Structuring Partnerships/Investor Funding

[James Marable]

What’s up guys! Coming off the sidelines to hopefully get a little guidance from the community. I’m a new owner in the Cincinnati Ohio market (7,000 sq ft 4plex), and I would love a little guidance on structuring deals with investors to fund future projects.

I have a pretty strong network in my area due to a few businesses that I’ve had in the past and after I purchased my property a couple of months ago a ton of people started coming to me about investing in deals that I may have. However I’m so new at this I wouldn’t know where to start in structuring deals as I’ve always worked alone and never done anything in real estate. I literally bought my property to live free and save to buy another one but now it’s becoming more than i anticipated and I see an opportunity to scale but I’d love some advice what these agreement should look like.

[Jack Martin]

@James Marable as you scale your business and start to include capital partners, there are three general approaches that are commonly taken.  I am sharing this as general guidance and am not an attorney. Regardless of where your path takes you, you DEFINITELY should have an experienced attorney on your team who can create your documents and give you legal advice. Generally, as soon as you include more than one capital partner (and especially if they do not know each other) you will be entering the world of securities. This is where it becomes more expensive and you should be working with an attorney who specializes in that arena.

• The first approach is a partnership with a single capital partner. That is usually accomplished through forming a single entity LLC, which is governed by an operating agreement(OA). The OA spells out all the rights and responsibilities of each partner and how cash flow, profits, and taxes are distributed. This approach is best used for smaller deals where you will only need one partner, and they have a minor role. As the expert, most of the real estate duties will be yours, but many times the capital partner will have some regular minor duties as well.
• The second approach is commonly referred to as a syndication, but you will also hear people call it a private placement, PPM, Reg D, 506b, 506c, pool, syndicate, etc. This approach involves a single asset that you already have in contract to purchase. A syndication is a legal structure that allows multiple investors who may or may not know each other to invest in a single asset. It typically includes three sets of documents: An operating agreement for the LLC or entity that will own the real estate, a private placement memorandum (PPM) that spells out what the offering is and the strategy for the property, and a subscription agreement that investors complete as they invest. This approach is commonly used on larger properties or where more capital is needed.
• The third approach is commonly referred to as a fund, but you will also hear people call it a pool, blind pool, equity pool, private equity fund, etc.  This approach is similar to a syndication, but instead of investing in a single property, a fund invests in multiple properties.  Usually, a fund will have a specific strategy and type of property the sponsor can target, but they may not have a property in escrow yet.  Investors commit their capital to the overall strategy so when the sponsor finds a target property they don't have to stop and raise capital, rather it is already available.  When a fund is fully funded and the assets are acquired, the investors have ownership in a group of properties.   This approach is used by more experienced sponsors with a track record of doing deals just like the ones the fund will target.  It usually focuses on a specific asset class and gives investors diversification within that asset class. 

Again, make sure to include a qualified attorney on your team when you start partnering in any fashion. 

All the best,

Jack