Is this Fraud or Creative Financing?

Question

I came a across a syndication deal that sounds a little fishy. At first it loos like the sponsor is putting in $440,0000 but after further DD it looks like he has no skin in the game at closing. He is raising $7.7m for an $11M purchase. He is charging a 1% acquisition fee and I am okay with that. The fishy sounding part is where the other $330,0000 is coming from. This is an off market deal. The sponsor is a licensed broker. He negotiated with the seller to pay him a 3% commission and just told them to inflate the purchase price to pay for it. I know he has $100,000 because he put that up as the earnest money deposit. He will be making ~$20,000 per year for an asset management fee on top of his equity position.

Is this an acceptable practice? Is this violating any SEC regs?

Dion DePaoli · Answer

It is not clear if the fees he is attempting to collect are being contributed or if he is taking them and putting them in his pocket.  If the latter, probably not a good deal to do.  If the prior, then the structure may just need some tweaking if the additional 4% creates more risk for the investor(s).  He can certainly earn fees as an agent putting the deal together and at the end of the day, those would come out of the purchase price.  Putting together an $11m purchase is certainly not without work.  Perhaps look to why 4% and not the 3% or the 1%.  Is he trying to achieve some underwriting criteria to put debt on the asset?  There is a gap in the deal which I assume is being addressed with debt.  Is he trying to raise $3.3m in equity and $7.7m in debt?  Is the debt institutional?  Is he signing for it?It's not illegal what he is doing.  He may run into issues with disclosures if he is self-dealing in the deal and is not properly disclosing that.  Is it acceptable, is a matter to be determined by the investors.  If it is not, then counter or don't do the deal.