Structuring RE Syndication ??

12 Replies

Hi BiggerPocketers,

As I proceed on my quest to setup my first Apartment syndication deal I have encountered some questions on how to structure the required business entities and thought what better place to ask these questions than on the BiggerPockets forum so here goes.

  1. As I understand it each property is held in its own LLC but do I need to I form an management LLC as well?
  2. Since I am participating as both as an investor and a GP should my management LLC hold the equity stake or should I hold it personally?
  3.  I have a prior relationship with all of the investors I currently have lined up so should I go 506(b) or 506(C) for my first syndication deal?
  4. Who normally pays for setting up the property LLC? If the management LLC pays is this cost normally covered as part of the Acquisition Fee?
  5.  Should I engage a Real Estate attorney in the target market or should I use someone local to my area?

Thanks in advance for your time and consideration.

Hi Travis--

  1. As I understand it each property is held in its own LLC but do I need to I form an management LLC as well? Generally, yes.
  2. Since I am participating as both as an investor and a GP should my management LLC hold the equity stake or should I hold it personally? Neither. You may want to consider holding it in an LLC that you use for personal investments, but it depends on a lot of things.
  3. I have a prior relationship with all of the investors I currently have lined up so should I go 506(b) or 506(C) for my first syndication deal? 506b
  4. Who normally pays for setting up the property LLC? If the management LLC pays is this cost normally covered as part of the Acquisition Fee? no its reimburseable
  5. Should I engage a Real Estate attorney in the target market or should I use someone local to my area? RE transactional attorney in target market; securities attorney is okay nationwide.

@Travis Gibson

  1. As I understand it each property is held in its own LLC but do I need to I form an management LLC as well? (Yes forming a management LLC would be smart. Keep little to no cash in this account just in case a frivolous lawsuit. You should create a holdings company in Wyoming)
  2. Since I am participating as both as an investor and a GP should my management LLC hold the equity stake or should I hold it personally? (You should hold the GP/LP stake in whatever LLC you hold the property in)
  3. I have a prior relationship with all of the investors I currently have lined up so should I go 506(b) or 506(C) for my first syndication deal? (This depends if the majority of your investors are accredited or not. If the majority are not accredited, that answers it)
  4. Who normally pays for setting up the property LLC? If the management LLC pays is this cost normally covered as part of the Acquisition Fee? (All these upfront cost are taken on by the sponsor syndicator. Essentially whoever is leading the charge)
  5. Should I engage a Real Estate attorney in the target market or should I use someone local to my area? (You should engage an SEC attorney and a RE attorney. The RE attorney I prefer to stay local. SEC attorney, you may need to step out of your backyard to work with the best. The best in the business is @Mauricio Rauld)

@Tj Hines just going to chime in that i strongly disagree with respect to the 506b or 506c question. 506c requires verification and if he already knows his investors, there's zero reason for him to do a 506c.

@Amy Wan I appreciate your opinion as you're entitled to have one. Yes a 506B requires an existing relationship. This I know. I answered the question as if his investors were not accredited. I think you miss that. Either way, thanks for sharing your thoughts. Take care.

@Amy Wan not sure what you're trying to prove here. Everything you said I already know. Plus we work with the best SEC attorney in the syndication game and that's all he specializes in. Did you know that 90% of syndications that are filed are 506B? Anyways I'm done with this post. Good luck with all of your endeavors. You should educate someone who doesn't know. Take care

Originally posted by @Tj Hines :

@Amy Wan not sure what you're trying to prove here. Everything you said I already know. Plus we work with the best SEC attorney in the syndication game and that's all he specializes in. Did you know that 90% of syndications that are filed are 506B? Anyways I'm done with this post. Good luck with all of your endeavors. You should educate someone who doesn't know. Take care

Firstly, Amy is a well-respected SEC attorney.

Secondly, I think she is pointing out this sentence of yours 

'This depends if the majority of your investors are accredited or not. If the majority are not accredited, that answers it)'.

That sentence makes it sound like a 506c is a viable option for his scenario. Neither Amy nor myself thinks it should be. Travis already said he knows all of his investors so why would you think he should even consider doing a 506c? Even if the majority of his investors are accredited, going with a 506c would prevent him from taking any of his sophisticated investors. And even if ALL of his investors are accredited, there would still be no reason to go with a 506c since there is the added burden of verification that is not required since he already knows them and can easily do a 506b.

 

@Michael Le Le first of all I'm not telling him which route he should or should not go. That's for him to figure that out. And maybe I took @Travis Gibson question out of context a little. Good for @Amy Wan being a well respected SEC attorney. Congrats. Everything you just said I already know. You take care too. Your point has been made. I declare you and Amy the winner. That should settle it. Geesh

To clear up the 506(b) and 506(c) confusion: 506(b) can be used if you have pre-existing relationships with your investors. You can have up to 35 non-accredited investors and an unlimited amount of accredited investors. This offering cannot be advertised or announced publicly - only offered to those you you already have a good relationship with. 

A 506(c) comes in to play when you are looking to raise capital from people that you don't know. This offering can be advertised and offered to the general public that is accredited. Investors need to have their accreditation verified. This type of offering excludes non-accredited investors, no mater your relationship. This is also typically more expensive and time consuming to set up. 

There are other offering that may be available as well, especially on the state level. In Minnesota we have a few offerings that allow us to publicly raise from accredited and non-accredited investors. Other states do as well. If you want to know the state laws where you're at, having a local securities attorney could provide value. 

Of course in all cases use a securities attorney to make sure you have the right set up and all legal aspects covered.

@Tj Hines I'm not trying to put you down here--I just want to make sure the original poster doesnt go down the 506c route and end up failing on his first raise. I know your attorney and respect him as well. Perhaps this all came down to a typo, but it looks like its been cleared up.

@Amy Wan thanks for chiming in. I didn’t take it personal I perceived his question the wrong way. But totally understand and agree with you. Keep crushing it. I wish you the best with everything

@Amy Wan  @Tj Hines @Todd Dexheimer @Michael Le thank you all for your feedback. I apologize for any confusion my post might have caused.  As an investor new to MF Syndication there are a plethora of things to learn. 

I guarantee I will be posting more "newbie" questions in the near future and let me just say ahead of time that I appreciate everyone's time and consideration.