Syndication newbie, need help!

[Kevin Zhang]

Hi, this is my first post. I am a real estate investor but fairly new to syndication project. Currently I have a $6M project which I got hard money loan for 60%. I want to syndicate the other 40% to investors. What's the best way to do it? The dilemma is: the loan is secured by my company and personal asset, however it's loaned on the project itself. So can I claim 60% ownership of this project if I'm willing to be responsible for paying the loan payment and liability? Other investors might be afraid that if I default on the loan, then the project(their investment) will be in jeopardy. What's a good way to handle this situation? I don't think it's fair for me just taking 10-20% as equity partner since I got the deal and I already got 60% financing. Please advise...

[Joel Block]

It's hard to know what the right amount of participation is for the person who is responsible for putting together the deal – or for someone else who assumes responsibility for the debt. It is a function of how well you sell the value that you add. In the case that you have described as much as I recognize that you feel that you are the cornerstone of the deal, an investor will give you very little credit for signing the mortgage and assuming that responsibility. You indicated that only 60% of the deal has been guaranteed and that 40% more remains. Remember, the last dollar, like the last yard in a football game, is the most important dollar - and it's the one that's worth the most. The first dollars are worth the least.

There are two ways to think about the participation for a promoter. The venture capital model assumes the promoter or inventor brings value to the transaction for example, because the inventor has contributed intellectual capital of some type. The investment makes it possible to monetize the patents or marketing plans. The real estate model is used when the additional value is forced into the asset, either through appreciation, management adjustments, and other factors.

The model to use depends on what should happen on liquidation. In a venture capital environment, on liquidation, there's probably not much to liquidate because in many cases, the intellectual property of a failed venture is close to zero. In real estate however, there's intrinsic value, whether the promoter adds any additional value or not. That's the reason that promoters do not take a substantial percentage of the current value of the transaction. Rather, they take a substantial percentage of the upside that they help to create. Most promoters take real estate fees as they are earned and success fees based on the upside generated in the property in the future.

Signing the note is not worth all that much, and the investors might expect you to do this. And remember that on liquidation, your note will not be the first money to go down the drain. On liquidation, the equity is going to go first and a personal guarantee on 60% debt is not likely to be attacked if you're buying the property right. We sometimes structure in a “Guarantee Fee†for a few points a year, but it doesn’t really affect our back end percentage.

I wish you the best of luck with this transaction and hope that my insights are helpful.

Joel G. Block :cool: