Real estate sponsors and owners looking to raise equity financing for their real estate deals have several options. Generally, they set up a Limited Liability Company and sell membership units to investors to raise capital for the real estate they would like to buy. In essence, they are selling securities to raise money.
Most real estate operators and owners turn to syndication attorneys to help them to stay within the securities laws. These attorneys help them use legal exceptions to sell securities to accredited investors. The exceptions they use are 506(b) or 506(c). Both of which allow the operator to raise funds mostly from accredited investors and with some limitations from a select number of non-accredited investors.
Many owners and operators and their attorneys do not know an alternative way to raise capital. Reg CF allows companies to raise a maximum of $5 million from anyone, including non-accredited investors. The offering must be conducted through a Funding Portal registered with the SEC and a member of Finra.
In a recent blog post, syndication and crowdfunding attorney Mark Roderick explains why this is a good idea:
- I participated recently in the syndication of a high-quality, income-producing, multi-family project in a top market.
- The sponsor raised $4.5 million from a family office. Among the terms of that investment:
- The sponsor provided 40% of the capital.
- The investor received $75,000 for making the investment.
- The sponsor made representations about the property’s condition, including environmental representations.
- The sponsor guaranteed the proposed renovation of the project as if it were the general contractor.
- The sponsor was required to provide the investor with lots of financial reports, including audited financial statements.
- The sponsor was required to update the project’s business plan on a regular basis, subject to the investor’s approval.
- The LLC Agreement listed 38 separate actions requiring the investor’s consent.
- The investor had the right to sell the project after three years.
- The sponsor was subject to all traditional fiduciary obligations, like the director of a public company.
- The investor had the right to replace and/or sue the sponsor based on mere negligence.
- If the investor asserted a claim, it could stop all distributions to the sponsor — not just fees and distributions in the nature of a promotion, but distributions made with respect to the sponsor’s capital.
- The Tax Appendix was itself 18 pages long.
- I view that as pretty onerous, especially for a $4.5M investment.
- As that deal was being negotiated, real estate Crowdfunding sites were raising $4.5 million and more for individual projects with terms nowhere near as onerous.
- At the same time, they’re giving ordinary Americans, not just wealthy family offices, the opportunity to invest in great deals. That’s why the title of this post says “Another.”
Invown is a Funding Portal registered with the SEC and a member of Finra, designed exclusively to raise public capital for companies backed by real estate. We are open for business and actively looking for real estate deals to list for our growing list of investors.
About the Author: Levi Brackman is CEO and Founder of Invown