All Forum Posts by: Jim Groves

If you're acquiring these new investors through relationships and/or word of mouth, you needn't worry about the crowdfunding rules. Those are more concerned with general solicitation. Get an attorney to draft an operating agreement for you and make sure that you follow one of the SEC safe harbor provisions. Most smaller real estate investments generally fit into one of them. The outside investors will be listed as members of your LLC, and the operating agreement should spell out decision rights, payment priority, etc.

@Benjamin Summers, I think you're leaving out a key aspect of options markets and that is mechanisms necessary to cover for counterparty risk.  In laymen's terms, an options market requires the ability of all parties to follow through on their obligation.  At a typical options exchange (to quote Trading Places), "all accounts to be settled at the end of the day, no exceptions".  This is another way of making sure all participants are credit worthy and follow through on their obligations.

You mentioned that calls are typically in most contracts.  The credit worthiness of the holder of the call option isn't as important to the counterparty (the owner of the asset).  If the holder of the call option cannot raise the money necessary to exercise it, then the seller continues to hold the property.

That doesn't work with put options.  If you hold a put and wish to exercise it (someone needs to buy back the property at a specified price), what happens if they don't have the money to buy it back?  Your put option is effectively worthless.

That's not to say these options cannot be used in the real estate world, it's just that it will require a lot more analysis on a deal by deal basis and is a long way away from becoming a commodity.

John, you should form an LLC for a property investment regardless of whether or not you plan to raise money via crowdfunding. The crowdfunding platform will form a separate LLC to pool the investor money, and they will own a percentage stake in your property-level LLC.

As for the state that it is formed in, maybe an attorney can comment on the advantages of separate states but my experience is that I would form in either the state where I'm located (Illinois) or in the state where the property is.  There are cost differences in each state, and I believe Texas is among the cheapest (which is maybe why it was recommended) but you'll need to pay for a registered agent if you are not a resident in the state.

I've formed LLCs in Georgia for property investments in Florida, South Carolina and Virginia, so it isn't necessary to be in the state of the property.  We formed in Georgia because our attorney was in Atlanta and could more easily represented us there.

 How strict is it being followed? It depends on the safe harbor rule that the platform is using.  If they are using 506b, they can rely upon a representation from you that you are accredited.  In other words, you can lie about your status and get in.

Is it "legal"?  Well, no.  

In my view, the rules keep you from investing a sizable portion of your net worth on a lightly regulated investment marketplace.  As a rule of thumb, you probably shouldn't be investing more than 10-20% of your net worth in these deals anyway.    

 It's the provision that allows for non-accredited investors to participate in crowdfunding investments.  Based on your prior posts, I'm assuming you're accredited so it won't apply to you.

I'm not a car wash expert, but I do know that they tend to be located on cheaper parcels than $400K/acre.  That's a pretty steep price prior to even building the improvements.

If a typical land cost for retail is say 20%, that means that your car wash should be worth around $2MM, or net approx $200K/year.  Does that seem possible to you?

 Debt- Typically 8%-10% coupon. I wouldn't expect to see very competitive offerings for a near stabilized multifamily of that term length through crowdfunding.  You're better off getting a more conventional loan.

Equity- Preferred return of at least 8% with a 75% split to the investors.  You can probably get a better split but you'll have to pay a little better preferred return.

Fees are generally 2-3% upfront

 In the case of Realty Shares, the platform is only facilitating the offering so there technically is no credit underwriting outside of screening deals to protect the platforms reputation.  In cases where the platform does not underwrite on the investor's behalf, you'll want to look into who the equity co-investors are and that the sponsors have sufficient equity at risk.

 @Bryan: Interesting timing as I'm sure some of you guys saw that Fundrise just posted their prospectus for the Reg A debt fund: http://www.sec.gov/Archives/edgar/data/1645583/000...

Although considerably more elaborate and formal than what you're looking to produce, the first thing that stands out is that you don't go into any real detail about the fees you plan to charge. One of the things that attracts me to the Fundrise offering is that it's fees are very reasonable, especially in comparison to Private REIT stocks.

You should also go into some more description on the Austin market, why you believe the time is right and your competitive advantages to other HML lenders. I'd also want to know what my transfer rights are, or if this is a self liquidating fund. Finally, do you have some potential investments that you plan to contribute? If so, profiles of those investments would be helpful.

I'm kind of curious from those that are seeking to raise money through Crowdfunding--given that most of the major players are gravitating toward institutional money these days (and not true P2P), is this really the panacea that everyone thinks it will be?