Raising capital for multifamily syndication

[Kristen Ray]

Hello BP,

Recently my friend was asked to assist with a capital raise and due diligence on a Multifamily syndication. The company has a compensation carve out for such services.  However, my friend (the one raising capital and doing part of the due diligence) informed me that the company he is working with is charging him a fee for "telling him about the deal." Has anyone else experienced this? What are your thoughts?

[Greg Dickerson]

Doesn’t sound right to me. Is your friend paying for coaching to learn how to raise money or just paying to look at the deal?

[Ronan Donnelly]

@Kristen Ray, there are a couple of red flags here:

1) Due diligence is such a key part of the success of any deal that it just doesn’t make sense to outsource any part of it to someone who is paying for the privilege. The only way you would pay for the privilege is if you were looking to gain experience and who would want someone inexperienced doing due diligence for them

2) In order to stay within SEC regulations when raising capital you typically need to be part of the general partnership so I would recommend checking with a SEC lawyer to ensure that your friend isn’t in breach of any SEC reg’s When raising capital for someone else.

[Kristen Ray]

@Greg Dickerson thanks for responding. My friend is not coaching. He developed a relationship with the sponsors and agreed to raise capital as assist with DD and asset management. He was taken aback when one of the members of the team informed him that they were charging him a fee for telling him about the deal. Although he is bringing capital and other services as apart of the GP.

@Ronan Donnelly thanks for responding. I not totally clear on your first response. 2. He is working with his SEC attorney during this process. He just thought it was odd that another member would charge a fee for "telling him about a deal" that he is working hard to help them close. He asked me to also ask around and see what other people experiences have been. Since he is actively working on the deal he did not want to ask. 

[Michael Ablan]

@Kristen Ray  - Sounds like a scam, or it sounds like they're using a marketing gimmick of offering $X to do the work, but only being willing to pay $Y by incorporating junk fees.  Regardless, this isn't a company I'd want to work with regardless.

[Kristen Ray]

@Michael Ablan thanks for the feedback 

[John Corey]

I think the fee indicates someone is naive about syndication. I would not want them as part of the GP.

The right choice is to walk away until the GO grows up.

[Charley C.]

@Kristen Ray when you see a lot of junk fees on the front in, then the junk fee is just paying to get you a bunch of junk. Not to mention for something sight unseen (a special secrete deal..hmm) . "The fees" should not be payable until after the property is acquired  or at minimum have it well locked under contract. Then there really is work that needs to be paid for (at that time), setting and fixing the fees upfront is a good thing.. just not do not pay them until this super special secrete deal is under contract. Why didn't this person or "company" wanting the fee put the property under contract?? see my point?

Who "the company he is working with" ever is asking for that silly finders fee, tell them I understand what it is like being a commercial broker and finding a really good deal to just at the end of the day, find out "oh we are only giving you a bird dog fee"  of measly $5000. As a youngster, that happened to me too often until I learned to put it under contract or keep my mouth shut. A company that does have the where with all to put the deal under contract, does not have the where the all to waste your time or money

[Alina Trigub]

@Kristen Ray

I think the best bet for your friend is to speak with an attorney, perhaps even the one his company utilizes for syndications. 

[Kristen Ray]

@John Corey thanks for your feedback.

@Charley C. thanks for your feedback. the fee is supposed to be paid at closing. The fee will be taken out of what he’s supposed to be compensated for the services rendered. 

@Alina Trigub thank you for your feedback 

[Chris Grenzig]

@Kristen Ray the only thing I can think of that may justify it, is telling them they have to give there share of the upfront costs until the deal is closed and they'll be reimbursed, but if it doesn't they're on the hook. There are several costs that are incurred by the GP until the deal closes, and they have to eat if it doesn't.

That's the only possible conceived way I could see this being a legit thing and just a miscommunication, but if they're saying it's a fee it sounds like BS to me.

[Josh C.]

@Kristen Ray

Taken at closing is less scary. As long as that’s clear and transparent and not up front I’d be less concerned with. People are always trying to get paid every way which way. However, seems odd to pay someone and demand a fee at the same time. Double however, big companies have managers that need to think up complicated junk to validate their existence.

[Tj Hines]

@Kristen Ray a fee for telling him about the deal? Is he wholesaling the contract. Not to sure about that ...   In regards to raising capital for others deals that's not legal. You need a series 7 license in order to raise capital for securities. That's a very thin line to walk. Now, if the person raising the capital will have a role and responsibilities on the GP side, then that's a different story. 

[Kristen Ray]

@Chris Grenzig @Josh C..    @Tj Hines     many thanks. I appreciate your feedback