All Forum Posts by: Craig Zappetti

With regards to the first issue, if you will only ever have one flip at a time, then one LLC should be sufficient protection.

For the second question, I would strongly suggest having a separate LLC for each building. It may seem like a pain to have multiple LLCs which means multiple tax returns and accounting and annual reports, but these are nickel and dime issues when you consider the liability protection that the separate entity provides. If there is a fire or other casualty loss in one building and all of them are in one entity, the plaintiffs lawyers will attack all of the buildings. If they are in separate LLCs and run separately, then generally there should be no ability to get to the other buildings. This strategy with the umbrella policy should provide you with adequate protection. It also makes it easier to track financial results to show prospective buyer's when you go to sell the property.

I would also suggest a separate LLC as the management company that enters into contracts with each building. Again, the provides another level of protection if negligence in the management caused the casualty.

The Series LLC, while interesting in theory, seems cumbersome to me in practice. I am sure that some DE lawyers praise them, but having one large operating agreement that grows even larger with each series seems to be more trouble than it is worth.

I live and practice in the Philadelphia area and would be happy to discuss this with you.

Jeffrey,

We run a group in the Philadelphia area that is geared to education and networking.  Real estate is a big part of these opportunities.  It is the Strategic Investor Alliance.

http://strategicinvestoralliance.com/

We just had an event that drew attendees from throughout the country.  If you have specific types of contacts that you would like to meet, I may be able to introduce you to them through this organization.

Read Give and Take by Professor Adam Grant.  He explains why you should always take the time to answer questions and generally help people when called upon, regardless of your profession.

You never know when the person you help will find a great deal.  And need a co-investor to help him finance it.  And take 50% of the profit.  The book provides plenty of examples how great business deals happen based on these small interactions.  Nice people do win.  People remember small favors.

Another famous guy in history preached these same lessons.  Yes, he was crucified, but he ended up doing alright for himself.  And he generally smiles upon those who help others.   

The biggest reason that you would choose a 506(b) offering is that it is considered a "covered security" and is preempted from coverage by state securities laws.  This means that you would comply with Regulation D, file a Form D and you would only be obligated to complete notice filings in the states in which you sold securities.  A Rule 504 offering is not considered a covered security.  This means that you would need to comply with federal requirements AND the separate and distinct requirements of each state in which you sold securities.  Some states review the memorandum and give you comments that must be resolved before you can sell in that state.  This process adds a great deal of time and expense to an offering, particularly when different states offer conflicting comments.  Also, whenever you sell to non-accredited investors, even in a Rule 506 offering, the disclosure rules are more rigorous and stringent, so you should really consult a securities lawyer if this is your offering plan.

I believe that there are correct statements in both Leslie's post and Bryan's post.  Generally speaking, an issuer does not need to file a Rule 506(b) or (c) offering with FINRA.  However, if they hire a licensed broker-dealer to market the offering, then the broker-dealer may need to file the offering documents with FINRA as that is the agency that regulates registered broker-dealers and the filing allows them to keep tabs on the broker-dealers. 

Why would you hire a broker-dealer to market your deal?  They generally have a long list of customers that may be interested in investing in your deal and can make raising money a very efficient process.  The catch is that they will generally charge an 8-10% commission for their services.  Incidentally, registered broker-dealers are the only folks who are permitted to collect a fee for selling securities.  This is an important matter that most issuers miss.

The facts of every offering are different and require their own analysis by a securities lawyer.  More often then not, we can find a way to help you to accomplish your goals in a compliant manner.  It does cost money, but it also provides piece of mind and will ultimately save you a lot of time and money by doing it correctly the first time. 

If you have questions or want to learn more about the process, please call me.  

The first issue to consider in any securities analysis is whether or not the item in question is in fact a security. If it is not, then it is not subject to the securities laws. A single note secured by a mortgage is essentially a real estate interest and generally not a security as there is an actual asset underlying the purchase. The purchaser is in essence is acquiring a real estate asset and the warranty covers a portion of the loss if the quality of that asset turns out to be deficient. This really should be no different than any warranty that a seller provides in a contract to sell a house. It is a contractual matter that is regulated by real estate and general contract laws.

This doesn't mean that regulators in some states won't try to push the issue. I just think that securities regulators would have this first hurdle to pass. The other issue is that, to expend enforcement resources, the buyer would need to have experienced losses. If the buyer receives some payments from the borrower and the seller covers the remaining unpaid amounts through the warranty, there shouldn't be any losses to justify any real enforcement action.

This analysis changes if the seller assembles a pool of notes and sells fractional interests in that pool OR raises a pool of money by selling equity or debt for use in purchasing a pool of notes. In either of those scenarios, there would be a sale of a security and regulators in all states and at the SEC would regulate those offerings. This is just not the case in these deals.