Rental Property Investor · Asheville, NC · Member since 2015 · 307 posts · 127 votes
Hello All,
I've been starting to get my research done on syndicating real estate deals. My current understanding is that you cannot send out mailers, unless the individuals have a certain net worth, and have expressed an interest in receiving information from you...which I don't know how they can until you contact them!
Anywhoo! Curious if anyone out here has had any success with syndicating a deal using an LLC with stockholders on a K-1 setup, or on some kind of debt service agreement tied to an LLC.
My typical deal structure involves selling units/shares to an LLC then passing through all taxable gains & depreciation losses to the investors via K-1's like you are proposing in your original post. There is no legal problem with that ownership structure per se other than the fact that you are creating a Security as defined by the SEC. Whenever someone raises money from private investors and then makes decisions on their behalf, a Security has been created.
You may open yourself up to liability (criminal & civil) if you do not register the Security with the SEC or, as typically done, jump through the hoops to qualify for an exemption from registration under Reg D. These 'hoops' are expensive as stated previously by @Curt Smith. You have to determine if you are serious enough to spend the $10-20k on upfront legal costs. You could charge it back to your deal if it is of a sufficient size and there is sufficient profit remaining to attract investors.
Incidentally, if you use a Series LLC form of ownership, future entity legal can be drastically reduced to below $5k per deal. Still you need to be doing deals of say $200,000 minimum to afford these future legal costs depending on profitability of your deals (my minimum deal size is $750,000).
As @Bryan Hancock indicates above, it is quite clear cut that you would be creating a Security. You should be aware that there are real risks that investors will lose money. Even if you are a great investor there are many things outside of your control that can tank a deal. Once that happens, the fingers will be pointed at the sponsor (you) and the SEC will get a call.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
10y
You can now advertise for investors pretty much any way you wish as long as the information is factual and contains all material information. Reg. D rule 506(c) allows for this. Consult with a securities attorney that understands the new laws.
You can offer debt securities to investors of your LLC. This is very common, but preferred equity arrangements will probably attract more investors in many situations. Preferred equity can function a lot like debt if it is structured properly.
The next best is to talk to friends, relatives, folks at your local REIA and do a JV agreement (see a local Attorney), where both partners (you and the lender) are both actively managing the business. You get into trouble if the lender is passive, not a real estate investor, then you'd be offering a "security" to the lender. So you would be back to the above SEC Reg D filing.
The next best is to talk to friends, relatives, folks at your local REIA and do a JV agreement (see a local Attorney), where both partners (you and the lender) are both actively managing the business. You get into trouble if the lender is passive, not a real estate investor, then you'd be offering a "security" to the lender. So you would be back to the above SEC Reg D filing.
Curt,
10k-13k would 100% defeat the purpose of what we're looking to do. I've run the current concept past an attorney, and he's given us a greenlight - just wanted to hear if anyone has heard of our strategy. Our concept is to start with friends & family of both myself and my partner. What we're considering is maximum 24 month notes against an LLC, maximum investment of 10k, minimum of 2.5k. Notes would essentially be unsecured financing with the LLC as the entity borrowing, and all monthly interest payments would go directly back to friends and family. In this way, we can purchase properties cash, rehab them, refinance them, turn around and pay off the "investors", and do it all over again.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
10y
Sounds like a security to me. Everything will be fine until it isn't. Hire a securities attorney. A regular old attorney won't do. Ignore the advice at your peril.
Old timers like Bryan have typed books for answers and over time you can recognize the short hand folks like Bryan use as the experts ponder the responsibility we all have to help new folks avoid big problem areas vs being verbose for no benefit. So Bryan is extremely terse re this issue of borrowing vs offering a security. It's a very fine yet fuzzy line.
If you use a JV (Joint Venture) agreement where the partners have an equity benefit and are are directly involved in decision making and you can prove they make decisions (when things go bad) then you'll be in ok shape. The gap is where to get a JV agreement written for your business?
I sense you will do this anyway.
I'd add risk disclosure paragraphs to your promissory note where you have a lender iniital that paragraph to force reading. You hand out your note doc to the lenders days before your closing so they can read: "all or some of your investment may be lost. The borrower's business model may run into serious problems that are unforeseen at this point in time resulting in 100% failure of the business."
You'd be foolish not to put disclosure and risk statements in your note. Please lift my donated text into your note or similar. You have to disclose the lender they may loose 100% of their principal.
Ignoring that one of the purposes of a SEC registration is for "registering" with the Gov you as a funds raiser, the main benefit in my view is forcing you to write a Disclosure document that your lenders / partners must sign.
My typical deal structure involves selling units/shares to an LLC then passing through all taxable gains & depreciation losses to the investors via K-1's like you are proposing in your original post. There is no legal problem with that ownership structure per se other than the fact that you are creating a Security as defined by the SEC. Whenever someone raises money from private investors and then makes decisions on their behalf, a Security has been created.
You may open yourself up to liability (criminal & civil) if you do not register the Security with the SEC or, as typically done, jump through the hoops to qualify for an exemption from registration under Reg D. These 'hoops' are expensive as stated previously by @Curt Smith. You have to determine if you are serious enough to spend the $10-20k on upfront legal costs. You could charge it back to your deal if it is of a sufficient size and there is sufficient profit remaining to attract investors.
Incidentally, if you use a Series LLC form of ownership, future entity legal can be drastically reduced to below $5k per deal. Still you need to be doing deals of say $200,000 minimum to afford these future legal costs depending on profitability of your deals (my minimum deal size is $750,000).
As @Bryan Hancock indicates above, it is quite clear cut that you would be creating a Security. You should be aware that there are real risks that investors will lose money. Even if you are a great investor there are many things outside of your control that can tank a deal. Once that happens, the fingers will be pointed at the sponsor (you) and the SEC will get a call.
I've been creating successful debt and equity structure syndications with private investors for a few years now. I went to Jillian Sidoti's (Taylor, Trowbridge & Sidoti) Securities 2 day workshop 3 weeks ago in late Sept. Needless to say, my eyes were opened. Don't get me wrong, I was doing a lot of stuff right, but I was surely doing a number of things wrong.
Everyone is happy when a project goes great. It's when things go wrong you have to worry about. Regardless of disclaimers, if a deal goes bad, which they do, and you did not disclose properly, secure investors properly, etc and you get a disgruntled investor, you can be sure just one phone call can bring your world to a screeching halt.
Heed @Curt Smith and @Brian Moore's and everyone else's advice. You are selling a security. Expense the cost into your deals, and use it as a template moving forward. Maybe try creating one LLC and using that LLC to do multiple properties at once, therefore creating enough margin to cover the expense. It may be a small amount you're raising from your investors, but the excuse of not knowing doesn't go over well with the SEC.
To answer your question about soliciting investors, I don't believe it's actually ok to generally solicit investors unless you are forming a Reg A fund. My advice, again, contact Jillians office. They'll shoot you straight. I'm still wrapping my head around the ins and outs of doing it correctly, but I wanted to chime in.
Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
10y
@Eli Freedman Google Jillian Sidoti and you'll end up finding blogs, forums, even a BP thread or two that you can read. Then call Jillian she'll give you 1/2hr free talking and she may have stuff to read.
I picked my knowledge up via all weekend coachings on raising funds and in bits and pieces via multifamily deal structuring coaching. Any deal type that requires raising $1M or more will automatically have discussion about how to raise money.
Look up Dave Lindahl and his training on syndication. It is rather complicated when you first start out, but if you are willing to learn, it becomes a process that you can easily replicate. The laws can be confusing, so you will need an attorney well versed in securities law.
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
10y
Please be careful. I am an investment advisor specializing in raising equity for syndications. The SEC regards this as a security. Sure you can advertise for 506C, but everything must be reviewed by FINRA before it goes out. There are substantial costs in syndications.
It seems everyone on BP wants to be a syndicator! There are companies with hundreds and thousands of employees in this business with full time legal staff who are securities attorneys. These firms have decades of experience in real estate and syndications and terrific past performance. That's your competition.
Best of luck to you, however you decide to proceed.
Investor · Lees Summit, MO · Member since 2015 · 39 posts · 11 votes
10y
Correct me if I'm wrong here. But if a deal cannot absorb a 10-13k attorney fee, should you be looking at a different structure if you are going to friends and family? Why not just form a partnership and use the friends and family as private lenders to fund your projects?
506(c) advertisements don't have to be cleared by FINRA before they "go out."
They have to be filed within ten days of use. And they'd better adhere to a strict reading of FINRA advertising guidelines! That's why it's required that they are filed in the first place
Investor and Property Manager · Waterbury, CT · Member since 2013 · 36 posts · 12 votes
10y
@Leslie Pappas We're here to encourage each other. Those "big guys" were once a small schnook just like me and other startup investors (and you once were). Even Donald Trump once did his first deal believe it or not.
@Leslie Pappas We're here to encourage each other. Those "big guys" were once a small schnook just like me and other startup investors (and you once were). Even Donald Trump once did his first deal believe it or not.
Hi Elisha- I am encouraging you. I'm also trying to provide you information and things to look out for to protect yourself. It's a heavily regulated area of investing and there's a lot to know. I think taking the course listed above would speed your process along. Best of luck.
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
10y
If your looking to throw it out to Non accredited people then beware. To take someone's 50k which is their last few cash is to create a pain in the butt investor.
I think Trowbridge is one of the leaders in this.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
10y
I'm sorry, but there is bad information in this thread. Private securities offerings are regulated by The SEC (and your state securities folks) and are subject to exemptions to registration. FINRA has zero to do with any of what most real estate syndicators do day-to-day. Form D has to be filed after an offering, but FINRA has zero to do with this process or the process of approving advertisements.
Platforms and operators also operate within different securities regimes, many of which have zero to do with FINRA. For instance, our platform uses the Private Funds Adviser exemption to operate:
So saying that FINRA has to approve anything necessarily means that you're posting based on your personal securities setup, which may or may not apply to posters on BiggerPockets and what their securities counsel recommends for them. People should speak with their own attorney about their specific situation, but I work with real estate syndicators all the time and pretty much all of them specifically avoid being subject to FINRA's brain damage by utilizing the issuer exemption. As long as your advertisement is factual, not fraudulent, and adheres to the rest of the securities regime you're operating under you should be fine. Speak to an attorney and don't take advice (including mine) from people on a message board. It's probably a good idea to have an attorney review any ads you use because the ads become part of your offering.
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
10y
Bryan is exactly correct. There are exemptions for issuers regarding the regulations that I and others must adhere to. I am not an issuer. My focus is to raise equity for issuers, and I am subject to regulation, both state and federal, as a result. The syndications I am involved in are for portfolios of NNN properties and large scale multifamily, office and more. Typically these offerings are for assets ranging in value from $25M-$125M.
Bryan is also correct in stating that these forums are not your final answer to any question. Only your attorney can advise you properly regarding this topic. Taking courses in syndication also helps a lot.
Investor · Philadelphia, PA · Member since 2014 · 6 posts · 9 votes
10y
I believe that there are correct statements in both Leslie's post and Bryan's post. Generally speaking, an issuer does not need to file a Rule 506(b) or (c) offering with FINRA. However, if they hire a licensed broker-dealer to market the offering, then the broker-dealer may need to file the offering documents with FINRA as that is the agency that regulates registered broker-dealers and the filing allows them to keep tabs on the broker-dealers.
Why would you hire a broker-dealer to market your deal? They generally have a long list of customers that may be interested in investing in your deal and can make raising money a very efficient process. The catch is that they will generally charge an 8-10% commission for their services. Incidentally, registered broker-dealers are the only folks who are permitted to collect a fee for selling securities. This is an important matter that most issuers miss.
The facts of every offering are different and require their own analysis by a securities lawyer. More often then not, we can find a way to help you to accomplish your goals in a compliant manner. It does cost money, but it also provides piece of mind and will ultimately save you a lot of time and money by doing it correctly the first time.
If you have questions or want to learn more about the process, please call me.