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Forming Real Estate Syndicates Forming Real Estate Syndicates first tuesday CITE THIS READING MATERIAL AS: first tuesday Forming Real Estate Syndicates Fourth Edition Cutoff Dates: Legal editing of this book was completed January 2015. Monthly updates of this text, including errata and recent developments, are available on your Student Homepage at firsttuesday.us. Copyright © 2015 by first tuesday P.O. Box 5707, Riverside, CA 92517 All rights reserved. No part of this publication may be reproduced or transmit- ted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage or retrieval system, without permission in writing from the publisher. Printed in California Editorial Staff Legal Editor/Publisher: Fred Crane Project Editors: Fernando Nuñez Connor P. Wallmark Senior Editor: Giang Hoang-Burdette Contributing Editors: Sarah Kolvas William L. Mansfield Carrie B. Reyes Matthew Taylor Graphic Designer: Mary LaRochelle Comments or suggestions to: first tuesday, P.O. Box 5707, Riverside, CA 92517 [email protected] Table of Contents i Table of Forms ................................................................................................................. iii Table of Introduction ....................................................................................................................iv Glossary ............................................................................................................................ 241 Contents Chapter 1 A chronolgy for syndication Guidelines for forming a group. 1 Oraganization Chapter 2 Selection and acquisition of property The benefits of group investment in existing Property rental property. .5 Selection Chapter 3 The economics of income property Advantage in high-value property. .19 Chapter 4 The reductionof investment risks The investor’s point of view. 27 Competent Chapter 5 The syndicator’s professional services Management Licensing as a legitimizing force. .45 Chapter 6 Retaining a real estate attorney Choosing the right one. 53 Chapter 7 Selecting suitable investors Profiling for investment longevity. .61 Chapter 8 The distribtion of income Contributions set share of ownership . 67 Sharing Chapter 9 Sharing earnings through services and capital Earnings contribtions The tradeoff in priority distributions. .73 Chapter 10 The tax treatment of a syndicator’s earnings Property rights, services or both. 87 Taxation Chapter 11 Tax benefits for co-owners Capital recovery, operating income and losses ............99 Chapter 12 Tenants in common or tax partners §1031 fractional ownership issues. 107 ii Forming Real Estate Syndicates, Fourth Edition Chapter 13 Securities aspects of syndication Securities Economics risks of the real estate market excluded .......131 Risks Chapter 14 Trust deed investment for groups Fractionalizing a trust deed note ...........................145 Self-Directed Chapter 15 Forming an LLC for a self-directed IRA IRA LLC Savings shifted from stocks to real estate ..................155 Chapter 16 An overview of the LLC The LLC vs. an LP .............................................167 The LLC Chapter 17 Liens against individuals Vesting to shield assets ......................................181 Chapter 18 LLC membership buy outs Assigning and terminating a member’s interest ..........189 Chapter 19 Documenting the LLC investment program The birth and expectations of an LLC ......................203 Chapter 20 The objectives of an investment circular Marketing The syndicator’s agency duty to disclose ...................211 Chapter 21 The investment circular A sample investment circular. .217 Chapter 22 Supplementing the investment circular Exhibits to the investment circular ........................233 Table of Forms iii Full-size, fillable copies of all 400+ first tuesday forms can be found Table of at firsttuesdayjournal.com. Forms No. Form Name Page Full 350 Client Profile — Confidential Personal Data Sheet ............................62 370 Supplemental Assignment Instructions — Forms Assignment of Purchase Rights to LLC ....................................................11 371 Investment Circular — LLC ....................................................................... 218 374 Amendment to Operating Agreement — Of Limited Liability Company ................................................................. 193 375 Assignment of Interest — In Limited Liability Company .......... 198 376 Buyer’s Syndication Addendum — Equity Financing Contingency ...................................................................13 545 Multi-Lender Transaction Notice (CalBRE 860) ................................ 150 LLC-4/7 Certificate of Cancellation ............................................................................ 177 LLC-1 Articles of Organization ................................................................................ 172 LLC-12 State of Information ....................................................................................... 176 159 Purchase Agreement — Other than One-to-Four Residential Units — Income Property .....................................................15 Partial 372 Operating Agreement — LLC ..................................................................... 192 Forms Income Property Brokerage (IPB) Suite of Forms ............................ 234 iv Forming Real Estate Syndicates, Fourth Edition Forming Real Estate Syndicates is written for real estate licensees, Introduction syndicators, attorneys and investors. This course material is designed to be an educational tool for use in the classroom and as a technical research and reference tool. The objective of this material is to fully provide the real estate professional, acting as a syndicator, with the knowledge needed to use the limited liability company (LLC) entity in group investment programs. Forming Real Estate Syndicates also discusses syndication activities and their chronology, the laws governing LLCs, the use of investment circulars and supplemental materials to solicit investors, and LLC operating agreements for the management of the investment group. Also analyzed in this material are investment activities that present a risk of loss controlled by securities law and tenant-in-common co-ownerships. Included in each chapter is a summary of issues reviewed in the chapter with definitions of the key terms essential to the reader’s comprehension of the topic. Unless a form cited in the book says, “See Form XXX accompanying this chapter” [emphasis added], it is not in the book. However, the reader has access to a fillable and savable version of all 400+ first tuesday forms online at firsttuesdayjournal.com. All materials are also accessible online from the reader’s Student Homepage at www.firsttuesday.us during their one-year enrollment period. Future errata, supplemental material and recent developments specific to Forming Real Estate Syndicates are available for further research within the Online Reading section of the reader’s Student Homepage at firsttuesday.us. Chapter 1: A chronology for syndication 1 Chapter 1 A chronology for syndication After reading this chapter, you will be able to: Learning • explain the activities of a syndicator needed to form a group Objectives investment structured as a limited liability company (LLC) for the acquisition and ownership of an income-producing property; and • appreciate the steps taken by a syndicator to locate property, solicit investors, form an LLC and acquire income producing real estate. syndication syndicator Key Terms Consider a real estate broker or agent who gathers investors into a group for Guidelines the purpose of buying, operating and ultimately selling income-producing property. Here, the broker is involved in a process known as syndication for forming a or syndicate brokerage. group A broker who arranges the acquisition of income-producing property, organizes the group of investors and will oversee property management is syndication known as a syndicator or manager. The activity of a syndicator to bring Unlike sophisticated real estate investors who tend to operate alone, together a group of investors in co- individuals who join together in syndication programs are generally ownership formed uninformed and inexperienced about: as a limited liability company to fund the • the legal aspects and accounting of co-ownership; purchase of a propety, and perform property • the economic factors that influence the movement of real estate rents management during ownership and and values; eventually resell the • the responsibilities of property management; and property. • the compensation a syndicator or manager is entitled to receive. 2 Forming Real Estate Syndicates, Fourth Edition syndicator The broker acting as a syndicator, sometimes called syndicate brokerage, An individual undertakes agency duties to: who solicits cash contributions from • conduct a competent due diligence investigation into the property to investors to fund be acquired; and a limited liability company which will • fully inform each individual prospective investor of all aspects of the acquire real estate for investment purposes. property and the investment program that might influence a prudent investor’s decision whether or not to contribute funds for its acquisition. Checklist of When a broker or agent decides to solicit investors and form a limited liability company (LLC) in a syndication effort to acquire ownership and operate an syndicator income-producing property, they need to consider all
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