I participated recently in the syndication of a high-quality, income-producing, multi-family project in a top market.
The sponsor raised $4.5 million from a family office. Among the terms of that investment:
- The sponsor provided 40% of the capital.
- The investor received $75,000 for making the investment.
- The sponsor made representations about the property’s condition, including environmental representations.
- The sponsor guaranteed the proposed renovation of the project as if it were the general contractor.
- The sponsor was required to provide the investor with lots of financial reports, including audited financial statements.
- The sponsor was required to update the project’s business plan on a regular basis, subject to the investor’s approval.
- The LLC Agreement listed 38 separate actions requiring the investor’s consent.
- The investor had the right to sell the project after three years.
- The sponsor was subject to all traditional fiduciary obligations, like the director of a public company.
- The investor had the right to replace and/or sue the sponsor based on mere negligence.
- If the investor asserted a claim, it could stop all distributions to the sponsor — not just fees and distributions in the nature of a promotion, but distributions made with respect to the sponsor’s capital.
- The Tax Appendix was itself 18 pages long.
I view that as pretty onerous, especially for a $4.5M investment.
As that deal was being negotiated, real estate Crowdfunding sites were raising $4.5 million and much for individual projects with terms nowhere near as onerous.
At the same time, they’re giving ordinary Americans, not just wealthy family offices, the opportunity to invest in great deals. That’s why the title of this post says “Another.”