Transcript: ‘Should You Really Start a Fund?’

Edited Transcript from the podcast episode ‘Should You Really Start a Fund?’

Hosted by Kim Lisa Taylor, Esq.

Originally Broadcast on March 3, 2022

Kim Lisa Taylor:

Hello everyone. Welcome. Thank you for joining. Welcome to Syndication Attorneys’ free monthly podcast where we talk about topics of interest to real estate syndicators with the opportunity to ask live questions and get answers at the end of the call.

I am Attorney Kim Lisa Taylor. Before we get started, please note that all of our podcasts will be recorded and may be used for future promotion, posted on our website, or broadcast in a podcast available to the public. If you don’t wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call.

You can put your questions in the question-and-answer feature of Zoom, or you can put them in the chat. I’ll monitor both of those. Information discussed during this free podcast is of a general educational nature and should not be construed as legal advice.

And today, our topic is: “Should You Really Start a Fund?” The reason I wanted to do this is because we have a zillion people coming to us all the time and saying, “I want to start a fund” or “I want to start a fund of funds.” And I spent a whole lot of time talking people out of doing it.

Because 1) I don’t think they’re qualified, or 2) I don’t think they’re going to be successful. And I want to make sure that you all understand what it takes to be able to do a fund and can understand your motivations and make sure that you’re doing a fund for the right reasons, and that you really should be doing a fund.

In most cases, the answer is no, you should not be doing a fund. So, I’ve revealed the end of the book before we begin. But I do want you to think about this so that you can prepare yourself and you can get the right prerequisites. And once you have all that stuff in place, then your chances of succeeding with a fund are going to increase exponentially.

Without these prerequisites, you’re going to be struggling along. You may raise just a tiny bit of money or you may not raise any money at all, and you’re going to spend a lot of money to create a fund that you’re never going to use. And we don’t want you to do that. Because that’s going to really derail your practice and what you’re trying to accomplish.

I don’t have a guest speaker today; I’m just going to teach you guys myself. We are going to have another, maybe an in-between podcast. We usually do them once a month. But we’re going to do another one because there has been a change in the law that’s going to affect everybody called the Corporate Transparency Act. And we are going to have a little update about that and what that’s going to mean for everybody. We’ll do that at some point in the near future.

For right now, let’s just dive into our topic. I wrote an article that accompanies this. If you want to read the article, it’s on our website — Go to the “library” and select “articles.” There’s one there called “Should You Start a Real Estate Fund.” And that’s what we’re going to talk about. If you’d like to read about it later, or just put this in your library for future reference, then you can get that off the website.

So, every week we have potential clients reaching out to us who want to start a fund. We could just go ahead and take their money and set up their offering documents — there’s a lot of attorneys that might take that position. But I don’t really want to do that. We’re not that firm; we really want our clients to be successful.

And we want you to start in a way that’s going to help you succeed and grow your business long-term; that’s always been our mission. We don’t want to let you just jump into a fund if we don’t think you’re ready. First, before we get into what are the prerequisites for a fund, let’s talk about the types of offerings that you can do to buy real estate with investors.

First: joint ventures. A lot of people start with joint ventures. And people may even start with promissory notes. If you’re doing single-family stuff to start with, you’re probably using hard money loans. Then maybe at some point, you begin to use private lenders. That’s okay.

That is good for small deals where you can get one person to fund a deal, but it’ll keep you small. It’ll keep you doing one single-family deal at a time or a very small deal at a time, and you can’t really scale with that. And it’s not workable for multifamily deals, which is what a lot of our clients are doing; really, any commercial project where you’re going to be getting an institutional loan as a first-position lender.

And the reason is that ever since the Great Recession back in 2008/2010, all lenders got together and said, “We’re no longer going to allow subordinate debt on any deals that we fund in first position.” Because they ended up with relationships where the second-position lender foreclosed on the property.

And then, they ended up as the borrower on the property instead of the first-position lenders … or instead of the original borrowers with the first-position lender. And the first-position lender said, “We don’t want that to happen ever again. So, we’re just not going to allow subordinate debt.”

So, you can use a promissory note on an all-cash deal. And maybe you can even use it if you’re using small credit union lenders or community bank lenders that aren’t prohibiting the subordinate debit. Anytime you get into a commercial loan, there’s going to be a prohibition against subordinate debt.

What that means is if you put a second-position loan on the property, the first-position lender is going to get notified. And it could be a default event with respect to their loan agreement; they could object and foreclose or require you to remove that second lien. You don’t want to be in that position.

Bottom line: using promissory notes with individual investors is going to keep you in the small. You can do a lot of small deals but you can’t do commercial deals that way.

Joint Ventures

Joint ventures —  that’s the next graduating step. Now, you don’t have a single investor that’s going to fund your deal. You’re not using a promissory note anymore. You want to use a joint venture. So, we would create member-managed LLC that would act as that joint venture.

The hallmark of a joint venture — what’s the distinction between a joint venture and selling securities — is that in a joint venture, all of the members have to be actively involved in generating their own profit. So, you’re not taking control of anybody’s money; you’re asking for money when you need it.

There’s no manager of the deal who’s running the show, you’re not offering your investors preferred return and a waterfall, you’re not taking fees as to act as a manager. So, in all these cases, everybody contributes and everybody gets paid according to their percentage interest.

Every single member of the joint venture is considered by law to be a managing member, meaning, they have the right to control the company. They have a right to make managerial decisions. They have a right to open and close bank accounts, and they have a right to contractually bind the company.

In my experience — and I’ve been doing this since 2008 — the magic number for joint ventures that seems to work is up to five people. Once you get more than five people, then there’s too many personalities, it’s impossible to make decisions, somebody gets offended.

Worst-case scenario, you end up in litigation. You just get paralyzed because everybody can’t agree or can’t get along. So, more than five people in joint ventures is really not workable, in my opinion. We’ve done this enough times to know, a joint venture is used in two different scenarios with real estate projects.

In one scenario, everybody’s pulling their funds at the joint venture level and you’re taking down some smaller projects. So, actually, I’d say three scenarios.

The second scenario is where you’re using your joint venture entity to be the manager of a syndicate or of a real estate fund.

So, that’s another place that you could put three to five people who are now going to be doing the management duties with respect to that offering.

The other place that we do a lot of joint ventures is on big deals, where a syndicate can raise half the money for a deal or part of the money for a deal, but then they bring in a private equity company that’s going to bring in the rest of it. And then, the private equity company in the syndicate become members of a joint venture that just has those two members. And they co-invest side by side in order to take on a bigger deal.

We also represent a lot of clients on their side of that joint venture transaction. Usually, it’s our clients who are doing a syndicate, and then they find a private equity company to come in with part of the money. And then, we also represent them in that joint venture. And we can either draft those joint venture agreements or we can review the joint venture agreements that are provided by the private equity company.

Usually, the private equity company is going to have their own counsel in their own agreements that they want you to sign. And that’s all going to start with them providing you with a term sheet or a memorandum of understanding saying, “we would bring in this amount of money under these terms and conditions.”

And those terms and conditions are usually going to require that they have some level of management control. A lot of times they’ll take a role as a silent partner in the management of the joint venture, or the property unless you don’t meet their performance criteria.

And they’re going to spell out in their joint venture agreement what that performance criteria is. They usually going to have some reporting obligations where you have to give them information about the property and the finances of the property on a regular and periodic basis.

They may also have some requirements for how much money you leave in reserves in the bank account, and your occupancy levels. And if any of those things start to falter, then they’re going to exercise their right to take over that project.

And in that case, they’re really only concerned about making sure their investors get paid, and they really don’t care about yours. So, joint ventures can be simple, they can be complex, it could be two people, no more than five. And they can be formed for a variety of purposes.

But again, the hallmark in a joint venture is everyone is actively involved in generating their own profits. And therefore, you’re not selling securities, because the fact that these people are actively involved.

So, pricing on a joint venture: These simple joint ventures where you’re going to take down a project with two or three other investors, those can be as little as $3,500. But these big joint ventures between your syndicate and another entity could be as much as $20,000.

Usually, we charge hourly when we get into those kinds of joint ventures, because we don’t know if it’s going to take us 10 hours or 100 hours and that’s largely driven by the joint venture partner. If you get into one of these deals with a joint venture partner who’s a private equity company, quite often you’re going to have to pay all your own legal fees. So, just be aware of that.

And they don’t care, they won’t cap their legal fees. They’ll hire really big firms. You can end up with a $60,000 or $80,000 bill just for their legal fees. So, it’s a big deal. But if you’re raising $10 million or $5 million, and they’re bringing in half of it, then maybe it’s worth it for you to do that.

Specified Offerings or Real Estate Syndicates

Next: specified offerings or real estate syndicates. These terms are really used synonymously. This is where you’re raising money from passive investors for a very specific project, usually something you already have under contract. And we do more of these than anything else.

I really think that this is the most common way that people are raising money for real estate, for commercial projects, is on a specified offering basis. It is the easiest way for you to raise money for real estate, because your investors really like the fact that they can look at a property.

They can look it up on Google. They can fly to it if they wanted to. They can drive by it if it’s in their community. It’s a real and tangible thing. And so, you can provide them with pro formas that are based on past performance with the information that you got from the seller. And you can project that forward. You can have a business plan for that project or operations plan for that project where you know exactly what you’re going to be fixing or renovating about the project.

And these are all tangible things that investors can understand and they can wrap their minds around.

So, they like to invest this way. It’s the easiest way for you to raise money. Where it becomes a little cost prohibitive is if you’re raising less than $400,000. With most people, it seems like if they are raising $400,000 or more, they’ll do a syndicate.

And the distinction here between the joint venture we just talked about and the syndicates is that in this case, you are selling securities. So, you’re meeting this task of creating investment contracts with your investors. And just to remind you, an investment contract is where you have passive investors.

But the technical definition comes out of a 1946 case called Howey, where the Howey test says an investment contract is an investment of money in a common enterprise with an expectation of profits based solely on the efforts of the promoter.

So, you’re the one that found the deal. Your JV team is the one that’s going to be managing that syndicate. And you’re going to be the ones who are doing all the work to acquire the property, obtain the institutional financing, oversee the property manager, conduct the due diligence, report to your investors.

And you’re going to act as the asset manager, the syndicator. The management group will act as the asset manager on behalf of investors. The asset management team can incur some fiduciary responsibilities; that just really means that you have to care for your investors’ funds more carefully than you would your own. And you have to put their interests ahead of yours. And you always have to use your best judgment, your business judgment, to make decisions on their behalf and not yours.

So, you could offer investors in this scenario, in a specified offering, you could offer them a share of the equity, or you could offer them a fixed return.

Or sometimes, we have clients that will do multiple classes of investors where one class gets a fixed return, but maybe they get paid first right after all the operating expenses and the institutional lender. And then, you could also buy them out — if you needed to — in advance of the time that you sell the property.

This is a great place where you might put seller financing. If you’re doing some deal where the seller is offering financing, and the lender won’t allow you to have subordinate debt, then you can bring in the seller as its own special class of members that just gets a fixed return.

And then, maybe you’re going to refinance the property in two or three years and pay them back plus whatever interest you owe them, and then they’re out of the deal. And from that point on, your next class of investors would be your equity investors, and then of course, your management team.

Your equity investors in the management team would be the ones that are splitting profits. You could build in a preferred return into that scenario. Usually, you’re going to have some kind of waterfall that applies for the income that you get from operating the project.

And you’re also going to have a waterfall that applies when you sell or if you refinance the project and you get cash proceeds out of it. And usually, the first step in that refinance or sale waterfall — which we call a capital transaction — is that you would always return investor capital first. Make sure that you make them whole, and then you’d make up any preferred returns that they might have not gotten from the operational period.

And then, there’s usually going to be some further waterfall that describes what happens to the rest of the money. Does some of it go to the management before you do a split? Or, do you just go to a split between investors and management.

So, for less than a $400,000 raise, that’s when you’re going to be looking at the joint venture. We do have a program that allows you to streamline legal documents if you’re going to be doing the same business model over and over and over again; we call it a segregated offering.

There’s some information about that on our website. And a lot of these things that I’m talking about, you could go to our website at and if you go into the library and look in the articles, then you can see there’s a whole lot of different articles in there about joint ventures, about co-investing. A lot of these different things that we’re discussing in this, you might get some more information about that at the website.

And so, the challenge with these specified offerings — and this is what everybody always wants to avoid — is that you have to raise the money right away.

And you only have a window of maybe a few weeks. Ideally, you should have 30 to 45 days to raise the money. The perfect timing situation for a syndication is a 90-day close; that would give you 30 to 45 days to conduct your due diligence.

During that period of time when we would be drafting the offering documents, your due diligence and the offering documents are completed the same time, leaving you the next 30 to 45 days to be able to raise the money while you’re processing the bank loan. That’s your ideal situation.

If you can’t get a 90-day escrow because the market is compressed — and it’s tight right now, there’s a lot of competition— then see if you can get a 60-day close with a 30-day extension and build that in upfront. So, build in any extensions up front because it will cost you a lot less if you negotiate that at the point that you’re submitting your purchase agreement than it will if you try to negotiate it a week before closing. And usually, there’s going to be some exchange of hard money. You’re going to pay the seller something or release something out of the deposit to them directly to get that extension.

But maybe if you got that negotiated upfront, it only costs you $10,000 or $15,000 or $25,000 versus you tried to negotiate it a week before closing, it’s going to cost you more like $100,000. So, this is daunting if you have not taken the time to develop substantive relationships with a list of pre-vetted interested investors.

If you’re going out after you got a deal under contract and you’re trying to meet people and get them to invest in your deal, you are going to be very, very stressed out. And you may likely be unsuccessful with closing on that deal. But if you’ve taken the time before you have deals to pre-vet your list of investors and to develop substantive relationships with them, they know what you’re doing.

They’re waiting to hear from you. Now, you’ve got a deal, you can start sharing that with them. Then you’ve got a lot more likelihood that you’re going to be able to close those deals in that timeframe in the scenario of a specified offering.

Specified offerings can cost anywhere from $10,000 to $15,000 to set up. Our prices are usually in between there. For any securities offering, you should always anticipate there’s going to be some filing fees of $2,000 to $5,000, depending on how much you’re raising for forming your LLC. And also, for filing blue-sky notices, state securities notice filings, they all have fees associated with them.

And the reason it gets bigger when you have a bigger fund is because you have ambassadors for more states. So, the more states that you have investors from, the more of these things we have to file, and the filing fees can range anywhere from nothing in Florida to $1,200 in New York; most states are $150 to $300.

But you also only have 15 days from when the investors’ funds become irrevocably contractually committed to be able to do these filings. So, we file a Form D with the SEC for any securities offering under Regulation D, Rule 506, which is the most common exemption that people are using.

We would file a Form D with the SEC, and then we would file these notices with the state securities agencies as well. A lot of people that try to do their own documents don’t understand that those filings are also required. And they end up defeating the purpose of having an exempt offering if they haven’t done the filings because it’s still not necessarily as protective as it could be.

It doesn’t mean you lose the exemption, but it creates a higher burden. If you’ve filed the forms correctly, it’s presumed that you follow the rules. If you don’t file the forms correctly, it’s presumed that you didn’t to know you have to prove how you file, how you follow the rules.

Blind Pool Funds

All right. So, a blind pool fund is a securities offering in which instead of describing a specific property, you have attached your business plan for your fund. You say “We’re going to raise X number of dollars. And with it, we’re going to go out and we’re going to try to buy X number of these specific types of properties.”

Or usually, you’re going to restrict a fund to a specific asset class. We do have people that come to us and say, “Oh, we want to be able to buy anything we want.” And this is something that we do discourage because every asset class you add is another reason for an investor to say, “no.”

Because they would say very often, “Oh, I would invest in multifamily existing properties, but I won’t do development projects, because I’ve heard they’re risky.” So, if you have existing and development projects, they may say, “Would have invested but I won’t do that.”

If you say “I want to be able to invest in any type of commercial opportunity that comes along,” then, again, you’re going to have people that say, “Well, I understand this model, but I don’t know that model so I’m not going to invest in that at all.”

So, it’s not good. We call these “kitchen-sink offerings.” Don’t do kitchen-sink offerings because they just are very, very hard to sell, and don’t usually work.

So, what is your business model? We call that an investment summary. In a specified offering, you’re going to attach a property package. I mean, it can be called an investment summary. But it really is just a plain-English document that describes what you’re investing in and shows pictures of the property. It shows how many units you have —  how many one-bedroom, how many two-bedroom, how many three-bedroom units.

It’ll talk about your plan of operation for that property: what are you going to do to the property to make it perform better than the previous owner? And how much money do you need to get into the deal — that’s called your “sources and uses of funds.” There’s an article about that our website.

And also, what’s your pro forma? How do you think it’s going to perform in the first, second, third year? Maybe in the third year you refinance. How do you project that it’s going to perform after that? What overall net operating income are you going to be generating and how does that translate into a return for both the management team and for your investors?

And then, you’re also going to show your proposed exit strategy. You’re going to have to imagine into the future how much net operating income you could have generated to imagine what sale price you could be selling the property for. And you’re going to make some assumptions about what the cap rates are going to be at that time and other market conditions.

And so, with any of those projections, you’re always going to have a list of assumptions that you made. And the reason for that is because we can then draft around that. And we can say that the management has made assumptions about how things are going to progress.

But there’s every likelihood that the assumptions are wrong, in which case it’s going to be different than what we projected. But we’ve made these estimates based on our best information at the time. And so, that’s what you’re going to show if you’re doing a specified offering.

If you’re doing a blind pool fund, you don’t have that luxury because you don’t have anything under contract right now. So, you’ve just got to describe your business model. And in it, you’re going to talk about what are the asset classes that are included. How long you might expect to keep them? How long do you expect to have the fund open to new investors? How long do you expect to own and operate each property and the fund as a whole? Who are the members of the management team? What is their prior experience doing this thing? And what are your buying parameters? What criteria does each property have to meet before you would make the decision to acquire that property?

Most blind pool funds are created to acquire properties directly, which is beneficial. If you’re doing real estate, this will preclude your having to register as an investment adviser because you’re not buying securities in somebody else’s deal.

You’re actually buying real estate, which is not a security. And you’re going to be in control. Your fund is going to be in direct control of that real estate. So, the advantage of a fund is that you can raise money from investors before you have a deal under contract, which sounds like the magic answer. But it is the hardest way to raise and manage investors’ money. You have a very limited amount of time that you can raise money before you put it to work. Because your investors will sit still for about 90 to 120 days before they will want to see their preferred returns begin to accrue.

So, if you’ve got too much money sitting in a bank account, that’s a big problem, because you might be making poor decisions on how to deploy it, because you feel this pressure to get it deployed and earning a return. Or just have the money sitting there, it’s not earning a return and eventually the investors are going to want their money back.

So, even if you have a fund and your objective of your fund is to go out and to buy five properties, then you need to have some reasonable expectation that you’re going to be able to get that money deployed in a certain period of time, or you’re going to raise money each time you get a project under contract, which sounds a whole lot like a specified offering.

The only distinction is that instead of your investors just investing in one project, they’re investing in all the projects that the blind pool fund ultimately acquires. And those returns from all those projects can be blended before you provide a return to your investors.

And so, that’s sometimes good if you are doing, say, a development fund. You’ve got two projects that are in the development stage and are not earning any money. But then, you’ve got three other projects that are actually cash-flowing and are on the verge of sale and they’re generating some cash that you can share with your investors. And so, it helps offset those that aren’t producing until they get to a producing point.

The blind pool fund is one way to go but it does require these prerequisites we’re going to talk about it in a minute. And I do want to mention one other type of fund. I just came from the Joe Fairless Best Ever Conference, which was a great conference by the way.

There’s many, many trainers out there, not many, many, but there’s a few really great trainers out there that are teaching people how to buy multifamily mostly, but some are also teaching people how to buy commercial projects and they’re having these events.

I highly encourage all of you to attend as many of these events as you can for networking, for meeting new investors to getting fresh ideas and meeting partners. It’s always a great way to ramp up your business and get your juices flowing. And it’s always good to get out of the house and go engage with a lot of like-minded people.

But I hear this a lot. I’ve been hearing it over and over and over again about people who want to do a fund of funds. And this derives from the fact that there are people out there that can’t find deals but they have investors. And there’s a couple ways that they can bring their investors to other people’s deals.

One of these ways is to become a member of the management team of somebody else’s deal. And then, just have your investors invest directly into their deal; that is actually the safest way for you to be able to do this and not get in trouble for securities violations.

But the downside to that is that you’re giving your investors away maybe to these other GP groups who now have access to all of their contact information, and could continue to market to them in the future. So, you’ve essentially let your investors become their investors.

The alternative to that is for you to go out and do your own securities offering, your own blind pool fund, and then your blind pool fund will invest in somebody else’s deals. And you can structure it. So, maybe you’re just raising money to invest in one deal.

It still could be a specified offering for you where you’re not giving your investors and business plans and looking to invest in a bunch of other people’s deals and “I’ll decide which ones we’re going to invest in.” That’s one way to do it. That would be the blind pool model.

Or, you could do a specified offering model where you’re raising money to invest in this specific project. In that case, you’re going to have to defend to your investors why shouldn’t they go directly into that project. You’re going to have to be careful about how you’re going to get compensated.

Because if you’re going to be taking some difference between what the ultimate investment is offering your fund, and what you’re paying your investors, then your investors are going to want to know why they can’t just invest directly. But sometimes the reason they can’t invest directly is because the investment amount required, the minimum investment amount required in that other syndicate is too big for your investors to do by themselves

Or, they don’t want to invest that much money; they would like to invest a smaller amount of money. But there are some complications with a funds of funds. Number one is, if your fund of funds is a Reg D Rule 506(b) fund that includes non-accredited investors, then you are only going to be able to … unless your fund of funds has over $5 million in assets, it will not be considered an accredited investor.

So, your fund is coming into somebody else’s deal as a single investor. And you have to look at what are their suitability requirements for an investor to invest in their funds. So, if their fund says “we only accept accredited investors,” then your fund has to qualify as an accredited investor.

It can do that by one of two ways. It can either have over $5 million in assets, or all of its members have to be accredited investors. So, if you’re investing in somebody else’s 506(c) fund, only allows accredited investors, you either have to have $5 million in assets for your company, or it has to have all accredited investors.

If you don’t meet either of those tests, your fund of funds wouldn’t be able to invest in somebody else’s 506(c) offering. You could invest in somebody else’s 506(b) offering. But if you have non-accredited investors and you don’t have $5 million in assets in your company, and you have non-accredited investors, then that ultimate syndicate that you’re investing in has to look through your company and count your non-accredited investors towards their 35.

So, that’s something you need to be aware of, and that could be a deterrent to them wanting your fund if you have 30 investors and they’ve already got 30 non-accredited investors in your fund of funds. And then, they’ve already got 10 or 15 in there, they may not want you because it’s going to put them at their 35 limit and they can’t raise money themselves any more.

Also, if you’re investing through a fund of funds, you’re not buying direct real estate. The Investment Company Act of 1940 gives you the exception that you don’t have to become a registered investment company and you don’t have to be a registered investment adviser if you’re not investing, if your fund is not investing in others securities.

So, that applies when you have direct control of the real estate. But in a fund-to-fund scenario, you won’t have direct control of the real estate. So, you’re going to have to look for a different exemption from registration under the Securities Act of 1940, there’s the Investment Advisors Act, you would have to look at that.

And you would then perhaps be required to register as an investment adviser. And you could also be limited to 99 members in your fund of funds. So, things to think about. It starts to get a little more complicated when you’re doing funds of funds.

And then, also, you have to examine your motivations. Is your motivation to be a real estate syndicator and to amass wealth by acquiring real estate? Or, do you want to be an investment adviser and manage other people’s money? Because the further that you get removed from real estate, the more likely it is that you’re just becoming a money manager.

Prerequistes to Starting a Fund

So, let’s talk about these prerequisites to starting a fund. And again, if anybody has questions along the way, please start putting them in the Q&A or in the chat and we’ll try to get to all of those.

So, a fund is the pinnacle of a real estate syndicate.

And you’re not going to want to do it until you’ve had prior experience. Or you have other people on your team with prior experience, or you’ve got some really good guidance, and you have a pretty big list of potential investors. So, let’s start.

One, you have to have prior experience owning the same thing with investors that you plan to buy with your fund.

All right. So, if you say — and I have people say this all the time — “I want to do a multifamily fund but I want to do self-storage. And then, I also want to do strip malls,” then my question to them is, “Okay, tell me about your experience with multifamily.”

They may say “We’ve bought four or five properties.” What about your experience with self-storage? “Well, we haven’t bought any of those yet.” What’s your experience with retail? “Oh, well, we’ve never done that but we heard it’s a good idea.”

So, I would tell them right off the bat, get rid of those two asset classes that you don’t have experience with because they will be a deterrent to investors investing with you. Only do a fund for the things that you have experience with.

You want to be able to demonstrate a track record. And a track record really means five to 10 similar deals with investors that have gone start to finish. You’ve bought it, not still in progress, it’s been sold, then you can demonstrate “This is what we offered for return. This is what we ultimately paid.”

So, does it help if you have four or five projects that are already in progress? Yes, but you really have an obligation to explain to your investors how that has gone. And you always have an obligation to disclose any material fact to investors that could affect their buying decision.

And if you have had some deals that have gone south or sideways, you better be talking about that. Because if your investors find out about that later, they’re going to accuse you of omitting material facts or lying, and misrepresenting and committing fraud.

And then, there is no limited liability protection for you. Every single thing you own is at risk. And in the worst-case scenario, you could end up going to jail. So, make sure that you’re very honest about your track record. It is actually beneficial for you to show investors if you’ve had a dud deal, because then they have the realistic expectation that, “Hey, not all deals turn out perfectly.”

So, if you don’t have experience, then you need to be able to talk about your team experience. You can leverage off other people’s experience by bringing them in as team members. I don’t think it helps you very much to put people as advisers who really don’t have anything to do with your offering; maybe they’re just someone you’ve learned from.

If you are going to list somebody as an adviser, you need absolutely need to have their permission first. And they probably should have some compensated role because they are taking on some liability. If you fail, someone goes back to the marketing materials that you provided for your fund. And they look and say, “Well, this guy was an adviser” and they named him in the lawsuit. So, just be aware of that.

Let’s see; what else? You always want to give the investors all the information they need to make informed consent, so they can’t find out something later about you, any member of your management team, your track record or anything that would cause them to say, “I wouldn’t have invested if I’d known that.”

If you tell them that up front, then they will make their decision at that time and they can’t come back and complain about it later. If you don’t tell them about it, it’s a concealed fact; it might have affected their buying decision. They can come back later and force you to rescind their offer to purchase and where you definitely have to give back their money.

But usually, that doesn’t happen in isolation; you usually have to give back everybody’s money. All right. So, prior experience owning the same thing with investors that you plan to buy with your fund, either you have to have it, or you have to have management team members that have that experience.

Number two: Prior experience raising capital and a substantial list of previous investors who are eager to invest in your fund. If you’ve never raised money before, a fund is not the way for you to go because your investors are going to want to see that track record.

And if you haven’t taken time to develop substantive relationships with investors, they’re not going to invest in your business plan. They don’t know you. They don’t know what you’ve done. They aren’t going to do it.

So, I don’t know if any of you remember the movie with Kevin Costner, “Field of Dreams.” The whole premise of that movie was “build it and they will come.” Yeah, that doesn’t happen with a fund. You build it, you promote it and you have a list of people that are already excited and ready to do it, and then maybe they will do it. So, you have to have sufficient deal flow to support a fund.

So, we did talk about that. Usually, you’re going to create a fund that has some limits. You’re going to have to raise a minimum amount of money from more than just one investor, usually enough to do a deal, before you can use anybody’s money.

And if you can’t get to that number, then you really shouldn’t be doing a fund and you should be giving everybody’s money back without deduction, and you should go on and use a different business model. You also would be establishing a maximum dollar amount.

Once you hit that maximum dollar amount, then you’re going to close the fund to new investors and you wouldn’t raise any additional funds. You might specify the number of properties that you expect to acquire. And then, usually, in a fund there’s going to be some investment period. This is the period of time that you can have new investors coming in and that you can be acquiring properties. And maybe if you sell something sooner than you expected, then you can even recycle that principal, and then use it to acquire additional properties.

One thing you have to be cognizant of is, anytime your fund makes money, it creates a taxable event for your investors. So, you always need to make sure that they have received enough of the profits from that sale or that capital transaction that they can pay their taxes.

So, if you’re only doing one or two deals a year, you probably don’t need to fund, okay? You just do one or two specified offerings. If you don’t have sufficient deal flow or a fundraising momentum to achieve your fund, fundraising goals in a year or two, you’re probably just going to fizzle out and not be successful.

There are two different ways to raise money in a fund. You can raise money with capital calls on commitments. So, if you have a large pre-vetted list of investors, and you can say, “I’m going to do a $10 million fund” and you get enough investors to commit up front to say, “Okay, I’m going to invest this much.”

And once you hit commitment for that $10 million, then you would close the fund to new investors. You would have those investors that committed give you some 10% or 20% of their commitment amount up front to hold their place in the fund, and then, you would go out and find deals.

When you get the first deal under contract, then you’re going to be in communication with your investors and say, “Okay. So, we need 24% of everybody’s commitment right now so that we can close on this deal. And then, we’ll let you know what we need when we get to the next deal.”

And then, people would have to invest the remaining amount. It always does pose a little bit of a question about what happens if somebody doesn’t make that next capital call because they can’t. Then usually, you have to build in some penalties or disincentive for them not to make that next investment.

For a lot of people that’s not an easy way to raise money because they don’t have enough investors already lined up that they could fill their whole fund with commitments, that’s the ideal situation. That’s where you should be heading if you’re not there already.

But the other way to raise money is to raise as you go. And in that case, you get your first deal under contract even though it’s a blind pool fund and you showed everybody their money, they’re probably still going to sit on the sidelines.

And then, when you say, “I’ve got a deal under contract” then they’re going to start investing. And at that point, you’ve got the first investors that invested in the first deal but your fund is really pooling all of the investors’ money and all of the deals. So, if there’s a big lag time between deals — let’s say you bought two deals in year one, and then come year two, you are ready to buy another deal — while these investors that came in early are going to feel a little bit cheated if you’ve already done a bunch of work and created a bunch of equity in the first couple of deals. So, they’re going to want some compensation for these people that are coming in later and called riding on their appreciation.

So, in that case, you would raise the unit price for your class A units or your investment units that you’re selling for the new investors that come in, to take into account what appreciation occurred in the prior period. And then, you would actually take that extra money, and you would pay those prior investors so that these new investors are coming in on par with them.

So, that’s called “truing up.” So, truing up happens. And this usually really only happens if you’re going to be raising money for more than a year. Also, if you are going to be raising money for more than a year, then we do have to update your filings with the SEC annually.

And then, there’s some states that are going to require that you also start over new with your blue-sky filings; California is one of those states. There’s some other states that require it, so you may just have to start over again with your blue sky filings.

And you have to update your private placement memorandum to show the new investors are coming in year two and beyond, what is it that the fund has done in the prior year and why would they want to invest in that. So, sufficient deal flow is very important.

So, if you get a lot of deal flow, then it’s important.

Number four, you need to have a tried-and-true fund management team that will be constant for the life of your fund. With specified offerings, you can create a new syndicate manager for each deal.

So you only have to be stuck with these people for one deal. If there’s people that are causing problems or they’re not pulling their weight, then you don’t have to do another deal with them. But if you are doing a fund, you’re stuck with the same management team for the life of your fund.

So, that’s one of the things that you have to be concerned about. There are some fund management programs out there. We’re happy to talk to you about those if you want to reach out to our office. But there, you’re either going to hire a fund manager or you’re going to have someone in your team that’s capable of it.

And you probably absolutely are going to need an investor management platform to try to help keep track of who’s in your fund and all of that.

Number five, you need loan guarantors and your fund management team that can guarantee loans for all of the projects that your fund intends to acquire.

So, you need to think ahead to what are the size of the deals that you need, making sure that you have people with the right net worth. That applies even if you’re doing non-recourse loans. The lender still wants to see that your management team has net worth equal to the loan amount.

And they’ll look at the collective net worth of the management team. But you’ve got to make sure that you’ve got that. Because otherwise, if you start going out and getting bigger deals, then you have loan guarantors for them you’ve got to bring somebody else into your fund management.

And then, they become part of the fund management for all the deals you did even for the previous properties that you didn’t use them as guarantor. You need to have an established bookkeeping system and accountants that can assist you with fund management.

Some of that you can do with your investor management platform if it’s sophisticated enough to help you manage your fund, and there’s a variety of them out there.

So, you need to have an actual launch plan for your fund, right? The people that actually do the best with funds have a launch plan.

I don’t know how many of you have followed Grant Cardone. But if you have ever signed up for anything that Grant Cardone has done, then you know that you get bombarded with about five emails a day. And Grant has a marketing machine.

You absolutely need a marketing plan for your fund. How are you going to reach out to prospective investors? How are you going to tell them about your fund? Are you going to get them excited about, “Hey, the fund is coming,” just like a launch plan for a book.

When I wrote my book, we kept sending emails to everybody saying, “We want you all to buy this on day one.” And the reason we wanted that is because we wanted to be a number one seller in the categories that we had chosen for that day, because then we can be a number one Amazon best-selling book.

And once a best seller, always a best seller, right? That’s why you do the launch for your book and that’s why everybody asked you to buy on one day. So, your fund is the same way, you want to create some hype. You want to get people interested.

You need to make sure that if it’s a 506(b) fun that you already vetted all those investors and that you have created the substantive relationships with them before you start bombarding them with information about your fund. But if you’re doing a 506(c) fund, then you can freely market on any social media or advertising that you want to do.

So, for the fund of funds — this is just a little bonus one, and once again, you’re investing in securities, you’re investing your fund proceeds in securities and not directly in real estate that you control — then you’re going to need to file a form with FINRA to become an exempt reporting adviser.

And then, at some point, when you have enough assets under management, then you would probably need to register as an investment adviser. And that does require some ongoing compliance. And it also invites FINRA into your world, which is sometimes not ideal.

So, anyway, that’s the whole thing about funds and the prerequisites you need to have.

Questions and Answers

And we’ve got a few questions and answers. Here’s someone saying, “Thinking about getting my securities license to qualify as an accredited investor and capital raise for multifamily deals, are there issues with structuring it this way?”

And the real answer is that you are going to have to become a broker dealer. You can’t just get a Series 65 or 85 or 22 license or a Series 7 license; all those licenses allow you to work underneath a broker dealer. So, you would either have to go work for a broker dealer, who then may not allow you to do your own private offerings, or even to invest in other private offerings.

And then, if you’re going to be capital raising, you need to be associated with that broker dealer or you need to get the correct license to be a broker dealer, which is a very onerous thing to get and very time-intensive. And at that point, you’re not a real estate investor, you’re a securities broker dealer and it’s consuming all of your time.

So, not as easy to do as you think. There are a couple of companies out there that are hiring registered reps. And that will allow you to raise money for certain deals, but they’re going to be looking hard at the qualifications of those issuers to make sure that they are not creating some situation where they would become liable for inexperienced operators.

Okay. So, here’s another question: “We have a partnership of a few people and thought of coming in as a fund of funds. That way, we can go in deal-by-deal for our investors; is there a better way?”

Well, you can’t do a manager managed partnership or a limited partnership as a general partner and limited partners, unless you are also qualifying for your own securities exemption, which means you’re going to have to have — depending on the financial qualifications of your investors — you might have to have a private placement memorandum, you’re going to have to have a subscription agreement and also do some filings. So, if you do it as a joint venture, like we talked about in the beginning, where it’s a member-managed LLC, again, magic number for that is five. And you would then create a separate member-managed LLC for each thing that you’re going to invest in if you have different members in each one.

And the people that you’re investing in are going to have to look at the financial qualifications of the people in your fund of funds to make sure that they’re allowed to invest in that other offering. So, that’s where we talked about your fund of funds would either have to qualify as an accredited investor where all of the members are accredited or it has over $5 million in assets.

So, that’s this company that you’re creating with these investors, or you would have to invest only in a 506(b) offering. If you have non-accredited investors then that syndicator who you’re investing with is going to have to count your non-accredited investors towards their 35. So, that is a little bit of an issue.

Another question: “Do the managers of the fund also need to be accredited?” Well, there are 12 definitions of an accredited investor and one of them is the officers’ directors, people in management of the fund itself are automatically considered accredited investors.

So, that answer is yes. You can qualify. Also, there’s a new definition that applies to knowledgeable employees.

“What about raising funds on crowdfunding platforms; how does that work?”

They are very, very selective about who they will take on. Some of the ones that our clients have worked with in the past are RealCrowd and CrowdStreet. And they will be looking to see that your team has done at least five deals start to finish, or maybe a certain dollar amount of deals start to finish.

And they also will sometimes dictate the terms that you’re going to be able to offer your investors. We have had clients that have used them in the past and then have stopped because they didn’t like the terms they were being dictated and said, “We can’t do that.”

So, it’s difficult to get on the crowdfunding platforms. You might want to find out if you’re going to go that route whether they’re going to dictate terms. And also, what’s the typical raise they do for your type of a fund, because you’re going to be paying money upfront, usually a marketing fee to have them post your deal on their site. And then, they’re going to also be with you for the duration of that fund.

All right. Somebody asked, “How much should I budget to establish a 506(c)?”

It depends if you’re doing a fund, or you’re doing a specified offering. And I think we covered some of the prices. But go look in the article that’s on our website that there’s some prices in there and you can look at that.

Okay. So, let’s go now to the chat and see what chat questions we have. So, here’s one: Lisa asks, “If a fund manager creates a 506(c) fund, but they are not accredited, is my understanding from your fund’s perspective, then you become an accredited investor of your fund?”

Yes, that’s a question we just answered.

“But it is my understanding it from the perspective of 506(c) investment offering, my fund would not be considered accredited since I’m not an accredited investor.”

No, that’s not true, because you’re accredited by definition.

Let’s see. Here’s a question from Paul: “Can you help put together syndicating joint ventures with projects tied to EB-5? I’m looking into one now.”

No, because that is a different animal. First of all, multifamily does not work for the EB-5 program because their requirements for the foreign investors are using the EB-5 program to be able to get a green card in the U.S. And there’s specific criteria that that investment that they’re making has to meet. There’s some variations on it. But in general, it’s like they have to invest a million dollars that produces 10 jobs within two years. Well, you’re not going to do that for multifamily property, maybe if you’re creating a property management company.

But also, the EB-5 program is only administered through something called regional centers that have been pre-approved to be able to offer these investment opportunities. So, your EB-5 investor has to invest in one of these regional centers or one of their approved projects.

So, it’s not likely that your project is going to be approved for their purpose. So, no, you really can’t help EB-5 investors, that’s not what you should be doing.

“Is the recording of this available?”

Yes, we will be posting this on our podcast, Raise Private Money Legally; it’s available on 20 different podcast platforms. So, go get it. There are 49 episodes out there right now and more coming.

So, we’ll go a little longer. If you all have time, please hang around and I’ll continue answering the questions. Allan says, “I want to do co-GP, but I don’t want to reinvent the wheel. Any suggestions on groups you’ve done that you can sponsor, initial packages ready?”

No, I don’t know, Allan. I think we’d have to look at what you’ve got and see if that’s something we can help you with. So, go ahead and if you want to go to, there’s a place at the top where you can schedule a call with me or another securities attorney and we will talk to you about what you wanted do and help you figure out if it’s something we can help with.

Someone asks, “Would you be interested in speaking in a multifamily conference?” Of course, please reach out to me at, and we’d be happy to talk to you more about that.

Let’s see. Some people saying nice things. Thank you all. Appreciate that. I won’t read those because I know we’re running low on time.

Someone asked, “Your services also cover hard money lending funds?” Yes, we can create a hard money lending fund.

Somebody says, “Great book, everyone should read it.” Thank you. Appreciate that. And you can get a free copy of it at our website at If you want a free digital copy, just go there and click “Get the Book.” It’ll also give you a link to if you want to go and buy it on Amazon.

Someone is asking, “Can I get a recording?” So, yes, we will be posting the recording. All of our podcasts are recorded and posted on our website, and then also at any of our podcast platforms.

“What was the conference you suggested to attend to mingle with like-minded people?” There are many of them. Okay. The ones that we love are RE Mentor’s Ultimate Partnering event or any of their training programs; Jake and Gino, they have an annual multifamily mastery event and they also have a lot of other local or regional trainings in online stuff.

All these guys usually have some other training, coaching, and online or home study courses. But most of them also have a big event. Rod Khleif has a big event once or twice a year. Let’s see, Best Ever Conference (Joe Fairless) is really good one.

And then, also Michael Blank has some events. So, if you look up any of those guys, Joe Fairless, Michael Blank, David Lindahl or RE Mentor, Jake and Gino and Rod Khleif, then you’re going to find out about their events, get on their mailing lists.

All of them are good. Every time I go, we usually sponsor, we’ll have a booth and I’ll usually speak. Every time I go, I see some of the same people at different events. But as you can see, a lot of new people are also at these events as well. So, a really great place for you guys to go and get juiced up.

Let’s see. So, lots of thank yous. And then, here’s someone, I think this is maybe the last one: “If our company has clients that are raising funds for individual projects like affordable housing for U.S. vets or other projects, what preliminary information could I provide them initially?”

So, I’m not sure I understand that question. If a company has clients that are raising funds for individual projects … well, so you actually have like co-GPs that are raising funds for individual projects, they are going to need to see everything that you’re going to be providing your own investors; you can’t conceal anything from them. They should be looking at all the same information. Or these sub syndicators or fund of funds should be providing information that mirrors yours, so that they know what they’re getting into.

So, thank you all for coming today, so glad you did. I hope I didn’t ramble on too much.

And we look forward to seeing you at the next one. And the next one we’re going to do, I will put together something probably an interim one. And we’re going to talk about this Corporate Transparency Act because it’s going to create some additional burdens on everybody, us and all of you.

All right. Thank you so much, everybody. Have a great day.


Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

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Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!