March 5, 2008

Real Estate Syndication Questions & Answers: Part 3

As we prepare for our seminar program that covers the concepts of successful syndication, many people are sending in questions that they have about the topic. We are organizing them into categories and I am answering them so that everyone who is interested in learning how to make money the same way that Wall Street makes money, can begin to understand how the business works.

In the coming weeks, I will continue to answer the real estate questions that come in using our Wednesday column. Feel free to submit your own questions as well. To register for our upcoming live event, go to www.SyndicateFast.com. To submit a question of your own, go to www.joelblock.com/capital.

More Questions about Real Estate Syndication

Where do we get joint venture or syndication agreements?
Syndication agreements fall generally into two broad categories. First are the corporate documents that govern the partnership and the partners’ relationships with each other. If the entity chosen is a limited liability corporation or LLC, then an operating agreement would be drawn up that defines the relationships between the parties and describes the relationship the promoter has with the investors and the relationship the investors have with both the promoter and each other. The second category of documents that are required are the securities documents. The LLC documents can be drawn up by any attorney, provided that he or she has experience in this area. However, the documents that are required for the private placement memorandum are much more complicated. The creation of a syndication and accepting investments from passive investors automatically creates a security interest in the property. This means that the Securities and Exchange Commission has the right to put their hands all over your deal and inspect it at any time. So be very careful to have both of these documents drawn up in tandem. They need to be drawn up by the right kind of attorneys who have proper experience in this area, and who have proper training as well. Participants in the successful real estate syndication seminar will receive sample agreements of both types.
Why do investors like to put money into real estate syndication?
Investors like syndications because they can buy better properties and bigger properties, which are more secure than projects they could buy by themselves, especially because most of the people who have the net worth and disposable income to make these investments are very busy managing the rest of their lives. The syndicator agrees to be responsible for management and other responsibilities, leaving the investment and the operation of it to a professional. This is very attractive to investors.
How do you handle the “raise the money” part?
Clearly, raising the money is the hardest part for most people. Although some individuals have done a brilliant job organizing a network of high net worth people, most others have not. Like any business, creating a pool of investors is the same as creating a strong fan base of customers. One has to get investors to believe in the skills of the syndicator and earn the trust of these people. Once that trust is earned, they will make tremendous amounts of referrals because people with money tend to hang out with other people who have money. Therefore, start small and parlay your suc cesses into more dramatic wins.
How do I raise capital and acquire corporate credit for my syndication?
Raising capital for a real estate syndication will involve multiple layers of both debt and equity. On the equity side, accredited investors will supply most of it in the beginning. That means that individuals will write checks into your deal for you to go and acquire property with. Additional layers may be provided by traditional bank lenders or, in some cases, mezzanine or hard-money lenders, depending on how much debt you want to place against your property. Using any structure that’s more sophisticated than a combination of accredited investors, plus traditional bank advancing, could create undue stress, especially for a syndicator that is new in the business.
How do I begin to use other people’s money?
First, if you want to use other people’s money, you need to step up and own up to the dramatic responsibilities that using other people’s money demands. Using other people’s money creates a responsibility that very few people are aware of in advance. It also creates dramatic conflicts of interest because there will be many times that the promoter’s self-interest is at odds with the investors’ capital contributions. The syndicator must, at all times, balance his or her own greed and need against what’s in the best interest of the investors. Remember that if the goal is to build a pool of fans and to have a long-run success in the syndi cation business, then the syndicator must make decisions that are in the long-run best interest of the individual investors. Sometimes that means post poning or deferring confrontation that would otherwise be due. Raising money is clearly the hard part, not only because it’s difficult to get investors to say yes, but also because it’s difficult to manage the conflicts that are inherent in this relationship. If you want to succeed at this, there are several specific approaches that we teach all of the people that we show how to raise money. These will be discussed in great detail at our next Successful Real Estate Syndication seminar (contact our office for more details).

All this material and a lot more will be addressed at our live seminar in April called “How to Raise Money for Real Estate: Harnessing the Power of Syndication.” If you are a real estate professional or someone who is involved on the capital side either as an investor or facilitator, then this incredible two-day event is for you. For more information, go to: www.syndicatefast.com.

About Joel G. Block

Well known in the business community, Joel Block is a best selling author, speaker, and business strategist. Frequently a principal in his transactions, Joel has raised tens of millions of equity dollars for his ventures, which have included real estate syndications and privately held businesses.

Joel’s career is highlighted by the launch of a financial publishing company which he grew nationwide and later sold to the Los Angeles Times. More recently, Joel works with scientists, engineers, technologists and others to help them optimize their entrepreneurial opportunities. Would you like to get a private phone consultation with Joel? Visit www.joelblock.com/capital for details.

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