Syndicating Real Estate 101
For many seasoned Real Estate investors, syndicating a large transaction is considered “Next level”. Most of us never start off working for Brokerages or Big commercial real estate firms. We start off with a small residential project. Over the years, we may have gotten pretty good at what we do and have created a repeatable template for acquiring, renovating, and renting or selling these properties.
For some, we have reached a sort of comfort zone and either keep coasting or decide to tackle something a little more challenging.
During this last economic cycle, we saw a huge boom in the real estate industry. While residential prices soared, Multi-family and Hotel construction also saw a boom. We watched the evolution of Airbnb’s and Rental prices skyrocketed.
Currently, we are seeing many hotels in default and struggling to make ends meet. Needless to say, many of these hotels and Multi-family complexes will be on the market or for sale in the near future.
For the seasoned residential investor, and for the novice hotel and apartment building investor, here is a crash course in raising capital or syndicating your next transaction.
- Do you need to start raising capital with a Fund? Many investors who are creating a fund are more than likely seasoned managers with a track record and team. If you are looking for capital, note that Capital investors will be looking at this. Most capital investors that you will be pitching to are sophisticated and really going to scrutinize the individuals raising the funds. Keep in mind that there are Regulations regarding who you can market too and how. More on this below.
- What kind of regulations should a newbie observe? Your deal structure will determine what regulation you will need to adhere too. A security is an instrument where investors do not have a say in what type of investments are made. If investors are involved in the decision-making process, then it's not a security. There are several types of exemptions regarding securities, that can be filed with the SEC, and these will be discussed in detail later, but the most common is Regulation D. Under Regulation D there is 506(c) which has stipulations for the individual making the offering to follow, regarding who can invest and how you can solicit them. In other words, you can only target accredited investors you know and are allowed up to 35 non-accredited investors to participate.
- Is a Private Placement Memorandum Necessary? When we first started this venture of syndicating real estate we wanted to know how much an attorney was going to charge. As we talked to all kinds of attorneys at the various conferences we attended, the engagement retainers started from 50k to 500k. Every attorney had a different approach, but the fundamental unifying component was the private placement memorandum and entity structure. The private placement memorandum is not a requirement by the SEC. It is preferred, but not required, and in my opinion, geared more to protecting the offeror than the consumer. That said there are fill-in templates that one can acquire. For a few hundred dollars you can do it yourself and get a legal review for a fraction of the cost.
- What kind of entity structure should be considered? The entity structure will be contingent on the overall strategy. The size and structure of your syndication will determine the complexity of your situation. In most cases, a simple LLC will suffice. It will have its managing partners and general limited partners. In most cases, profits will flow through to the individual. In more complicated situations you may want to create a Delaware statutory trust, corporation, trust, or another type of operating entity. In more complicated situations, I would recommend an attorney and CPA for advice.
This is only a brief summary of what may seem complicated to the novice syndicator, but with time, patience, and education anyone can gain an understanding of the process. For the beginner without a track record, the most important component will be the asset. Find a great deal and just get some joint venture partners, until you can develop that track record.
Luis A. del Mazo, JR
