All Forum Posts by: Elijah Brown

@Ryan Solberg I’m looking for 2-10 unit multifamily near Orlando for around $500k.

Hi Justin,

Small-scale syndications under $5m are very easy. I disagree with Greg in that the legal fees will be $10k and the LLC maintenance will kill cash flow.

Here is what you can do:

1. Set up an LLC in Delaware (annual tax of $300) and list all the members, their contributions, and their equity % on the Operating Agreement. You can do this on LegalZoom, Rocketlawyer, etc. I recommend doing it yourself and then paying an attorney $300-$500 to review it for any issues. Get all the investors to sign the Operating Agreement.

2. Take your Articles of Incorporation to the bank and set up a corporate bank account.

3. Find a deal and place it under contract. Pay your attorney another $300-$500 to review the Purchase and Sale Agreement if you don’t trust your real estate agent.

4. Present the deal to your investors in a nice PowerPoint. Make sure to include a Legal Disclaimer slide that outlines all of the possible risks as well as a boiler plate statement that you can find online if you google “Private Placement Memorandum Legal Disclaimer”. Ask the potential investors to let you know if they are committed within a few days.

4. Send your investors a “Capital Contribution Notice”. This is a one page document that tells your investors exactly how much money they need to transfer into the corporate bank account, when they need to transfer it, and the bank account details.

5. Close on the deal.

For small deals like this, there is no need to spend $10k in legal fees and jump through hoops to ensure you’re in compliance with SEC regulation. Once you get into larger deals ($5+ million), you will need to worry about SEC rule 506.

Good luck to you and let me know if you have any questions! 

*Please note that I am not an attorney and you should not rely solely on my advice to make decisions regarding the management of money. Please conduct your own diligence and ask a licensed attorney for any clarification on all legal matters.*

Hi Paul,

-Typically we like to see a hurdle of 8%. However, it depends on your investors and the risk of the deal. High risk deals (C- class properties in opportunistic markets) should have a hurdle closer to 10-12%, and lower risk deals (A class properties with a strong demographic and stable cash flow) should have a 6-8% hurdle. If your investors are younger and require higher returns, you may need a higher hurdle as well. 

-I like your waterfall, but it may be too complicated if your investors are not sophisticated or accredited. Your investors (and your accountant) may prefer/understand a more simple structure. I recommend skipping the "catch up" period for your first deal because your investors likely don't care if you get any special return period and it may confuse them. I would just skip straight to the 75/25 or 50/50 after the investors get their 8%. If you really want to include the extra split at 50/50, add it. However, I would choose either 75/25 or 50/50 for the entire waterfall. If this is the best deal you've ever provided, go for the 50/50. If it's a bit riskier and your investors need to be paid more, do the 75/25. I recommend 80/20 or 75/25 for your first offering.

-Are you charging an Asset Management Fee? Typically you will charge 1% - 1.5% annually on the value of the equity. In year one, that fee will be based on the amount of equity raised. In future years, it will be based on the value of the equity after appreciation is factored in. Out of this fee, you will likely have to pay for Property Management services and any G&A related to your General Partner LLC (which you should have).

-Don't pay out the investors monthly. This may cause cash flow issues for your business. I recommend paying out dividends on a quarterly basis and your investors shouldn't care either way.

Hope this helps!

Elijah Brown