Syndication, JV, preferred return?

[Zach Plackemeier]

I know I’ll ultimately be getting some legal/tax advice on this but I am looking to raise capital for essentially a fund I guess you would say. It will be 100% tied to RE but I want to offer investors a return of around 10%. They have no ownership in the RE or any role they are strictly passive investors. Anyone’s thoughts on what type of agreement I would want or need?

[Chris Levarek]

@Zach Plackemeier There a variety of funds out there. Some are equity and some are debt. Debt being exchanging interest for capital and equity being exchanging ownership shares for capital. There are rules for both. I advise having a call with securities attorney or fund attorney to see what kind of fund might suit your needs.

If it's 10 investors and lower, you could even just do a joint-venture with promissory note. This simplifies paperwork and cost. I say 10, because you mainly have to solve for what's called the "Howey Test" to prove you are not selling securities or running a syndication. If you go above 10 investors, it can be not as easy to prove.

Howey Test to prove if investment contract. The investment is :

1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. To be derived from the efforts of others

The final option "To be derived from the efforts of others" is where the joint venture can get away with not being a investment contract and thus not held to securities rules.