In this episode, we’ll be discussing the age-old question … what’s the next step for investors who’ve run out of capital but want to keep growing?
Our answer? Syndication.
Syndication allows investors to move their focus away from earning and saving money toward raising money.
And if you’d rather not spend your time doing deals, syndication is a great option for putting your cash to work … while you do what you love.
But we’ll be honest … syndication is a lot of work.
You need to build an investing plan, understand your market, vet your investors, and know what could go wrong … and right … with a deal.
You need to understand not only the business side of each deal, but the legal side.
That’s why we invited an experienced securities attorney to chat with us about the ins and outs of syndicating.
In this episode of The Real Estate Guys™ show you’ll hear from:
- Your secure host, Robert Helms
- His insecure co-host, Russell Gray
- Securities attorney, Mauricio Rauld
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What is syndication? What is a security?
Mauricio Rauld is the founder and CEO of Premier Law Group. A long-time acquaintance of ours, he’s worked with us to vet many syndication deals.
We’ve watched Mauricio evolve into an experienced securities attorney, and we trust him to answer all our syndication-related questions.
Let’s start with the basics.
First, what is syndication? Any time you are pooling resources … usually money or capital … to do a deal, you’re involved in syndication.
Next, when does securities law come in? If you’re the one running the deal, the minute you take a check from someone, your transactions fall under the realm of the securities law.
The structure of the deal doesn’t matter … you could write out a profit-share agreement or simply shake hands with your investors, and you’d STILL be dealing with a security.
We asked Mauricio what investors need to be aware of when it comes to securities law and the Securities Exchange Commission (SEC).
He said that when dealing with a security syndicators have three choices:
- Register the security with the SEC.
- Find an exemption so you don’t have to register.
- Avoid the two options above and go the illegal route.
Needless to say, we don’t recommend the third option!
Most investors are able to choose the second path because the SEC offers multiple exemptions. To get your mind around the major exemptions, Mauricio recommends working with an experienced securities attorney.
An attorney will help you catch any mistakes … before you’re head-deep in a deal and it’s too late to fix your errors.
Like the saying goes, an ounce of prevention is worth a pound of cure.
If you’re going into a syndicated deal as an investor, there are some preventive steps YOU can take as well. Mauricio names two main steps:
- Do your due diligence when it comes to the deal sponsor. Check their track record and make sure they have some successful deals under their belt.
- Review the sponsor’s documentation and paperwork. Missing items can be a huge red flag, Mauricio says. A sponsor who doesn’t give you the appropriate disclosure documents is cutting corners.
Syndicators need to draft and publish a private placement memorandum before doing a deal. This document essentially names all the ways a private investor could lose their money.
Private placement memos are specific to each individual deal. To draft one, syndicators need to work with an attorney, who will evaluate all the ways a deal could go wrong.
This documentation is critical whether you’re the syndicator or the investor.
If you’re the syndicator, make sure your lawyer sits down with you and gets specific details about the deal so they can list every possible risk in the memo.
If you’re an investor, it’s wise to review this document and the deal itself with your lawyer so you are aware of possible risks before you put your dollars in.
How should syndicated deals be structured?
There are two parts to syndicating a deal.
First you have to raise money, find the deal, and make sure you’re in compliance with securities law … and then you have to figure out what you’re actually doing with the money you earn.
We asked Mauricio to talk about how syndicators can structure syndicated deals.
He said that first, syndicators have to look at whether they’re structuring a deal for equity or for debt. Syndicators should also look to see what their investor pool is looking for.
And syndicators should keep in mind that a deal may be structured differently while there’s cashflow versus after the property is refinanced or sold.
When it comes to structuring your deal, Mauricio reminds syndicators to ALWAYS disclose, disclose, disclose. Any way you or your spouse are compensated needs to be disclosed to the SEC.
This is where a securities attorney comes in handy, says Mauricio. If you’re a syndicator, a good specialized attorney will spend the time up front to understand your deal and help you structure it … while making sure you disclose the proper info.
Now on to specific deal structures.
The most basic deal structure is to split the profits between syndicator and the investor pool.
The standard split is 80-20 … 80 percent for investors and 20 percent for the syndicator. But that percentage is malleable depending on the deal itself.
Another option is a “preferred return.” This means a certain percentage of the original amount invested is set aside for the investor … say, 7 percent, for example. The investor gets all the profits up to that percentage, and the syndicator gets anything beyond that.
You can also do a “waterfall.” This means setting up different tiers … up to a certain amount, the profit is split 60-40, and then after that, 70-30, and so on.
Whichever deal structure you choose, there are two basic guidelines you should follow, says Mauricio:
- Keep it simple. A waterfall structure with 10 different tiers is more work for you and more complicated for investors to understand.
- Keep it fair. Evaluate the deal structure based on how much work you’re putting in versus how much capital investors are contributing.
One of our favorite things about syndication is that there are basically unlimited options for the type and structure of deals you do!
Interested in building a syndication business but not sure where to start? Mauricio recommends starting by farming for potential investors so you have an investor pool to pick from when you’re ready to do a deal.
He also recommends making sure your entity and asset protection structure is in place. This can be done BEFORE you find your deal.
Want more information? Click here to check out Mauricio’s exclusive webinar, Practicing Safe Syndications. And consider attending our Secrets of Successful Syndication Seminar, where Mauricio is a staple speaker annually.
We wish you safe syndicating!
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