How To Start a Syndication ?

[Christopher Lynch]

I recently watched an episode of BiggerPockets where the guest discussed how he started a real estate investment company and buys commercial properties with 0% down. While I understand the basic structure of General Partners (GP) and Limited Partners (LP), I was under the impression that GPs always had to put 'skin in the game.'

I have 10 years of experience in retail real estate and a couple of partners who are interested in investing with me. I also have some capital to contribute.

Could someone explain how syndications are typically structured, and how are people using Other People's Money (OPM) to build large portfolios with little to no money down?

[Don Konipol]

Quote from @Christopher Lynch:

I recently watched an episode of BiggerPockets where the guest discussed how he started a real estate investment company and buys commercial properties with 0% down. While I understand the basic structure of General Partners (GP) and Limited Partners (LP), I was under the impression that GPs always had to put 'skin in the game.'

I have 10 years of experience in retail real estate and a couple of partners who are interested in investing with me. I also have some capital to contribute.

Could someone explain how syndications are typically structured, and how are people using Other People's Money (OPM) to build large portfolios with little to no money down?

There are some legal considerations as well as practical considerations 

1.  A “syndication” is almost always a capital raise for the sale of a security/investment.  As a result any “offering” must either be a registered securities offering, or qualify for an exemption from the required registration. The two most common exemptions are the exemption for intrastate offerings and the exemption for private placements.  Because intrastate (single state) offerings must still comply with that state’s securities laws, and because with the internet its difficult for offerings of any size to be limited to investors residing in a single state, the exemption for private placements is the exemption from registration most often used. 
There are two main ways to utilize this exemption. The first consists of the general exemption, which means the sponsor just complies with the definition as defined by the SEC. The other method is to use a "safe harbor", i.e., the specific procedures laid out by the SEC in Regulation D. Most utilized is Reg D Sec 506 b or c. The investors must be provided a Private Placement Memorandum, subscription agreement, and operating agreement. While formerly the limited partnership organizational structure was used, its now mostly an LLC structure being utilized. The legal fees and filing fees for the Reg D package average about $10,000 or so. The advantage of Reg D over relying on the general exemption is (1) if you comply the SEC can't come back and say you should have registered and (2) if your sued by a disgruntled investor you have a definitive defense, which means an attorney is unlikely to take an investors case on a contingency basis - unless fraud was committed. Further. You can have any lawsuit initiated by investors in state court moved to Federal court where the Reg D safe harbor will preclude any state law liability.

2. If you are raising capital from people you don’t have a prior relationship with, and even people who you do, they would regard you as serious only if you had a professional prepared PPM and Operating Agreement. Since in the sponsor - investor platform the investor is giving up decision making to the sponsor, there needs to be a legal structure offering the investor recourse should the sponsor not act in the investors best interest, or prove incompetent to manage the enterprise.

3. Utilizing Reg D 506 C is the only way to legally use “General solicitation and advertising” in an offering exemption from registration.  Further, Reg D 506 C offerings can accept new investors money right away, while other private placement exemptions require a 90 day waiting period for investments from investors with whom the sponsor did not have a prior relationship. 

4. There is an exemption for a “crowdfunding” type of retail offering, with limits on how much of their net assets an investor can contribute.  The advantage of this is that the investor need not be accredited.  The disadvantage is that compliance is difficult, much more expensive than Reg D, and the chances of being sued much greater, while raising capital more difficult.