Legal question on structuring a deal

[Vu Nghiem]

Hi all,

I'm a novice investor that have done a few live flips deals on my own. I have a group of friends that is willing to commit about 300K of capital for me to BRRRR with.

How should I structure the entity so that all of my friends have a piece of the equity and not coming in as a lender? There is about 10-12 people willing to commit 25-50K each. 

300K is too small to justify the costs of private placement memorandum and subscription agreement in the formation of the LLC.

Is there a way to have all these friends of mine, lend on the deal until I complete the cash out refinance, then sell them the equity in lieu of repayment of the loan as a work around?

Any advice is appreciated.

-Vu

[Taylor L.]

Originally posted by @Account Closed:

Originally posted by @Vu Nghiem:

Hi all,

I'm a novice investor that have done a few live flips deals on my own. I have a group of friends that is willing to commit about 300K of capital for me to BRRRR with.

How should I structure the entity so that all of my friends have a piece of the equity and not coming in as a lender? There is about 10-12 people willing to commit 25-50K each. 

300K is too small to justify the costs of private placement memorandum and subscription agreement in the formation of the LLC.

Is there a way to have all these friends of mine, lend on the deal until I complete the cash out refinance, then sell them the equity in lieu of repayment of the loan as a work around?

Any advice is appreciated.

-Vu

You set one One LLC that you personally own. That LLC sets up Joint Venture agreements with each of the other investors. Since you all are friends and you won't be soliciting from people you don't know, there isn't really a syndication problem and you should be fine. I'd have an attorney draw up the Joint Venture agreement and reuse it for each investor. It does not get filed. You have in the agreement that you make all of the decisions about the property since someone has to make decisions and having 12 investors is a bit like herding cats. Everyone will have an opinion but someone has to be in charge. Also, use a title company, escrow and have umbrella insurance.

 I'm not sure I understand "then sell them the equity in lieu of repayment of the loan as a work around?" or how that would benefit anyone (everyone would still have taxes due) so I can't really speak to that particular issue.

It is not correct that you do not need to do the syndication paperwork because you already have a relationship with the investors and are not soliciting people you don't know. Pre-existing relationship does not factor in to the SEC's determination of whether an offering is a security, and in fact a pre-existing relationship is required for one of the more common syndication rules used, 506(b).

There is a helpful discussion of what constitutes a JV here https://www.realestateinvestorlaw.com/buy-or-sell-a-property/joint-ventures/