How did you structure your syndication?

Question

Hey guys,

Just wanted to hear what everyone has done with their deals. My partner is an expert in RE, and I want to help grow his business. I wanted to raise some money through friends and family. I am looking to raise 500k in our first fund, and wanted advice on how to structure the operating agreement. I really, really want to keep things easy, with no preferred returns or anything like that. I feel like simpler is better at this point. What have you guys had success with? I saw an article about a 95/5 split, where the investors are entitled to 95% of distributable cash, and the sponsor gets 5%.

Please share structures you have had success with for friends and family! If you have a few minutes to share wisdom, don't hesitate to PM me!

Thanks!

Joseph Gozlan · Answer

@Travis Doyle you need to be careful and educate yourself about SEC rules.

If you "raise equity" or "structure a syndication" it sounds like something that falls into the definition of selling securities. If you "get some friends and form a partnership" it's different.

Do you expect to have a large group of people to raise the $500K?

If you only have 4-5 investors that know each other well (family or close friends) then partnership is simple. setup an LLC, everyone is a general partner everything is awesome. No one cares how you split the profits but the CPA.

Start having 20-30 people in the group and talking about "returns for investors" and things get hairy and scary. CES don't play games, they take people to jail.

I am not a lawyer and I would HIGHLY recommend that you consult one before you take a penny from an investor.

If you want to learn more about syndications you should read the book "It's a Whole New Business!: The how-to book of syndicated investment real estate" by Gene Trowbridge

David Thompson · Answer

Travis,

GP/LP splits that I see for seasoned syndicators is 70/30 (LP/GP) in decent sized deals.  Re: the GP split portion amongst partners, in my experience, if you bring all the money and you are dealing w/another partner who will do all the work and has a lot of experience you should get 10% of the 30% or 1/3 of the GP split.  If you and your partner are not so seasoned, you may need to go 80/20 on the overall split LP/GP as I see in clubs, and take 50% of the GP split for your cap raise efforts (10/10).

Todd Dexheimer · Answer

The split may also depend on the deal and type of financing. If you are buying a building with a large value add component that will allow the equity to be given back to the investors you may be able to get a 50/50 split or even partner with them like a hard money lender. Also if it is recourse vs non-recourse loan. If you are the guarantor on a recourse loan and no one else - that will help you leverage your position.  It is all about what works for you and your investors!

David Benton · Answer

I agree 10-15 Investors is a lot for $500,000 and as stated  but, it's all about what makes the deal work. I would insure these are people I know well to avoid SEC violations.

I've structured Operating Agreements in the past through a series LLC (a) with myself in (a) and other investors in the other LLC (b). The split would always depend on what someone brought to the table, and not just money. Personally if the others were bringing only cash and I were the sole sponsor or had a co-sponsor in with me, my LLC (a) would not get less than 25% of cash flow and the equity and more likely 50%.

If using the syndication structure I might set up an acquisition fee at minimum and possibly other fees depending on the scenario.

Mine was usually structured very simply to receive 25%-50% of all cash flows after expenses.

Travis Doyle · Answer

I probably should have mentioned this, but my partner is the RE expert, and I am only here to help praise his efforts because multiple close friends of ours have expressed interest. He simply doesn't have the time to focus on this, and here is where I come in.

We currently have a series LLC setup with both of us as managers, and we will be pooling funds through members to each series LLC.

In summary, my partner is doing all of the RE work, and I will be handling 100% of anything related to the pooling of funds. I think at this point, we will probably just cut ourselves some of the cash flows from the asset, and 70/30 or 80/20 seems to be normal. What do you think of this example?

We do an 80/20 cash flow split with members getting 80%, and us 20%. How much do people like me normally demand from that 20% split?

Joseph Gozlan · Answer

@Travis Doyle everyone has their own model. Some are more complicated than other.

The key factors would be how much effort the leads put into the deal and how much risk/liability the other investors are willing to tolerate.

A syndication model allows the investor to be limited liability partners and just be passive while partnership makes puts them on the hook as much as you will be.

As @Jay Hinrichs mentioned above, paying over $10K for securities lawyers to set it up might be too costly for a $500K raise but then again, you might not have a choice...

Travis Doyle · Answer

@Joseph Gozlan I just bought the book! Can't wait to read.

How do you guys like to structure your operating agreement to participate in cash flow during the hold, outside of general equity us managers already have in the deal? What numbers have you seen or used yourself, and how have investors reacted?

Jay Hinrichs · Answer

not sure what the threshold is.. however if you have lets say 5 or so.. you can certainly just have them all as members of an LLC with you as manager or each of you can be managers..

when you get to 10 to 15 and if they are unknown to each other and your the only nexus the PPm route is what most use... pretty costly and cumbersome for only 500k..

How did you structure your syndication?

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