Commercial Real Estate Investing From A-Z How to Keep Yourself Out of Jail: Legal Compliance in Syndications
What are some of the biggest items that syndicators need to keep in mind? How to raise a fund yourself under your company name? Mauricio Rauld , real estate syndication attorney of Premier Law Group and host of real estate syndicator live, shares his knowledge.
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What are some of the biggest items that syndicators need to keep in mind that are easily forgotten?
Understand that you are in the business of selling securities, because a lot of times, especially new real estate syndicators, they don't quite understand that. I'm just buying real estate, why do I have to worry about the Securities and Exchange Commission or the SEC? I'm just getting a couple of my friends and we're going to go buy a single family home, or buy this building, why do we have to worry about all this stuff? People think of SEC as the stock market, stocks, bonds, mutual funds, etc but it is much broadly than that. TIC agreements, joint ventures, profit sharing agreements and promissory notes are potentially securities, I always joke that high fives and handshakes are securities but the structure itself doesn't matter. People try and get creative such as I'm going to structure it this way or that way, or it's just a loan, it's just my dad, but the reality is the SEC doesn't care about any of that, all they care about is whether you are raising money, where the returns are generated by your efforts. If you're raising money, and you're doing all the work, or you and your co-sponsors are doing all the work, and you have passive investors who are writing you a check, it doesn't matter how you structure it, and how creative you get structuring it, it's going to be a security and that's something that newbies forget.
What would be a way to go around that, would it be to raise a fund yourself under your company name, and then invest in that deal if you don't want to participate fully on the operations side or other things?
In order for somebody to come into the syndication group as a legitimate co-sponsor and bringing in some capital, there are three things they need to fit into because there's an exemption. The general rule is you need a broker dealer license, but we can find an exemption to registration and that would be what we call the issuer exemption which requires three things and most of these deals don't follow. Number one is no transaction-based compensation. This happens a lot, you have to be willing to say, I'm going to give you 10% of the GP even if you don't bring a single dime. I know you promised that you thought you were going bring a half a million dollars from your investors and it turns out, you aren't able to bring any, you still have to get that 5% or 10% because you're giving that person that percentage, not for raising money, but for other things they should be doing like any other syndicator: due diligence, underwriting, asset management and all these little ton of things otherwise it's transaction-based compensation. Your primary role needs to be those substantial duties, it can't be raising capital and you have to show that you're doing more than that. If you're a real syndicator, you have two or three partners, you're part of the team, and you're all working hard to make this deal work, then you're going to fit into that exemption.
Do funds pay an interest until they allocate all of the funds, is that optional?
That's the beauty of syndications in general and certainly with funds, you can be as creative as you want to be. I would usually recommend not making it super complicated, because then you start losing investors. Some people decide to give a flat fee, almost like a coupon rate.