Combination of an equity, a credit partner and project sponsor
Most Popular Reply
Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes@Hassan O.
This would probably be a tough sell structured as you propose.
An easier way to sell the program and still retain the benefits you seek is to provide the person or persons maki g the $120k downpayment with 60% equity. The loan guarantor would receive 30% equity. You get the remaining 10%.
All the equity get their initial investment back first upon property sale, plus a 8 percent per year return. After that they get 60% of the profit while you receive 40%.
You can also act as general contractor on the rehab at the standard contract fee of 10% of repairs.
This should bring you to where you want to be, but provide the important psychological advantages of (1) the investors and credit provider(s) don’t see you obtaining an outsize share of ownership without putting up cash or credit and (2) they see that their investment plus a market return is returned first before you receive monetary benefits. This is more in line with how we operate in the real estate syndication business. An even easier sell would be if you did contribute, even a relatively small ($10-20k) amount of cash for the down payment, but it can still be done regardless.
The thing you need to be careful about here is Securities regulations. Without going into details under the relatively new expanded definition of securities offerings, adopted by the SEC and almost all state securities regulatory agencies, if a financial investment is involved, and people putting up the money or having money at risk don’t have control of the decision making, then its a securities offering.
All Securities offering must be registered with the SEC if they’re interstate offerings, or a state securities agency if they’re intra state offerings, unless they qualify for an exemption from registration. The exemption applicable to most situations is the private placement exemption. The simplest form is to do no general solicitation and advertising, and make the offering available only to people you have an existing relationship with. This avoids the time and expense of filing and complying with the save harbor Regulation D filings, although by relying on the general exemption for private offering rather than a Reg D filing you do give up your statutory defenses in a case where you are sued by your investors, for example should something go wrong and your investors lose money and decide to sue you. This means that by complying with Reg D, absence fraud, this is a definitive defense should an investor sue you, and since you have a definitive defense no attorney will represent the investors on a contingency basis and almost all attorneys would discourage an investor from filing a lawsuit. Without the utilization of Reg D, the plaintiffs would have more chance of winning under various legal theories, attorneys are more willing to take their cases, cost of defending yourself is much greater, and outcome far less certain. It’s, as always, a risk reward tradeoff.
5 Replies
- 7yDylan VargasPro MemberRental Property Investor · Chico, CA · Member since 2016 · 633 posts · 336 votes
@Hassan O. Welcome! With those numbers you are providing I would do everything in my power to do the entire deal myself. This is worth having your money tied up in my opinion. I would consider keeping it a little simpler and have a partner that has done flips or an investor loan you the money for the hard money loan to finance the project. Most people want first position though. Just my two cents. Good luck and keep us posted. Congrats on finding such a good one.
- 7yJo-Ann LapinPro MemberLoan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
Sounds like an amazing opportunity. Are planning on forming a single asset llc?
- 7yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
@Hassan O.
This would probably be a tough sell structured as you propose.
An easier way to sell the program and still retain the benefits you seek is to provide the person or persons maki g the $120k downpayment with 60% equity. The loan guarantor would receive 30% equity. You get the remaining 10%.
All the equity get their initial investment back first upon property sale, plus a 8 percent per year return. After that they get 60% of the profit while you receive 40%.
You can also act as general contractor on the rehab at the standard contract fee of 10% of repairs.
This should bring you to where you want to be, but provide the important psychological advantages of (1) the investors and credit provider(s) don’t see you obtaining an outsize share of ownership without putting up cash or credit and (2) they see that their investment plus a market return is returned first before you receive monetary benefits. This is more in line with how we operate in the real estate syndication business. An even easier sell would be if you did contribute, even a relatively small ($10-20k) amount of cash for the down payment, but it can still be done regardless.
The thing you need to be careful about here is Securities regulations. Without going into details under the relatively new expanded definition of securities offerings, adopted by the SEC and almost all state securities regulatory agencies, if a financial investment is involved, and people putting up the money or having money at risk don’t have control of the decision making, then its a securities offering.
All Securities offering must be registered with the SEC if they’re interstate offerings, or a state securities agency if they’re intra state offerings, unless they qualify for an exemption from registration. The exemption applicable to most situations is the private placement exemption. The simplest form is to do no general solicitation and advertising, and make the offering available only to people you have an existing relationship with. This avoids the time and expense of filing and complying with the save harbor Regulation D filings, although by relying on the general exemption for private offering rather than a Reg D filing you do give up your statutory defenses in a case where you are sued by your investors, for example should something go wrong and your investors lose money and decide to sue you. This means that by complying with Reg D, absence fraud, this is a definitive defense should an investor sue you, and since you have a definitive defense no attorney will represent the investors on a contingency basis and almost all attorneys would discourage an investor from filing a lawsuit. Without the utilization of Reg D, the plaintiffs would have more chance of winning under various legal theories, attorneys are more willing to take their cases, cost of defending yourself is much greater, and outcome far less certain. It’s, as always, a risk reward tradeoff.
- London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Hassan O.:
I have a great deal in southern California with $300k purchase price, 60k in rehab with an arv of about $650k. Single family detached, private seller not willing to owner finance.
I want to create deal bringing together 3 people; (a) cash partner at $120k +(b)credit partner for the Bal on a private loan+ (c)carve out a secured stake (25-30%) for me (without me putting much cash of my own in) as the person that found the deal and that will manage the closing, rehabbing and resale process.
I have success fully completed several deals where I used a single private lender to buy straight out or to cover costs in second position on a subject to deal. Have not used a credit partner before except for the primary on the loan for the subject to ( loan already in place)
Conceptionally I get the idea but need to get a clearer picture of how to legally structure this. Does anyone have an example or two. My intention is not to tie up much or any of my cash in the deal as I am working on another.
As Don highlights, you are likely over the line in terms of a securities offering if you take this forward. There are a few lawyers who specialist in this area. Two or more are active on BP and in your are with another a few more miles north. So, lots of opportunity to get some quality legal advice before you put the deal together.
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