How do you start something like a REIT

Question

We have investors who would not qualify for a REIT, but they have money to go into an LLC that I own and to do buy and holds with me. I will maintain XYZ% of the LLC and sell off portions of it to them. From a forming standpoint to protect everybody on ownership, risk, and taxation what pointers would you have?

Taylor L. · Answer

This is a syndication. You need to talk to a syndication attorney.

Mauricio Rauld · Answer

You guys are all correct that this is a securities offering and you would need to comply with both State and Federal securities laws. ANYTIME you take money from investors where the returns are generated primarily from your efforts (your investors are passive) you are issuing a security. You must Register, Find and Exemption, or its Illegal.

@James Sanson @Taylor L. @Luke Miller

@James Sanson @Taylor L. @Lucas Miller

Luke Miller · Answer

@James Sanson This isn't necessarily a syndication, but you're most certainly selling a security in your example. To do this correctly, first, you need a securities attorney. Don't get your attorney friend to do this, get an actual securities attorney who has experience creating private offerings.

From what you describe, you'll be setting up an equity fund to purchase properties. The income from them would be split amongst the LLC according to percentage of shares. You'll need a Private Placement Memorandum, subscription agreement, and entity paperwork and depending on the structure, they'll probably need to be accredited.

All that said, you'll probably pay somewhere around $8k to $40k (depending on complexity) to set this up.  If you are doing a high amount of volume, that might make sense, but I would guess that this is just going to be cost prohibitive for your business. If that's the case, you are probably better off just borrowing money from investors. When I was doing small deals, it was one investor and one loan per property.

Securities law and messing with the SEC is not something you want to play fast and loose with. There are serious consequences for violating securities law. I'm not a lawyer so take my advice with a grain of salt. If you do want to move forward, I can recommend a great securities attorney! Good luck!

James Sanson · Answer

thank you

Nate Marshall · Answer

@James Sanson

You need a lot more experience, investors and expert help to setup a REIT. If you're just having friends, family and close associates as investors you could do a Reg D 506(B) but if you want to solicit the general public you need to do a 506(C) and you need the right exemption. There are specific ones for what a sponsor is doing. There is the Investment Company Act of 1940 to consider as well.

The legal part is an area you cant go cheap on. You can do presentations and build pitch decks yourself but don't DIY the legal.

Amy Wan · Answer

Basically sounds like a securities offering via a blind pool fund.

Pat Marco · Answer

@James Sanson

Just make all members votes on decisions so they are not passive and voila, you’ve got them more interested and excited about what you do and you’ve legally avoided the securities requirements for a private placement memorandum and the filing with the SEC

How do you start something like a REIT

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