Task
Draft documents for a young syndicators first commercial real estate deal.
Challenge
The prospective client is a 30-year-old male living in Austin Texas. He received his bachelor’s degree from UT Austin and has been working in marketing the last 7 years. During this time he has invested in several single-family homes and small apartments (less than 4 units) but has no experience in commercial real estate investing. He now wants to purchase a 30-unit multifamily apartment building located in Dallas but does not have enough capital himself. He is also not sure how to structure it and what legal documents he will need. He is heard of “crowdfunding” and wants to know if he can use “crowdfunding” to raise the capital needed (about $1 million total).
Solution
Although he has experience investing in single family and small apartments, he has no experience investing in larger commercial properties. This makes it extremely difficult to find investors outside of his network to invest which means he should not do an offering using general solicitation (e.g. Rule 506(c), Reg CF, or Reg A). Furthermore, since he’s never raised capital before, his best bet at finding investors would be through his personal network with people who would trust him with their money regardless of what he’s investing in (i.e. his family and friends). As such, my advice to him would be to do a Regulation D Rule 506(b) offering and create an LLC to purchase the property which would also be the entity his investors would be buying ownership interests in. He would need to make sure all his investors were either accredited or sophisticated (no more than 35 sophisticated investors however) and he would need to have a Private Placement Memorandum Drafted.
