How to syndicate your deals

[Benjamin Pekarek]

Hello All, 

I've been starting to get my research done on syndicating real estate deals. My current understanding is that you cannot send out mailers, unless the individuals have a certain net worth, and have expressed an interest in receiving information from you...which I don't know how they can until you contact them! 

Anywhoo! Curious if anyone out here has had any success with syndicating a deal using an LLC with stockholders on a K-1 setup, or on some kind of debt service agreement tied to an LLC.

Any comments are appreciated. 

-Ben

[Brian Moore]

@Benjamin Pekarek

My typical deal structure involves selling units/shares to an LLC then passing through all taxable gains & depreciation losses to the investors via K-1's like you are proposing in your original post. There is no legal problem with that ownership structure per se other than the fact that you are creating a Security as defined by the SEC. Whenever someone raises money from private investors and then makes decisions on their behalf, a Security has been created.

You may open yourself up to liability (criminal & civil) if you do not register the Security with the SEC or, as typically done, jump through the hoops to qualify for an exemption from registration under Reg D. These 'hoops' are expensive as stated previously by @Curt Smith. You have to determine if you are serious enough to spend the $10-20k on upfront legal costs. You could charge it back to your deal if it is of a sufficient size and there is sufficient profit remaining to attract investors. 

Incidentally, if you use a Series LLC form of ownership, future entity legal can be drastically reduced to below $5k per deal. Still you need to be doing deals of say $200,000 minimum to afford these future legal costs depending on profitability of your deals (my minimum deal size is $750,000).

As @Bryan Hancock indicates above, it is quite clear cut that you would be creating a Security. You should be aware that there are real risks that investors will lose money. Even if you are a great investor there are many things outside of your control that can tank a deal. Once that happens, the fingers will be pointed at the sponsor (you) and the SEC will get a call.