Syndicators, Where You At?

Question

As we've been working on getting the ball rolling to set up our company we've been confronted with a couple options that have left me a little surprised. The main issue is potentially being required to set up the business as a security. I can picture down the line this issue not being as much of a problem, but for now it's creating some difficulties.

For instance the set up cost could be upwards of $25,000, take 2 weeks to set up for each potential investment, and require an offering memorandum. This cost and time to set up could ruin a lot of opportunities. My education on this part of the matter is very elementary. I've been educated myself, listening to podcasts, ready syndication book, and I've yet to hear someone address this part. Am I missing something from the equation? Do most people skip over this and hope for the best when it comes to the success of their deals? Any tips for starting out syndicators is welcome as well!

Brian Burke · Answer

@Connor Stark any time you raise money from investors, you are selling a security.  If you want to sell publicly, you have to register your securities as a public offering.  That can cost hundreds of thousands of dollars.  It's impractical if not impossible to do that for a typical real estate deal.

The securities laws recognize this, so the regulations were created with a mechanism to raise money without having to register to trade them publicly.  These exemptions, most commonly rule 506(b) and 506(c) allow you to raise money without registering as a public offering.  Rule 506(b) allows you to do this as long as you don't advertise.  There are specific rules you must follow, such as limiting non-accredited investors to 35 or fewer, among others.  Rule 506(c) allows you to advertise, but you then must only allow accredited investors to invest in your offering, and you must take reasonable steps to verify that they actually are accredited.

Drafting the documents needed to execute an exempt private offering costs $10K to $30K depending on the complexity of your offering.  If you are planning to do this to buy a $50,000 house to flip, it is impractical.  If you are looking to do this to acquire a $20 million apartment building, the cost is nearly a rounding error.  It's all relative.

If you are looking to do smaller deals you might need to find other ways to bring in capital, such as active partners that bring money, borrowing from private money lenders, and small friends and family partnerships.  Or if you already have a decent track record, perhaps you can raise a small fund as a private offering, which would in turn invest in multiple properties over time, allowing you to amortize the start-up costs over multiple investments.

Alina Trigub · Answer

@Connor Stark

Syndication is not an inexpensive business venture. Hence, prior to moving forward you should evaluate whether it makes sense financially after you add up all the fees. Also, consider speaking with a few securities attorneys to get a better understanding of the legal structures and the costs. Many of them are on this platform. I suggest you reach out to @Amy Wan or @Mauricio Rauld.

Lee Ripma · Answer

@Connor Stark

I think you’re a little confused. You’re looking for an exemption from registering as a security, the most common exemption that syndicators use is 506b but you can also do 506c (and others). You’ll still have passive investors fill out a lot of paperwork and disclose the risks to them. The most common structure is that they will be members of a LLC as limited partners where you’ll be the general partner, that has an operating agreement. The cost of the paperwork you need is usually about 15k per deal. If you’re just investing with partners that’s not necessarily a syndication. I think the part that you’re confused about is that you will be exempt as a security but you still need a lot of custom legal documents, which cost money. Also, don’t take my legal advice, I’m not an attoney! I just do this so I think I can see where your confusion lies.

Account Closed · Answer

@Connor Stark What books did you read on syndication? I'd recommend Joe Fairless's Best Ever Syndication Book, it's somewhat expensive for a book but definitely worth the read if you haven't.

Connor Stark · Answer

Account Closed I have the audible version on my phone. I agree, It's very informative.

Todd Dexheimer · Answer

Soliciting for funds brings on a new problem. You can only raise money from accredited investors, which may take away your ability to raise from your friends, family and acquaintances. This is by far your largest networking, especially in the beginning.

Soliciting for money may sound easy. Find an awesome deal that pays investors really well, put together a cool and informative presentation and the money will roll in, right? This couldn’t be further from the truth. The investors will scrutinize your company and the deal and will only invest if they feel your track record and the offering pass the test. This will be very difficult.

Some states have options to raise From both accredited and non-accredited investors through soliciting, but check with your local securities attorney.

Right now continue to educate yourself, build your network and build your track record.

Connor Stark · Answer

@Brian Burke @Jack Martin Thank you both, these are very helpful messages. My plan is to get some calls going with some securities attorneys and get smart that way. Then we look to make the decision on which exemption is more in line with what we're looking to accomplish short and long term.

Jack Martin · Answer

@Connor Stark if you plan to bring on LPs, you should absolutely be working with a securities attorney to prepare documents. Do yourself a HUGE favor and make sure to work with someone who specializes in real estate syndications and can guide you in the right direction.  There are a handful of securities attorneys giving guidance here on BP, so search the forums and you will find them. If you have never done this before, there is a lot of education and critical decisions to make, including your choice of exemption, that will have you even more frustrated if you don't choose the right fit. For one, it will be a difficult task to raise capital from experienced accredited investors (a requirement of a 506c) if you don't have a track record to lean on.

Depending on the size of the deals you are doing, I agree with @Brian Burke that it may make more sense to raise capital in a fund that would acquire multiple properties than it would to individually syndicate.

Rudy Avila · Answer

Hello Connor. Im also interested in syndicating and also from LA. Can we get in contact, I would love to hear your progress and maybe i can help you in some way like introduce you to people i know that are general partners themselves here in LA

Jack Martin · Answer

@Connor Stark I forgot to mention that there are companies that specialize in helping sponsors structure offerings and provide all the solutions for you, for a reasonable consulting cost. If you want to be successful out of the gate, you might want to consider that.  PM me if you'd like a referral.

Syndicators, Where You At?

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