Syndication vs Hard money

[Austin Beyer]

Hi there, Iv got 3 people that have a total of around 700k and they want to give me the money to grow my real estate portfolio in exchange for a return on their investment and full repayment with in a set amount of time. Im a little confused on if i need to set up a syndication and get the sec involved or can i just draw a contract and use their money like a private loan. Any advice?

[Bryan Hancock]

A "syndication" has nothing to do with whether or not the LPs are strangers or if they're your best friend since childhood.  The relationship you have will impact the exemptions you can use, but if the investors are passive you're going to desire to have an offering memorandum and to make sure that the operating agreement specifies the arrangement of how things will work.  A securities attorney can help you with this and with the subscription agreement, which is often a joinder for the other agreements.

Hard money is generally used for short-term projects and it often can be less expensive than what you can set up with a syndication.  Note that you can syndicate senior debt in the same way you can syndicate preferred equity, mezzanine capital, or a lot of other arrangements.  The key is whether or not the investors are passive and if The Howey Test and other tests apply.

A lot really depends on your type of project and the duration.  If the duration is a lot longer than a year hard money may not be your best option.  A simple WACC calculation is often useful in determining a path, but the fixed costs of hiring a securities attorney matters as do the points a hard money lender would charge.