All Forum Posts by: Jillian Sidoti

The fee is based on the yearly Capital Account Balance. It is what keeps the lights on for the Manager (there are no other "Manager expenses" paid to the Manager). The 50% split is how the Manager makes actual money. 

Please, no one take my commentary as investment advice. 

Also, the 8% return is NOT guaranteed - it is preferred. There are never guarantees in securities.

@Ian Ippolito - I wrote Tulsa Real Estate Fund. Yes, 5.5 is higher than normal, but the fund isn't taking any other fees other than that fee - no acquisition, no disposition, no asset management, no refinance - nothing. 

I still recommend you do a PPM even if you are raising $600k to $800k. Those are the deals that I find always get in the most trouble for not doing it right. (Our firm requires a PPM for any deals over $500k.) I didn't read the whole thread here, but here is some useful information on 506(b) and 506(c). Best of luck!  

What is the difference between a 506(b) and a 506(c) offering?

The Securities Act of 1933 (“Securities Act”) requires all public securities offerings to be fully registered with the Securities and Exchange Commission (“SEC”). However, Regulation D (“Reg D”), Rule 506 of the Securities Act carves out an exception for full, federal registration of private placements of securities.

Rule 506 allows for two different methods in structuring an offering – 506(b) and 506(c). While you may select a 506(b) or 506(c) offering for any size offering, you must use one of these methods if you intend to raise more than five million dollars. Under both types of offerings, there is no maximum dollar limit for the offering or sale of securities. Also, both offerings require disclosure documents and timely filings of Form Ds in the appropriate states.

There are, however, significant differences between these rules to be considered before selecting the most appropriate offering.

506(b)

Under Rule 506(b), a sponsor is not allowed to use general soliciting or advertising. A sponsor must be able to show how their investors learned about the offering and that this knowledge did not come from a general email, social media post, public seminar, etc.

Also, Rule 506(b) allows for an unlimited number of accredited investors and up to thirty-five (35) sophisticated investors. An accredited investor is an individual or an entity that meets a specific set of guidelines regarding net worth. A sophisticated investor is an individual or an entity that has a pre-existing or business relationship with the sponsor, is experienced in investing, understands the risks associated with the offering, but does not qualify as an accredited investor. (See “What is the difference between an accredited and sophisticated investor?” article for more detail.)

506(c)

In contrast, under Rule 506(c), a sponsor may use general soliciting and advertising. Also, sophisticated investors are precluded from investing in a 506(c) offering; only an unlimited number of accredited investors may invest in a 506(c) offering. Further, Rule 506(c) requires sponsors to take reasonable steps to verify that an investor meets the accredited investor standards.

Here is an article I wrote. I hope this helps: 

Using Private Money Lenders: is it exempt from securities law?

There is a plethora of education and “how to’s” in the world of real estate education that claim that if a real estate entrepreneur uses a private lenders and secures such a transaction with a piece of real estate with the use of a mortgage or deed of trust, such a transaction is exempt from any kind of securities registration.

This is somewhat true but is not always true. In this article, we are going to explore when you can rely on the deed of trust and mortgage and when you should consult a securities attorney for your real estate transaction.

How do I know it is a security in the first place?

The Securities Act of 1933 was established as part of FDR’s new deal, post-Great Depression to require either a registration of securities or exemption therefrom. However, in 1946, the WJ Howey case gave guidance on what a security actually is by establishing an easy to use test:

• 1.There is an investment of money.
• 2.In a common enterprise (more than one investor).
• 3.With the expectations of profits.
• 4.Through the efforts of a promoter. (In other words, the investor is passive.)

If you fit all of these points, then you are a selling a security and go to the next step.

Are you crossing state lines?

The Securities Act of 1933 is the big federal law that rules the land when it comes to securities and securities transactions. Particularly, it matters when your property is in one state and the investor is another state. For transactions or notes that are secured by a deed of trust or mortgage, there is no federal exemption. Thus, you must make proper disclosure to the investor and perhaps file a FORM D with the Securities Exchange Commission (SEC.)

What are the rules in your state?

Most states do have what is called a “self-executing exemption” when it comes to notes secured by mortgages or deeds of trust. However, there are rules.

Do not try to skirt these rules. Several years ago, a client of mine had recorded multiple investors on a mortgage. The securities commission in that state had a habit of perusing recorded documents like these notes and found multiple, unfamiliar lenders on my client’s note. The securities commission swiftly sent out a subpoena followed by a cease and desist attached to a hefty fine of $5,000. These types of simple violations are a great way for states to generate revenue.

Which states do not have an exemption?

Alaska, Arizona, Arkansas, Florida, Kentucky, Montana do not have an exemption like this meaning you have to find another exemption or register the security. Furthermore, those in Illinois should be aware that Illinois has some stricter rules.

So what should I do?

Regardless of whether or not you are afforded an exemption for your private lender transaction you should practice the following steps:

• 1.Provide full disclosure to your investors. Make sure they are apprised of all the risks associated with investor and understand the terms and conditions of the transaction.
• 2.Provide your investors with a written note. The note should discuss the terms, the rate, the maturity state, and the security interest.
• 3.Actually record the deed of trust or mortgage. Failure to do this with ruin any exemption that you have. 

When talking about investments to investors. NEVER EVER USE THE FOLLOWING WORDS:

1. Low risk

2. Safe

3. Guaranteed

4. Secured

You can argue with me all you want on how it is "low risk" and it is "safe." I promise you, the SEC and state securities boards see it very very differently. 

You should not be guaranteeing anything. A.) There is no reason for you to do this. B.) Even if you do, you still can't say that. 

Hey @Gova Reddy - if you get a letter from your CPA, RIA, or attorney, they can verify you are accredited. I hope this helps. 

What kind of deal are you looking to fund? Different deals = different platforms. 

you're welcome! 

Hi Melissa, Here is some info for you:

I hope this helps. Email me if you need anything.

How do I know it is a security in the first place?

The Securities Act of 1933 was established as part of FDR’s new deal, post-Great Depression to require either a registration of securities or exemption therefrom. However, in 1946, the WJ Howey case gave guidance on what a security actually is by establishing an easy to use test:

• 1.There is an investment of money.
• 2.In a common enterprise (more than one investor).
• 3.With the expectations of profits.
• 4.Through the efforts of a promoter. (In other words, the investor is passive.)

If you fit all of these points, then you are a selling a security and go to the next step.

Syndication….?

“What is a real estate syndication?” is a question our firm is asked often. Maybe you’re a developer, a real estate investor, or someone looking to expand your business by taking in outside investors to fund a larger project that you wouldn’t be able to do by yourself. Or maybe a friend or acquaintance has approached you about investing passively in his real estate deal that he’s organizing with other investors.

Whatever your role is in the above transaction, you would be taking part in a real estate syndication. In the simplest terms, a syndication is the structure or relationship between multiple investors who pool money together to fund a project, real estate or otherwise. Investing in a real estate syndication is essentially investing in a real estate enterprise as a passive investor alongside multiple other investors.

What kinds of projects can be syndicated?

Theoretically, one can syndicate any type of real estate project, be it debt, equity, raw land, or even single-family residential property. Most projects that are syndicated, however, tend to be larger commercial projects, such as multi-family apartment complexes, office space, retail, or industrial buildings. Syndication allows a person to acquire properties that are often worth more than what that single person would otherwise be able to afford.

Who can invest in a syndication?

Federal and state securities laws typically apply to real estate syndication transactions. Normally, securities may only be sold if the securities are registered with the SEC or otherwise exempt. Traditionally, most real estate syndications offerings have taken the form of a private placement exemption under Regulation D (Reg D). In 2014, there were 33,429 Reg D offerings that raised some $1.3 trillion. 99% of those offerings were raised under Regulation D’s Rule 506 exemption.

Reg D has 3 exemptions, each of which requires the investors to be either an accredited investor or a sophisticated investor. The most commonly used Reg D exemption is Rule 506(b)—formerly known simply as Rule 506 prior to 2013. Reg D allows a company to raise unlimited funds from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.

An accredited investor is someone with an annual income of at least $200,000 (or $300,000 if filing taxes jointly) for the last 2 calendar years, or someone with a net worth over $1 Million, excluding their primary residence. A sophisticated investor is someone the issuer/sponsor (the person organizing the syndication) believes is knowledgeable and experienced with financial and business matters, but is not accredited.

With the passage of the JOBS Act in 2012 and the creation of several new “crowdfunding” exemptions, non-accredited investors (i.e. everyone else) can now invest in certain syndications. However, many of the “crowdfunding” exemptions have restrictions that do not make them appealing to real estate syndications (e.g. a lower cap on the total amount you can raise, limitations on how much a single person can invest, etc.) which is why there are not as many real estate syndications open to the general public.

If you’re an accredited investor you can invest in any real estate syndication. If you are experienced with financial/business matters and have a prior relationship with a sponsor, then you can invest in real estate syndications organized by that sponsor with which you have a prior relationship or real estate syndications open to the public. If you’re neither an accredited investor nor a sophisticated investor, then you can only invest in syndications open to the public.

How does the sponsor/syndicator make money?

The sponsor (or syndicator) is the person who forms and organizes the group of investors and manages the investment. The sponsor typically charges investors certain fees during the initial set-up process and throughout the lifetime of the deal. These fees may include:

• an acquisition/organization or due diligence fee, often a flat percentage of the funds raised;
• asset management fees, for overseeing the project from beginning to end, which can take the form of a percent of gross revenue;
• disposition fees which are paid from the proceeds of the eventual sale of the property;
• refinance fees;
• property management fees (if the sponsor is managing the property too); and
• a share of profits if they take an ownership interest in the investment.