All Forum Posts by: Brian Moore

@Bryan Hancock Congrats on getting to the finish line with your portal. The Title III offerings should give you a first-mover competitive advantage. I wish you good luck and prosperity!

I am considering crowdfunding as an option to fund my deals. I was wondering if during your pre-launch phase you have had any contacts with or recommendations for an intra-state portal in Illinois.  Thanks.

@Wanda S.  if this is truly a good deal that you don't want to let go then I would suggest you find some creative gap financing ( either hard money or an aggressive  multi family finance company) .  This will allow you to close the deal while you build up your investor  subscriptions.  Once you have your deal fully subscribed you can transfer ownership to the 506(b?) ownership entity. 

This method will not be cheap, expect to pay 8-12% for a six-month loan. Also, you would need to come up with some of your own money and not exceed some LTV (80-90%?).

 Good luck! 

@Benjamin Summers

(Sorry, technical difficulties on prior post...)

Your information on derivatives is good but other than the call option (known simply as an "option" in real estate parlance) I'm not sure how puts or straddles can be applied to real estate investment.

The problem with real estate versus the US financial markets (where these financial derivatives were "derived") is that, unlike publicly traded companies, public information on real estate is imperfect, so bad in fact, that for a commercial deal to transact it takes 30-60 days of due diligence by the buyer.

The only way for these derivatives to have any type of reasonable liquidity is to have professionals perform standardized due diligence and publicly share the information to all parties. Most owners don't want to have their building picked apart by a professional appraiser, building inspector, pest inspector, environmental inspector, etc- because it can hurt their potential market value. (They would rather take their chances with a buyer that is less detail-oriented). Plus, who would pay for that cost - which could easily run several $000's?!

Thinking through this a little further, there MAY be someone willing to pay for these costs in order to get financing - a sponsor that raises funds through crowdfunding. Many crowdfunding portals already perform a portion of this due diligence when they list an offering. For a few thousand dollars more, they could do a fairly complete job of the due diligence and create a standardized report on the asset. With this report a reasonable market participant could estimate the underlying value of the property. Then, the crowdfunding portal could offer an exchange for a) the underlying crowdfunded asset (debt or equity share), and b) derivatives tied to these asset values.

One issue with these derivatives is that the duration of the crowdfunded asset (debt or equity share) has a limited and unknown lifespan. Derivatives that expire after the entity dissolves and the crowdfunded asset has been settled will have no value. This uncertainty would ensure very few market participants.

Another issue with a derivatives market is the information asymmetry between the sponsor and the investors. Not only does the sponsor have substantial inside information on changes to the asset value, but the sponsor has full control over the asset and can sell it, refinance it or otherwise manipulate its value. Why does that matter since the sponsor has a financial interest in the success of the project won't he/she make the best decisions to increase the return to investors? With derivatives, especially options, a sponsor (or his/her surrogate) could make more money trading in the secondary market than the sponsor could make on the original fees/carried interest from the deal. Thus the issue of insider trading becomes something that may have to be regulated just like in the public markets. 

@Jay S. I think you have good investment goals and some criteria that you are trying to fill in order to put your money to work for you. Unfortunately, by their "private" nature there are not any repositories of information on private placements. Thus it is not easy to: A) Find a large number of deals in which you can invest, B) Compare investment criteria among deals such as risk/return, fees, splits, projected returns, C) Find investment track records for syndicators, the key person that has the most control over your investment.

That leaves you in a position where you have a few options: 1) trust the opaque due diligence process of a crowdfunding site and invest there in a (rare) equity offering 2) Do your research to find a reputable syndicator that works in your preferred property type and in the areas you want to invest, look at their documents and ask to talk with their prior investors so you are comfortable putting them in charge of your money, or 3) invest in public securities,  they are liquid and they take no particular effort, bit your returns will reflect that. 

@Trung Hong my business invests in small multi-units in Wicker Park, Ukrainian Village and Bucktown (within the West Town and Logan Square neighborhood areas). In these A/B+ markets you are looking at stabilized cap rates in the 5.5-6.5% range. There will be little cash flow on these deals for the first few years due to the low cap rates. Most are purchased for the appreciation due to the high demand for this area by quality tenants (causing low vacancy and strong rent growth). 

If you buy an off-market fixer-upper, you should be able to achieve a 7%+ cap (stabilized NOI after rehab divided by total development costs). If this is the route you want to go, you are welcome to contact me about analyzing potential deals. I may be able to walk you through the deal process from acquisition, financing and rehab through leasing.

Full disclosure: I am an IL Broker but typically only represent my investment company. Lately, I see more good deals than I have time to acquire, and thus would be able to assist others to find good bargains in this tight market.

I would also recommend you contact @Brie Schmidt about the other neighborhoods in which you have interest. She can point you in the direction of higher returns (with somewhat higher risk) in the B/B- markets. She is a broker that works with new multifamily investors like yourself in those neighborhoods. She can quickly help you analyze the deals and find something that will meet your goals (or help you determine if your goals are realistic).

Good luck!

@Bryan Hancock

First a few general comments. I agree with Ian that you should either focus on first lien/ 65% LTV or in your "Capital Strategy" include the maximum proportion of 2nd lien and high LTV that you would target. This info is important for most investors to evaluate their highest priority - the preservation of capital.

It is not clear how the fund will generate revenue for the principals (via fees/equity/carried interest) nor what type of ownership the principals will assume (common/preferred equity) since it appears to be subordinate to the preferred equity.

Also not sure how the debt fund dovetails with your crowdfunding strategy.  Will the fund issue debt to crowdfunded deals? Or is it just that the fund will be offered to the crowd from your online platform?

More specific comments:

-The footnote on page 4 is not clearly written "The amount of the investment dollars are not net of repayments to investors". It sounds like your intent is that the investment dollars may be used to pay current quarterly distributions of preferred returns to investors. Maybe something like "The projected investment may be reduced by preferred returns paid to investors".

-At bottom of page 6 you state that investors will receive their initial investment back in approx. 3 years, however, the capital projections go out 5 years.  The intent here is not clear. Later (pg 8) you mention "committed 3-year hold period" and "early withdrawal" but it is not clear if any request for withdrawal prior to the end of the life of the fund (year 5+?) will include participation in the upside or if the investor must hold to the end to get those gains. 

- Top of page 7 "...or the income projections were too low" as reason for unsuccessful investment. Shouldn't this rather say "the income from assets was too low" or "the income projections were too high"?

- On page 7 "How can I verify that the company is real and not a hoax?" I wouldn't use the term "hoax" (ie. does not exist) since that is not a common concern and the use of this term raises investor discomfort. You should perhaps address investors' more common concerns over relying on the principals to safeguard their money. Such as, a) prior dealings of company and principals free of criminal/civil proceedings  b) controls over the money and reporting to prevent fraud/appearance of fraud.

Overall, sounds like the fund will be a great service to central Texas developers. From an investor's standpoint, answers to some questions above would be helpful to evaluate if it is a good investment. I wish you luck.

Brian

@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.  

@Joel Florek Private lending between just 2 parties is not a security so there is no SEC involvement (where the accredited requirement comes into play). Legal requirements for mortgage loans can vary from state to state so be sure and find an experienced attorney in the same location as the property to be be mortgaged.

@Andrey V.

You are bound to whatever it states in the lease that you signed. You can't break the lease until they are in breach of the lease (beyond any cure periods). From my experience, their lack of communication is a big problem. Especially because they have bad credit / other risks(?).  

Do not give them the keys until you receive the full first month of rent in a form that you accept (not cash but should be certified funds). If they don't agree to this in advance or you don't hear from them and the first day of the lease is approaching, I would contact an attorney. Remember, even if they have not paid rent nor received the keys from you, they still have a valid lease so tread carefully.