Frequently Asked Questions
A real estate syndication is like “crowdfunding” in that a group of investors pool their capital together to make an investment in a real estate asset, such as purchasing a building or several buildings. The syndication is typically managed by an experienced general partner, manager or deal “sponsor.”
Investing as a group increases the purchasing power, allowing individual investors to participate in large real estate transactions they wouldn’t be able to do on their own.
According to the S.E.C, an accredited investor must meet one of the following criteria:
Net worth over $1 million, excluding the primary residence (individually or with spouse or partner)
Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year
Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company) For investments in a private fund, “knowledgeable employees” of the fund Entities owning investments in excess of $5 million
A private placement memorandum (PPM) is a legal document provided to prospective investors when a company is selling stock, LLC member units, or another security in a business. It is sometimes referred to as an offering memorandum or offering document. A PPM is not required for accredited investors, but highly recommended so that investors understand the details of the deal. The PPM generally includes:
- Executive Summary
- Company Purpose and Overview
- Use of Proceeds
- Financial Information
- Terms of the Offering
- Risk Factors
An operating agreement is a legally binding document that limited liability companies (LLCs) use to outline how the company is managed, who has ownership, and how it is structured. If a company is a multi-member LLC , the operating agreement becomes a binding contract between the different members. The operating agreement should include: Percentage of members’ ownership. Voting rights and responsibilities. Powers and duties of members and managers. Distribution of profits and losses.
A subscription agreement is an investor’s application to join a limited liability company (LLC). It is also an agreement between the company and the new member (subscriber). A member “unit” in an LLC is like a share in a corporation.
Every PPM and Operating Agreement should provide a tax section. Always consult with your CPA before subscribing to any investment to ensure it is a fit for your financial situation. Each investment will have different tax aspects like allocations of ordinary income, capital gain, losses, possibilities of phantom income, or UBIT which will affect your investment.
Investing in a fund offers many of the same benefits of owning your own individual portfolio (leverage, tax benefits, appreciation), depending on the terms of the operating agreement.
The main difference is a fund offers more diversification and professional oversight. In a single family rental fund, for instance, the investor funds are spread amongst multiple properties. The investor is generally not responsible for any of the management of the property. It is all handled by the fund manager, including obtaining financing, insurance, property management, etc. Investing in a fund is far more passive than owning an individual portfolio.