Lender · Chandler, AZ · Member since 2019 · 2 posts · 1 vote
Hello all, newbie here with a question for any RE attorney or veteran of using OPM for purchasing real estate.
Suppose that I have a deal sitting on my desk but no money to fund it. I have a personal relationship with someone who has the money to fund my deal, and is looking for deals. Suppose that I want to offer them a preferred return on their invested capital and then split what is left over according to a negotiated split percentage. At this point would I be considered to be marketing a security to them? Presumably that comes with some required SEC fillings and additional regulatory concerns. Or am I in safe harbor under 506(b) since I have a personal relationship and am not publicly marketing the deal. Any information or direction to where I can read up on this is much appreciated.
Thanks yall.
V/r,
Jake
**This post is a request for information only. Nothing in this post should be taken as a solicitation. Any inquiries about the specific deal will not be responded to.**
Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
5y
Based on what you describe alone, the classic attorney response "it depends" applies.
Setting up a securities offering should run $25-50K, so for small deals that doesn't make economic sense.
A note/lien makes more sense but you still have to overcome the presumption of an investment contract (among other issues) if you do an equity kicker. That answer has to match the facts of your deal.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
5y
I am not a securities attorney. I just do syndications.
Check out @Mauricio Rauld's response to this thread. Based on details you've provided you probably are offering a security, since this person is a passive investor. A 506(b) still requires legal documentation prepared by a securities attorney. Just having a pre existing relationship does not mean you do not have more work to do.
Why not find someone you can actively partner with on your deal?
Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
5y
If the person is a "friend" you don't need to spend 10k creating a syndication. Friends have been buying properties together since properties have been for sale. Make sure to contract the property through a LLC and go from there to buy the property.
If this person is not a friend then it is a solicitation and should be legally treated as such.
Lender · Chandler, AZ · Member since 2019 · 2 posts · 1 vote
5y
Thank you for the help. I think I understand, but to make sure:
If I setup a 2 member LLC with my friend to contract the property, at that point it is not considered a security since we would both be active partners in the LLC and thus avoid the otherwise necessary securities filings? Whatever comp structure we negotiate would be between us and wouldn't cause it to be considered a security, even if that structure included a preferred return similar to a syndication.
Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
5y
I know the syndication talk has been huge on this site lately (I'm not totally sure why) but I've been buying real estate for 20 years with partners and I have never once created a syndicate. While I have been catching up on the talk about syndication on here the overwhelming amount of investor properties are bought by through regular partnerships and friends and family as it has been for years. Don't let anyone make it more complicated than it has to be for you.
My advice would be to talk to a real estate attorney in your area and ask him what's the best way for you and your friend to buy a property. I'll bet money he says, LLC. But let me know what he says. I hope this helps. Good luck.
Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
5y
Based on what you describe alone, the classic attorney response "it depends" applies.
Setting up a securities offering should run $25-50K, so for small deals that doesn't make economic sense.
A note/lien makes more sense but you still have to overcome the presumption of an investment contract (among other issues) if you do an equity kicker. That answer has to match the facts of your deal.
Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
5y
@Bob Floss II I completely agree if he forms a partnership he would have to give his friend voting power. But I'm sure his attorney would explain this to him. I only was suggesting that an LLC would be an option.
@Jerel Ehlert I'm assuming (I could be totally wrong) @Jacob Huston, a new investor, is asking about a small real estate property as a first time investment. Security offerings, creating a syndication, and SEC filings seems like an expensive and overly complicated route just to buy a small property and it seemed like the answers were drifting in that direction. This is why I suggested talking to his attorney about doing an LLC because it seems pretty straight forward. Although, the details could totally change that. This is why I suggested he talk to his attorney to get advice specifically related to this deal. In general, I would lean toward this being an LLC.
Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
5y
@Steven Stokes If the money investor is strictly passive, it is still a security. Not really that different than selling stock in a corporation. A slightly less volatile approach, depending on the state the property is in, would be to do a JV (joint venture). A JV is similar to a GP with an agreement to split debt. Each JV owes fiduciary duties to every other JV, so it is also dangerous in the extreme for novices.
Easiest thing would be do a note/lien at a good rate you both can agree upon and build a relationship from there.