Investment group and LLC questions

[Steve Sauro]

I'm looking for anyone who has experience with this sort of setup.

I have a group of 8 investors (friends/family) that are want to pool money to invest in real estate.  I would be one of the investors as well as handle the property management.  I would identify the properties of interest, get the tenants for an annual rental and handle all maintenance etc associated with management of the properties.

I can't be the first person to try this and I'm hoping to connect with others that can help me understand what is required to establish a new LLC (or similar), divide profits evenly as well as tax reporting. Am I oversimplifying this?

Feel free to reply to the thread or contact me directly.

Thanks!!

[Drew Sygit]

Pooling money to invest in a single property is often an SEC violation - unless you setup a fund to work with accredited investors.

There are different requirements if you have one investor per property...

[Account Closed]

Originally posted by @Drew Sygit:

Pooling money to invest in a single property is often an SEC violation - unless you setup a fund to work with accredited investors.

There are different requirements if you have one investor per property...

 And that's an important distinction for readers to take notice of, thinking begin accredited will give them some kind of privileged access.

All "Accredited" meant for me was there is no agency like the SEC who was going to protect me in any way on those kind of deals. 

[David M.]

@Steve Sauro

I THINK you have a few too many there...  somebody will have to chime in as to whether this becomes a syndicatin or something where the SEC says they are going to regulate it.

But to your question... I'm not sure in Maryland but you would probably form a LLC, just like any other. You'll want a lawyer to draft up the Operating Agreement for you to cover everything, and perhaps an accountant to do the tax preparation and maybe even bookkeeping if you don't do it yourself.

It looks like you have 7 silent partners... You MIGHT want to create a Mgt LLC from which you act like a property manager. You can charge the main LLC which holds the TItle to the property for your services. There are lots of ways to handle this. I'd be happy to chat.

Good luck.

[Don Konipol]

@Steve Sauro

Please ignore the previous incorrect comments on securities regulations; why people with limited or no knowledge or experience continue to provide misinformation is very puzzling!

All investment offerings FOR PROFIT are securities offerings. All securities offering must be registered with the SEC, UNLESS the offering qualifies for an exemption from registration. The two main exemptions from registration are (1) intra state offerings and (2) private offerings. Recently, the SEC, at the direction of congress, has created a path for companies to have a public offering without registration.

An intra state offering is a securities offering to investors all residing in a single state. This type offering does not require registration with Federal agencies, but must follow any requirements of the state the offering is effective in.

A private offering is an offering made only to people having an existing relationship with the issuer. This offering can be done through the general exemption from SEC registration for private offerings as per the Securities Act of 1934, or in compliance with the 1982 SEC, Regulation D, Sec 504, 505, or 506. Regulation D is known as the “safe harbor” exemption because if an issuer complies with Reg D instead of the general exemption for private offerings, the SEC will not attack the offering as a public offering in the future, and the issuer has a definitive defense if sued by a disgruntled investor.

Reg D 504 (b) allows for up to 35 unaccredited investors and unlimited number of accredited investors. However, the unaccredited investors must be “sophisticated”. Reg D 504 (c) allows for issuance only to accredited investors, but allows “general solicitation and advertising”, thereby making this a “private” public offering! All Reg D offerings must offer the investors a Private Placement Memorandum with specific information and disclosures, as well as a filing (not registration) with the SEC, and a courtesy filing with any states the investors reside in. Attorneys specializing in securities work generally charge $10,000 - 15,000 for the basic setup.

For most of the 20th century the vehicle of choice for real estate offerings was the limited partnership model. The sponsor or an entity created by the sponsor was the general partner with liability for the business or assets, and investors were limited partners without liability. The setup was somewhat costly, a little clunky, and required a number of different legal entities to accomplish all objectives. In the 1990s limited liability companies were created, and now are the preferred choice. The sponsor is the "manager" of the LLC, and the investors are the "members". An Operating Agreement spells out the terms. Members are issued "units" representing ownership interests.

Alternatively, an offering g can be set up on blockchain, with an Initial Coin Offering, with a coin representing an ownership, or a financial interest. This is very new and legally uncharted waters.

So, your choices are (1) created an LLC and an Operating Agreement for the eight investors and utilize the general exemption for private offerings or (2) pay the greater expense of a Reg D offering.

As for the set, compensation, etc., here is what we found works.

1. If the sponsor is also the property manager then he receives a property management fee equal to what an outside PM would be paid

2. If the sponsor is a real estate broker, he receives a buyers broker commission on the purchase. If not, he receives a 2 point “acquisition fee”.

3. If the sponsor also investment his own money in the deal, he invests under the same terms as the other investors, usually under a separate entity he creates for this purpose.

4. Once the investors receive a certain minimum return, the sponsor receives a “promote”, or a share of the cash flow in excess of the investors minimum return.

5. When the property is sold, a total return to investors is calculated. Once a “hurdle” rate of return to the investors is received, the sponsor shares in any “excess” returns.

[Steve Sauro]

Don Konipol - Thank you for this detailed explanation. The plan was to establish a LLC for the properties that we would purchase over time. I already have a LLC and was planning on my LLC managing the properties that would be in the group LLC. If you have any experience with setting something like this up I'd love to be able to contact you directly if that is OK with you?

Thank you all.  Very interesting to me