Save your Money on Syndication Fees – JV instead

Since speaking at The Best Ever Real Estate Investing Conference in February, I’ve received a lot of emails and calls to discuss a strategy that I use to syndicate commercial and residential acquisitions. The major benefit is you can use the strategy too and save on hefty legal fees plus time for syndication documents.

I’m not an attorney and don’t play one on the internet. You need to review any legal entity structure with your attorney before raising money and acquiring a property with investor capital.

With that being said, here is the strategy to help take your business to the next level.

Once you have a solid property under contract, you share the opportunity with your network to secure investors. You need to explain the timeline to close, asset strategy, when funds are required, and how the ownership LLC is structured. You create a multi-member LLC with each investor becoming a member of the LLC and actively involved in business operations. Business operations includes:

• Reviewing monthly/quarterly/annual financials
  • The asset manager (it could be you, we discuss below) will prepare the financials for each member to review based on the member operating agreement
• How member votes function for improvements, management, and expenses, etc.
  • The asset manager will collect bids and select who should be used but everyone has a vote
• All other key day to day decisions that a real estate ownership company would need to make
  • The asset manager will run the day to day but can get member votes as needed or required based on your operating agreement (CRITICAL: we’ll get to it soon)
• Signing on the loan
  • Most traditional lenders require any member with 15% or more ownership to sign on the loan so you need to inform your investors and be prepared to share their financial information with the lender (it can be more paperwork to collect for the lender and loan process but it’s not a major hassle)

Having each investor become a member involved in operations reduces the need for syndication documents. Every investor involved has the ability to make decisions for their investment and you alone are not controlling their money.

You need to have a through operating agreement that outlines how to handle all types of situations, stipulates how the business will function with votes and who has authority to sign. In addition, you need to have a through member agreement that outlines how much money each member invested, how the business is responsible to pay back members, how to collect additional capital if needed for each member, and how to split proceeds. You need to have an attorney prepare these documents for you. Most attorneys have a standard set of documents that can be customized for your needs.

PRO TIP: If you have done a couple of deals and plan to manage the property or be the asset manager, here’s what you can do.

Property Management (PM): In your member operating agreement you call out that the business will hire a property manager and will follow the terms of the PM agreement. Your123 LLC PM company writes up a management agreement to manage the property and includes terms for management cost, duration of contract, how to renew contract, etc. for the property ownership LLC to sign. This allows you to better define your role as a member and property manager.

Asset Management: In your member operating agreement, you call out that the business will hire an asset manager and will follow the terms of the asset management agreement. Your5678 LLC writes up an asset management contract that defines duration, terms, responsibilities, deadlines and cost of services for the property ownership LLC to sign. Your5678 LLC should be able to make decisions on behalf of the property ownership LLC that does not require a member vote. You should set a dollar threshold for how high Your5678 LLC can make decisions. For example, if you need $50 worth of cleaning products you don’t want a member vote and if the property’s parking lot needs $50,000 for resurfacing you probably want a member vote. The dollar threshold is an amount that all members are comfortable with to give consent to the asset manager to make decisions on their behalf. The number can vary deal to deal.

If you have questions about your specific scenario feel free to reach out. Good Luck!