Legal documents for equity and debt financing partners

[Aaron W.]

Hello all,

This is the first time we are seeking other people's money to acquire real estate and are interested to know what legal documents we need for private money partners who want to join us as debt or equity partners.

We spoke with our attorney and he was unfamiliar with the legal process of raising money and said we need to speak with a securities attorney as we are selling a security when raising money. 

I just want to confirm with the BP community what we actually need. What I've heard others say in the past is when a private money partner is lending you money (debt financings) then we are able to sign an agreement such as a promissory note or mortgage with this individual listing the property, terms, etc.  

With equity, we can create an LLC with them listed as equity partners. If they are just going to be the money partner, then we can give them whatever percentage of the LLC that we agree upon. We are not necessarily looking for a syndication unless the only way we can bring on equity partners in this way is through a syndication.

Is all this correct?  What contracts do we need for debt and equity financing partners? Or do we need to actually bring in a securities attorney and create a syndication?  

Thank you all in advance for your help!  Have a great day!

[Jerel Ehlert]

For details, see Real Estate Securities by Levine and Feigin.  Your google terms are "investment contracts", "Howey test", "Reves test", and "Forman test".

The economic realities determine whether it is a security.  Pooling money from others where profits are generated by efforts of others, and no control over major decisions = a security.  The default rule is that all securities must be registered, unless the issuer (you), the security, or the investor qualifies for an exception or exemption.

Federal regulations cover the security side (PPM, syndication, issuing securities), but the state laws determine the local instruments (notes, deeds, lien instruments, entities).

Even the lightest capital raise starts, for me, at a $10,000 retainer and can climb to $50K+ depending on how involved I have to get.  This is one area you don't want to go cheap.  Investors have money, not only to invest, but sue if things go sideways and think they were defrauded.