Real Estate Syndications for raises under $1M

[Amy Wan]

From my research, it usually costs a minimum of $10K (and sometimes several times that) for a securities attorney to draft offering documents (PPMs and the sort) for real estate syndications, which means that deals below a certain threshold don't make sense to syndication because the cost of legal fees eats into the deal too much.

Is this a legitimate pain point? What's the threshold below which a syndication doesn't make sense? Are the legal fees too high a hurdle for beginner syndicators? What would you pay for legal help on a raise under $1M?

I'm interested in ways to lower the legal fees for smaller syndications, but still provide folks with a proper set of legal documents.

You can also private message me if you dont want to throw numbers out there.

[Bryan Hancock]

Deals less than $500k generally suffer from a whole host of problems:

-They're constructed with joint ventures where some (generally many) of the project's participants are passive investors.  Thus the deal's ultimate sponsor has the Sword of Damocles hanging over their head.  With 20/20 hindsight regulators and plaintiff's attorneys paint targets on these individuals through rescission rights or other legal techniques

-They train sponsors to source money through other active investors which inevitably leads to squabbling and a loss of control. There are too many cooks in the kitchen and the project and IRR suffer

-Licensed professionals that fall into FINRA-based compliance regimes given their business model shun these deals because they're too small to generate commissions sufficient to cover the cost of compliance

-FINRA-based professionals propagate reams of nonsense in the industry to justify paying layers of fees that are not needed.  One of the primary areas of nonsense of late is the half-truth of "serial issuers" not being able to use certain exemptions if they do more than one deal every 12 months

Smaller deals thus suffer from liquidity issues because it is harder for capital to form.  Hard money loans are common for projects with short durations to avoid the securities complexity and are generally sourced from wealthly individuals or funds investing money on a discretionary basis with capital raises sufficient to support the securities law complexity.  

Many of the newer exemptions also suffer from unneeded accounting overhead and complexity.  

The "fortunate" (insert better word) news for investors in these deal sizes is that the same legal fee prisoner's dilemma influences the suit risk after things go sideways or south.  Who is going to hire an attorney to recover their $50k investment in a $500k deal?  What attorney is going to take that sort of case on contingency?  Where there is a lack of money involved there is generally a lack of interest from attorneys.  It's kind of funny how that works.