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Forming Real Estate Syndicates

Chapter A chronology 1 for syndication

This chapter sets out a chronological list of the steps taken to select and acquire property for a group investment program to be formed and operated as a limited liability company (LLC).

Chapter 1 Outline Guidelines for forming a group Chapter 1 Terms Chronological list of activities Syndicate Manager Syndicator Syndicate brokerage

Guidelines for forming a group •• the compensation a syndicator or manager is entitled to receive. A real estate broker who gathers investors into a group for the purpose of jointly However, the broker acting as a syndicator buying, operating and ultimately selling undertakes the agency duty of fully inform- an income-producing property is in- ing each individual prospective investor of volved in a process known as syndication all aspects of the property and the investment or syndicate brokerage. The broker who program that might influence a prudent in- arranges the acquisition of property and vestor’s decision to contribute funds. organizes the group is known as a syndi- A chronological list of activities the syndicator or manager. cator should review and consider adopting Unlike sophisticated real estate investors who when forming a limited liability company tend to operate alone, individuals who join (LLC) for the acquisition and ownership of together in syndication programs are gener- an income-producing property includes: ally uninformed and inexperienced about: 1. Researching available residential or •• the legal aspects and accounting of co- nonresidential rental properties and se- ownership; lecting one to be investigated and con- firmed as suitable to purchase. (Non- •• the economic factors that influence the income-producing property acquired movement of real estate rents and val- by an LLC will require modification of ues; the documents in this material.) [See •• theSample responsibilities of property man- first tuesday Form 185 or first tuesday agement; and Form 279]

3 Forming Real Estate Syndicates Forming Real Estate Syndicates, Third Edition

2. Analyzing the property selected, 9. Delivering copies of the IC to prospec- including its physical condition, the tive investors to solicit them to become economic risks, environmental and members and fund the LLC so escrow natural hazards of the property’s location, can close and the property be acquired. personal security, title conditions and property operating data. [See first 10. Obtaining the signature of each inves- tuesday Forms 304, 314, 321, 324 and tor on a separate subscription agreement 352] and the signature page of the LLC operating agreement, and delivering their 3. Contracting to purchase the property in funds to the syndicator or escrow. [See the name of the syndicator under a pur- first tuesday Form 373] chase agreement, an option to purchase or escrow instructions with a vesting 11. Entering into a property management provision allowing the syndicator to as- agreement to employ the syndicator to sign his right to purchase the selected manage the day-to-day operations of the property to the LLC. [See first tuesday property. This agreement must be signed Forms 161, 161-1, 401 and 159 §§10.6 by each investor who became a member and 13.3] of the LLC. [See first tuesday Form 590] 4. Opening escrow in the name of the syndicator, not the LLC, as the buyer. Prior 12. Arranging mortgage financing and sign- to closing and after the LLC has been ing loan documents for an assumption formed, the syndicator will assign his of an existing loan(s) or the origination right to buy the property to the LLC. of a purchase-assist loan, either in the [See first tuesday Form 401] name of the syndicator or on behalf of the LLC, as demanded by the lender. 5. Completing a due diligence analysis and confirming the seller’s disclosures re- 13. Filing the LLC-1 (Articles of Organiza- garding the condition of the property’s tion), prepared and signed by the syndi- improvements, operations, location and cator, with the California Secretary of title. State. 6. Applying for new financing or an assumption of the existing financing as 14. Assigning the syndicator’s right to pur- called for in the purchase agreement. chase the property to the LLC in an amendment to the escrow instructions, 7. Reviewing plans for the formation and vesting title to the property in the name management of an LLC entity with com- of the LLC on closing. [See first tues- petent legal and accounting advisors. day Form 370 or 401-2]

8. Preparing the investment circular (IC), 15. Funding the purchase price and closing subscription agreement, LLC-1 (Arti- costs from cash contributions received cles of Organization) and LLC operat- from the members of the LLC and mort- ing agreement, along with their exhibits gage financing. and addenda, naming the syndicator as managerSample of the LLC. [See first tuesday 16. Closing escrow and taking possession of Forms 371 and 372] the property.

4 Forming Real Estate Syndicates Chapter 1: A chronology for syndication

17. Sending copies of all closing documents property and distributing earnings to the to each member. members.

18. Filing an LLC-12 with the Secretary 20. Reselling the property when ownership of State within 90 days after filing the of the property no longer meets the ob- LLC-1 and biennially thereafter, and jectives of the investment group or when identifying the name and address of the the initial goal was to sell or exchange manager as the agent for service. the property after a period of time. The manager will negotiate the sale and the 19. Operating the property on behalf of the net proceeds will be distributed to the LLC during the LLC’s ownership of the members on closing.

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