First time syndicator- entity structure for financing?

Question

I am a seasoned SFR hold investor and I own two property mgmt companies. One for my portfolio, and then I am a RE Broker so my brokerage manages other folks homes. So, the next step is multi family and I have a long list of friends and investors that want to do deals with me. My plan is four investors per deal, plus me. I will sign for the commercial loan with recourse, and have no cash invested in the deal. We each take 20% and my PM company will manage the properties. We plan on holding 24-60 months and then selling. I will be doing many deals, about one per quarter and each deal will have different investors as we go forward. Some investors will be on every deal, etc. So where I am at right now after talking to my accountant who is a RE guru is to take the deed in a LLC mm for the investors at 99% ownership, and my LLC will be 1% owner of the deed. I will be able to get the financing thru my LLC this way, and I will be an equal owner and manager of mm LLC. The mm will list us all as 20% owners and then we will draft up a joint venture doc to further tighten it all up. So then we do deal #2 and the new entity will be a joint venture and my LLC will own the 1/5th share or 20% of this property. My CPA does not like the LLP set up for these deals, says it is not needed, he is very respected in our RE circles here in Tampa Fl. I would like to see what you all think. Thanks in advance. Also looking for more partners, must be experienced and "somewhat accredited".

John Corey · Answer

Avoid the SEC? No way to do that given what you are proposing. It has nothing to do with you knowing them. It has everything to do with you being in charge. Check out the Howey test. https://www.investopedia.com/terms/h/howey-test.asp

Second, Gene Trowbridge is a lawyer who specialises in this area. He wrote a book. He is very clear in the book about the nightmare associated with being the general partner in such a structure and being the broker.

Otherwise, what you are suggesting sounds good. You just need a major rethink about the roles, the economics and what you can legally do before you file an SEC registration. There is no good reason not to go down the SEC route other than your fear of it. That said, your post implies you will be deep into SEC territory without knowing it. Time to lawyer up.

There are a number of lawyers who specialise in this area of the law and actively participate in BP. I can find the names or you can search for topics. Someone posts on the topic daily so the lawyers drop in on a regular basis.

Good luck. Do not get discouraged. Just accept that you are moving up into the big leagues. BTW, wealthy people know what the drill looks like. If you are offering them deals where you are clearly not aware of the regulations, they will be polite and pass. Why cut yourself off from serious funds because you did not know you needed to step up your game? Now you know.

Note: Grant Cardone's lawyer is one of the people who posts on BP.

Alina Trigub · Answer

@Anthony Johnson

I second what @Greg Dickerson and @John Corey advised you to do. Taking a syndication route only sounds scary when it is unknown territory (just like everything else in life.) Start by reading that book that @John Corey recommended, "it's a whole new business..." by Gene Trowbridge. Then connect with several securities attorneys. I can give you a few names if you PM me.

Another alternative to a syndication is when your partners are all active on a deal, so it's not just you who has an active role, but everyone else is as well.

Lastly, if you're looking for partners (or anything else), you should post such ask in Marketplace.

Best!

Greg Dickerson · Answer

@Anthony Johnson this is a syndication not a JV. You will need to contact an SEC attorney to put together the proper paperwork and do the filing. Not a big deal just a cost.

You will need to set up a separate LLC to hold eqch property. The members will be your operating company and the investors.

Sounds like you have the investors and infrastructure to go big. You should strike while the iron is hot.

Scott Runyan · Answer

On more thing to think about outside of your LLC structure. You said your PM company will be managing the properties. If no GP's on the deal have multifamily experience in the type of property you are purchasing, most lenders will want a management company to have experience in that size/class of property. You didn't say what type of properties your company manages, but if its only single family or small MF, lenders will most likely require another management company. Something to think about when underwriting...

Anthony Johnson · Answer

First of all, thank you for your valuable time sharing you wisdom with me, I value it.   I read about the Howie case and it is clear to me.      SEC attorney will be the next stop for me.    I have a new appreciation for the multi family arena and the knowledge  required to do these deals, soundly.   I will now follow the directions of the SEC atty, and from there have a clear path for entity structure that the commercial lenders will approve.      One of the investors will be the maintenance co/GC so they will be "active", I could find roles for the investors to do like property mgmt but as I go forward doing more deals that will be hard if not impossible to do so SEC filing would be a better long term plan.  But if I was going to just do one or two deals I could find ways to make them active investors.   This is why I love being in RE, I never stop learning and there are so many things I do not know as I grow my company, and myself.   best.

Anthony Johnson · Answer

Is there a way to do these deals without SEC? I am not soliciting(?), these are friends and current bus partners. With 4 investors plus me, 20% each, I sign for loan with recourse and I am the decision maker. What would you do? As we go forward the investors will be rotating on and off the deals as I have about 12 solid commitments to go forward right now. One of my investors owns the maintenance/rehab co. and will be on every deal and that will get me all maint. at huge discount, but the 4 will change as the deals go by. One of my investors has 3 million committed to going far and wide with me, she is selling a resort in the Carolinas that has a 1% cap, makes 36ka year, she is like a mom to me and I want to get her in on these deals. So I have a windfall of trust and capital. I currently have a 35k rent roll, 800 credit and 10+ years experience with my prop mgmt company, and the commercial lenders all say I will get thru underwriting. If I have to do SEC I will,just want to rule out there is not a simpler way. My friends will call me "Anthony Cardone" when they hear this. (Grant Cardone) ha ha

Luke Miller · Answer

One more thing, @Anthony Johnson make sure you "maintenance co/GC" isn't investing with retirement account funds. Could trigger him to lose that shelter if he is materially gaining from his own project. Not a problem if he is just investing with cash.

Greg Dickerson · Answer

It’s not a difficult process to syndicate. It’s simply an exemption that you are filing with SEC and the state There is a cost for the documents but way better to have all the proper paperwork in place just to be on the safe side.

David Lilley · Answer

@Anthony Johnson as long as your investors have an "active" role in the business then it is a JV, not a syndication. Once you have investors that are 100% passive with no role in the business then you need to start worrying about SEC regs.

James Johner · Answer

@Anthony Johnson

Agree with @Greg Dickerson. Some other things to keep in mind. Things will change, they won’t go exactly as planned. Stay flexible and be ready for some curve balls. Keep in mind that most debt products will require any owner with 20% or more in equity will have to sign on the loan. With a management company in place it will help your odds with financing. I would build a professional summary to keep on file and send to banks/investors that clearly explain your goals and buying criteria. The more sophisticated you are/appear to lenders and investors the easier it is to get your foot in the door.

First time syndicator- entity structure for financing?

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