Many clients have questions about how to structure their
syndication or fun. So I thought we'd do a blast from the past
for today's video to take a look at just what goes into that
thought process. It's a blast from the past, because it's a
video I recorded about three years ago, when I was working
with people who are becoming real estate syndicators and real
estate fund managers. But the the information in it is
absolutely up to date. It's timely, and I know you'll find
it useful.
We are talking through the core right now we're talking about
companies specifically Foundation. And in this segment,
we are going through structure. Now why are we going through
structure? Well, structure is obviously kinda like the
foundation. So it's what everything is based off of view
structure at right, it makes it much more easy to grow, makes it
much more easy to do what you want to do. And it also can
protect you, as we'll talk about soon. So, first, before we get
started, I'm going to use a couple terms here that we may
not have gone through yet. And you still you may not have seen
the segments yet on LLCs versus corporations. And I use and we
need to go through specifically two terms, which is member
managed. LLC is vs. Manager managed. LLC is now a member
managed, LLC basically means you've got people who are all
part of the same LLC. So this is a property LLC. And each person
gets their own vote, and they all have control equal to the
amount of shares that they own or the membership units that
they own in that LLC. So this becomes very, very hard to
manage, you're basically going to be ceding control to all of
your all of your investors in order to get things done. It
makes it so that you it makes it hard for you to get paid. And
basically, it's kind of defeatist in your in how you
want to do things. Now, you actually may use this member
managed in one particular context. And that's the joint
venture. And we'll talk through that about what joint ventures
look like. But most of the time, you are not going to do this, a
member manage instead, you're going to do a manager managed
LLC, which basically means that you or your entity, and we'll go
through that have the control over the LLC itself. And your
investors have only the voting rights that you give them in the
operating agreement. So I sent that out because I'm going to
talk specifically about member managed or manager managed in
the first way that you could do this now, the way you can
structure a syndication and the way a lot of people do. And
these are people who have not gone through our core, they are
not members of the altitude syndication founders club. This
is the way though that most syndications take place. And
there's actually a very big mistake that goes on when you'd
set it up this way, and we'll talk about why. So let's say you
have identified a terrific building. And I think this is
just perfect for investment investing. It's gonna make you
and all of your investors a lot of money. So you go you put a
down payment on it. And then you call up your friends call up
Bob. You call up Joe. And, and maybe three or four other
people, they all contribute money into the property as well.
So yeah, smartly decided, okay, well, I'm going to create an LLC
and that's what's going to own the property. And so we're going
to call that property LLC. And I am going to set this up now one
of the decisions you made when you were setting this up, was it
was either going to be managed or managed or member managed.
Hopefully most of the time you will choose Manage your Manage
after we had this discussion, because then at least you have
some control over the property itself and over your actions.
But here's the problem with this very simplistic form of
structure for syndication. Let's say there's Bob over here. And
Bob has decided he just doesn't like you. He just thinks, you
know, you sold them a bill of goods, and he doesn't like this
property, Joe's totally thrilled with it, and so are your other
investors. But for whatever reason, Bob's gone off his
rocker, and just doesn't like it anymore. So now he's mad. So
what's Bob do? Well, we're in the United States, and I'm a
lawyer. So I always see it this way, he is going to file a
lawsuit, and he's going to file a lawsuit against you and the
property. So he's mad, he wants his money back. He wants all
these other things. He wants punitive damages, and he wants
to punish you. And the property and anyone who has any
association with it, you're all bunch of jerks. Problem with the
way that the structure is set up in this instance, is that you
now are have exposure to this lawsuit. So this lawsuit exists.
So there's an indemnity clause, no doubt here. But it's not as
effective as you probably would like, because ultimately, what
is your choice to do, you can't just bankrupt this property LLC,
because you've got all these other investors out here. So
things go horribly, horribly wrong. And you just want the
whole thing to go away. You can't even bankrupt that
property, because now all of these people needed need their
money, and you are also on the hook. So you've had control over
this property, if you've set it up as a manager managed LLC. And
so you are acting kind of like if you've heard of GPs before
general partners, the one who's responsible for everything and
you are subject to the claims against the property, LLC
itself. This is not the way to go. But this is the way that
actually most small syndications are put together, this is not
the way sophisticated syndications are done. So what
are some How are sophisticated ones done instead. So we still
got this, we've still got you obviously. And we've got this
terrific looking building here that you know is going to make a
ton of money and you've got your investors and this time, this is
a whole new one you've learned your lesson. So now Joe's got
Bob's gone but now you've got Joe and you've got Sue and both
of them invest their money into this great property. And we'll
call it property to LLC. But now you've learned your lesson, you
know that the exposure if you were just to put your money and
put the deposit in on that property, you know that you're
being exposed so what do you do instead, you create another
entity here that is you management Inc, and we'll go
through entity choice of entity but many times this will be a
corporation sometimes it's an LLC for this purpose it doesn't
really matter. So you you contribute your deposit money
into you management Inc. and then you through you management
Inc, you make the downpayment in the property, start gathering up
the investors and things like that now property to LLC, pays
management fees and other fees to you Management, Inc. So if
Sue suddenly decides that she's mad at you, she can sue sue the
property, she can sue you Management, Inc. and she can sue
you personally. So what have you gotten out of this? Well,
because you've done it through this company so long as there
isn't fraud, you're actually not liable and the courts not going
to really recognize that as a lawsuit that's, that's
meritorious. So it may be meritorious against you
management Inc, or prop two LLC, but at least you're protected
and now all of your other assets are protected as well. So this
is the normal Wait, I'm gonna just get rid of this lawsuit
because this is the normal way to do it. And we don't want to
be associated with lawsuits anymore. So let's just get rid
of that. All right, great. So this is the the normal way to do
it. You're happy You and your investors are happy. So this is
this is the most common structure that you're going to
do. This is a management company managing the LLC itself, the
property LLC. So this isn't the only structure. So one other
structure that's a little more advanced is basically you have,
you're still here. And now you've identified not only one
really amazing building, we've actually identified two really
amazing buildings.
And you think that there's this other building out there as
well, that would be amazing. You don't know exactly what it is,
but you're going to find it and you're going to, it's going to
be a perfect investment for your investors. So what do you do
here in this case, so these are all different properties. So
let's leave this property, a LLC, property B. LLC. And after
you find it, it will be property C, LLC. Now, you still have your
management company.
And but how do you do this, your investors who are here have a
choice, here's Joe, your Sue. They could put money into you
management, but then again, we're not shielded against them.
So we actually build another LLC or corporation here. And this we
could call Investment LLC.
And your investors go there, investment LLC buys and manages
these properties. Investment LLC is managed by you. And pays fees
that way. So now what you've done basically, is you've built
out a structure where one entity that's easy to manage, can
manage multiple properties all protected and shielded, can
manage its investors, and so and protect, and basically be able
to treat investors efficiently. So the amount of money is all
treated based on how you however you design to do it. But
typically, it would be they're all you know, if if they put in
if Joe puts in 50%. And Sue puts in 50%. You know, they each have
50% ownership in all three of those buildings. Now, you may be
asking, Well, why are we doing the extra work of having these
other LLCs here. So the great example of this exact situation
is the ghost ship. Ghost Ship, I encourage you to look it up,
look it up on Wikipedia, there's a really good description of it
there. And then there's some links within that to different
news articles. But what happened in the ghost ship, so the ghost
ship was an office building in Oakland, California. Some of the
tenants decided to convert it to live in lofts and a dance hall
of sorts. And there was a fire that broke out now the ghost
ship was owned by a trust, who was owned by one person. So but
the trust didn't only own the ghost ship, it owned something
like 13 other buildings. So all the value of all of that was
owned by the trust, which ultimately was owned by this one
person. So go ship firebreaks out 20 people died family Sue
against the trust, who's the owner of the building. And now
because they now because there's one entity that's being sued,
all of these other buildings are suddenly vulnerable to have to
losing everything. So if they were done in this manner, in the
manner that we're talking about here let's say there was a major
slip and fall on property a that's somebody's fault lying on
the ground. That was really bad and and you know, they lost
their leg or something and property a isn't very big. So
they would file a lawsuit against property a and they may
try to get to investment LLC, but they're probably not going
to, to have that chance to get further up the line unless
there's been a case of fraud or something like that. So property
a LLC, they file a lawsuit. And if it just doesn't become worth
it anymore, property A goes bankrupt. But property B and
properties, these still exist and Joensuu still own their 50%
portion. So they've been protected for that. So that's
why we we separate, each building has its own LLC. So the
last way that you may encounter, putting together a syndication
would be something like this. So you have identified a terrific
building an apartment building that's worth that's on the
market for $2 million. So the, this is a great opportunity for
you, you decide that you want to buy this because you see how
much upside there is, but it's going to take a lot of work.
So you put your money in, you don't have any invest any
development experiences. So rather than seeking investors
for this property, you seek a different kind of investor, you
seek a joint venture. So say, you know somebody who owns the
company development, Inc. and they are a developer and are
terrific at rehabbing apartment buildings. It's owned by two
people's it's like two brothers. And they own that. So you have
now contributed $2 million into this building, and they are
contributing, say their time and materials into improving it into
what it is. And then when it comes time for, for receiving
money. It goes according to however your joint venture
agreement has been written. So your joint venture agreement is
kind of the umbrella that covers all of this talks about what
your duties are and what the responsibilities are and how
everybody gets paid. So let's just recap for a minute. This
way of doing things here, where you've got everybody investing
into the same LLC, including you is just not going to work. It
doesn't protect you from litigation, this is the most
common way to do things. So this is the way let's separate that.
This is the way you're probably going to set up your first
several syndications, it may be the only way you use to set up
syndications because it just works great. You can also have
different investments and still have you as the management. So
this is prop three. LLC, which has its own investors.
And this may be how you structure your entire fund. Or
maybe you decide you want to become more like a fund and do
it this way and have people invest into your investment fund
whichever way works for you. This is the basics on how you do
it. So this is the structure to keep in mind. Now I encourage
you to actually draw out what structure you think is going to
fit your needs the most. Is it something like this where you're
going to go property by property? Or is it something
like this where you're going to have a pool of funds a pool of
money in order to buy several properties at once. Most of them
view will probably be doing this but some of you may be doing
pools as well. So I hope that was helpful. Draw out your
diagrams, and we'll see you in the next segment. I hope that
was helpful for you. My name is Tilden Moschetti. I am a
syndication attorney with the Moschetti Syndication Law Group.
If we can help you structure your syndication or fund in the
right way, please give us a call