $30 million through pre existing relationships asks how do I raise $30 million when I don't have those relationships. Am I missing something here? How experienced in syndication and raising capital is your company? I'm going to offer a wild guess that your company is experienced in commercial real estate, but not in syndications. If my assumption is correct then you need to engage an outside placement agent to raise the capital using their contacts, possibly an equity real estate crowdfunding site. IF a reputable placement agent or crowdfunding site will accept your deal.

Sophisticated and accredited investors, for the most part, invest in people and sponsors with verifiable track records of successful similar investments. If you have this a successful $30 million capital raise, while still very difficult, is possible. Without it it’s impossible.

@Derek Raivio ,

After speaking with our legal counsel we have opted for Regulation D Rule 506 B. My question for the forum is- Since we cannot use general solicitation or advertising to market our fund, what are the most effective and creative way you have raised funds in this space? (Since you're 506B, you're right - general solicitation is prohibited. How's your network? Do you have trusted friends and family members, business associates, co-workers that believe in what you're doing. Do they see the value there. This is who I would start with.)

Myself and our team has a respectable “Rolodex”; however, we have been told by legal that even friends or friends cannot invest in our fund since there isn’t a “preexisting substantive relationship”. (Don't understand why you're saying friends and family can't invest with you. The pre-existing relationship is already there. Not to sure that the SEC attorney you're dealing with is advising you correctly on this. I would suggest reaching out to one of the best SEC attorneys in the game that deal with a ton of syndicators. @Mauricio Rauld)

Is there a work around? (There's no way to work around it)

How do you market? (You can't market to the open public. If you want to market to the open public, the best thing to do is to file Reg D 506C, which allows you to advertise to the masses without any consequences.)

What do you say when asked about your project? (You have to be honest and tell them, that we need a pre-existing relationship. You need to have a few meetings with that individual to learn more about them and their financial goals. After the 3rd meet or so, you should be good to talk with them about your projects)

Can someone that hears about the fund promote it to friends and family? (They can make introductions and from there you should schedule a few sit downs with that prospect before they can get access to the deal)

Can that same person promote it during an interview? (Not sure. A lot of these questions you have, should be easily answered by your SEC attorney, who you guys are working with. If they're not answering these common questions and you're paying them, I suggest seek counsel elsewhere. @Mauricio Rauld)

@Matt Wills Thank you for your insight. Regarding a pre-existing substantive relationship, I have heard and been told that a general rule for syndicators can be 3 points of contact prior to introducing the investment opportunity. The first, he introduction (where you learn about each other and build some rapport). The second point of contact (discussing the potential investors financial situation and goals). Lastly, step 3 (have the potential investor complete the 'accredited/sophisticated investor form'. Finally, introduce them to the fund and what we are offering.

Are these syndicators going about it wrong? 

And yes, we have a CRM in place!








similarit

@Omar Khan

We understand it is going to be a challenge; however, the property and potential really speak for itself. 

You are correct in that I do not have extensive experience in raising capital. However, I have been investing in SFH and smaller MF communities since 2011. One of my partners and GP in the fund has been developing for 40 years. He owns/has developed Walgreens, Fred Meyers, retail, office, and apartments. My value add is to bring investors and interest to this opportunity.

We have realized that if we struggle raising capital, we will seek a securities broker. 



@Matt Wills Thank you for your insight. Regarding a pre-existing substantive relationship, I have heard and been told that a general rule for syndicators can be 3 points of contact prior to introducing the investment opportunity. The first, he introduction (where you learn about each other and build some rapport). The second point of contact (discussing the potential investors financial situation and goals). Lastly, step 3 (have the potential investor complete the 'accredited/sophisticated investor form'. Finally, introduce them to the fund and what we are offering.

Are these syndicators going about it wrong?

And yes, we have a CRM in place!

@Alina Trigub

We have a good base of existing substantive relationships in place. $30M of capital gains requires a size-able pool of investors to call on. Our attorneys have mentioned that if we go the 506 B route, it will lessen our risk and liability because we do not have to verify if an investor is accredited or not. Makes sense to me, yet i'm not sure if it's true or not. Also, does it cost more to assure an investor is accredited and opt the 506 C route? Is the extra cost worth being able to solicit the fund? What's your take ? @Amy Wan and @Mauricio Rauld



@Don Konipol Lender from The Woodlands, Texas

replied about 12 hours ago

@Derek Raivio

I would get very nervous when the person in charge of raising $30 million through pre existing relationships asks how do I raise $30 million when I don’t have those relationships. Am I missing something here? How experienced in syndication and raising capital is your company? I’m going to offer a wild guess that your company is experienced in commercial real estate, but not in syndications. If my assumption is correct then you need to engage an outside placement agent to raise the capital using their contacts, possibly an equity real estate crowdfunding site. IF a reputable placement agent or crowdfunding site will accept your deal.

Sophisticated and accredited investors, for the most part, invest in people and sponsors with verifiable track records of successful similar investments. If you have this a successful $30 million capital raise, while still very difficult, is possible. Without it it’s impossible.

Don Konipol


@Don Konipol

I appreciate your opinion. 

You are correct in that I do not have extensive experience in raising capital. However, I have been investing in SFH and smaller MF communities since 2011. One of my partners and GP in the fund has been developing for 40 years. He owns/has developed Walgreens, Fred Meyers, retail, office, and apartments. My point is that, what the GP's lack in syndicating prowess, they make up in developing/investing experience. 

We have a size-able network, and raising $30M is definitely doable. However, there is still a possibility we come up short. That is why my initial post is whether we should bypass rule B and immediately designate rule C exemption? Also, what are the downsides of Rule C? Time? Cost? Risk?

Would you recommend we immediately opt for rule 506 (c) and do not attempt 506 (b)? Or, skip both of those and partner with a securities broker?





@Don Konipol

I appreciate your opinion.

You are correct in that I do not have extensive experience in raising capital. However, I have been investing in SFH and smaller MF communities since 2011. One of my partners and GP in the fund has been developing for 40 years. He owns/has developed Walgreens, Fred Meyers, retail, office, and apartments. My point is that, what the GP's lack in syndicating prowess, they make up in developing/investing experience.

We have a size-able network, and raising $30M is definitely doable. However, there is still a possibility we come up short. That is why my initial post is whether we should bypass rule B and immediately designate rule C exemption? Also, what are the downsides of Rule C? Time? Cost? Risk?

Would you recommend we immediately opt for rule 506 (c) and do not attempt 506 (b)? Or, skip both of those and partner with a securities broker?

@Tj Hines Specialist from Tampa, FL

replied about 8 hours ago

@Derek Raivio ,

After speaking with our legal counsel we have opted for Regulation D Rule 506 B. My question for the forum is- Since we cannot use general solicitation or advertising to market our fund, what are the most effective and creative way you have raised funds in this space? (Since you're 506B, you're right - general solicitation is prohibited. How's your network? Do you have trusted friends and family members, business associates, co-workers that believe in what you're doing. Do they see the value there. This is who I would start with.)

Myself and our team has a respectable “Rolodex”; however, we have been told by legal that even friends or friends cannot invest in our fund since there isn’t a “preexisting substantive relationship”. (Don't understand why you're saying friends and family can't invest with you. The pre-existing relationship is already there. Not to sure that the SEC attorney you're dealing with is advising you correctly on this. I would suggest reaching out to one of the best SEC attorneys in the game that deal with a ton of syndicators. @Mauricio Rauld)

Is there a work around? (There's no way to work around it)

How do you market? (You can't market to the open public. If you want to market to the open public, the best thing to do is to file Reg D 506C, which allows you to advertise to the masses without any consequences.)

What do you say when asked about your project? (You have to be honest and tell them, that we need a pre-existing relationship. You need to have a few meetings with that individual to learn more about them and their financial goals. After the 3rd meet or so, you should be good to talk with them about your projects)

Can someone that hears about the fund promote it to friends and family? (They can make introductions and from there you should schedule a few sit downs with that prospect before they can get access to the deal)

Can that same person promote it during an interview? (Not sure. A lot of these questions you have, should be easily answered by your SEC attorney, who you guys are working with. If they're not answering these common questions and you're paying them, I suggest seek counsel elsewhere. @Mauricio Rauld)@

@Tj Hines

That's what I was looking for. I have heard other syndicators say they generally have 3 points of contact before showing the prospect the deal. It seems like it could be a grey area though. Is this common practice when raising capital in the syndication world? And after 3 conversations, does this generally count as "pre existing substantive relationship"?

@Derek Raivio As others have said, 506c would have helped mitigate the issues you are now having with the capital-raising process. 

Now, for a $30M raise?!! It seems interesting that your team is at this point. 

Good luck on the project and keep us updated on how you guys resolve the issue 

"Would you recommend we immediately opt for rule 506 (c) and do not attempt 506 (b)? Or, skip both of those and partner with a securities broker?"

"Our attorneys have mentioned that if we go the 506 B route, it will lessen our risk and liability because we do not have to verify if an investor is accredited or not."

@Derek Raivio . in answer to the first question, I would go with 506C if I thought I could raise the capital myself, and try a professional capital introductory firm if I thought I couldn't.  Sometimes you can do both.

In answer to your second question, the risk and liability of verifying an accreditation under 506c is very small, because the SEC has outlined what needs to be done to verify.  For example, one way of verification is to obtain a letter from the investors attorney, CPA or wealth manager, attesting to the fact that the investor is accredited.  The SEC ha even approved specific language.  Once this is done it is no longer your problem if someone has lied.  Another approved method is reviewing 2 years tax returns.  Again, the burden is verifying what is on the returns, not that the returns are legit.  In anywise, the task can be outsourced to firms that verify accreditation for about $30 per investor, relieving you of the task and risk.

You seem like a sincere young man who wants to do a good job.  I just don't understand how someone without the experience in raising capital can be placed in a position to raise such a large sum in his initial entry.  However, I'm a dinosaur; LOL, set in my ways as 24 year olds start companies and become billionaires, so I'm most likely just out of touch with the 21st century! LOL

Best of luck 

@Derek Raivio

"We are in the final stages of our paper work and we will have the option to change from Rule 506 B to C.

My question for legal and syndicators are:

  1. - What are the drawbacks opting for 506 C vs. B?"

there has been 30 years of case law and court decisions regarding 506b, almost none regarding 506c.  

when LLCs were new some people still opted for corporations despite the advantages of LLCs because of the same reasons. When series LLCs came out some people still opted for multiple LLCs rather than a series LLC for the same reason.

On the spectrum of entrepreneurial risk, this risk is WAY DOWN the ladder.  Thats why risk assessments are made by risk assessment specialists, not attorneys.  Most attorneys never saw a deal they couldn't kill.