What is the state of syndications today? How to structure a syndication for protection purposes? Major differences between funds vs syndications and why are funds popular today? Jonathan Tavares, Managing Partner at Premier Law Group, shares his insights.
Read the entire interview here: https://tinyurl.com/25hhhjsf
What is the state of the market today? What are the IRRs looking like? Are you seeing more or fewer deals come across your desk?
There has been a shift to funds in the last 6-8 mos. Traditionally, especially during COVID, a lot of clients were doing a lot of multifamily syndication. Now, granted, that's been a piece that we focused on for a long time. A lot of our clients are heavily involved in the multifamily space, but with increasing interest rates over 22 and various other factors, property taxes throughout many counties and throughout the country, going up very quickly, as well as insurance and specific markets. We have a lot of clients in various markets in Texas that have just gone crazy, places like Houston or Florida, where insurance rates have skyrocketed. It's presented some challenges for some of our clients. Instead of seeing just a straight deal with a certain percentage of debt somewhere around 70- 80%, a lot of times, there's a lot of creative financing going on to make up for that debt piece that may not be there or where those percentages of debt to purchase price may be a little bit lower than what a lot of clients were used to before.
You see a lot of preferred equity. We've seen clients building out structures where, in essence, they're providing almost a debt structure to their investors too, to create a sort of debt piece as well as an equity piece in their raises. We've seen a lot of clients create funds and use their funds to come in for part of the debt piece for specific projects as well.
Depending on the asset type, and I'll specifically exclude development projects, we're seeing a lot of target IRRs between 15 and 20% generally.
Where do all the LLCs go for a syndication so that everyone is protected as much as they can possibly be?
There's all sorts of different structures that you might use to set up a syndication or a fund and for different reasons, for tax reasons, for asset protection reasons, etc. A typical syndication structure is going to include a syndication entity, and that's typically known as the issuer entity, that's the entity that's selling securities.
Why does the SEC care about what I'm doing if I'm raising capital to go buy real estate? The Supreme Court came up with a test that's called the Howie test. The SEC does an analysis to determine if you were selling securities or not, and essentially boils down to the four main tenets of the Howie test:
1) Is an investor investing money? Typically, the answer is yes.
2) Are they expecting some sort of return on profits? And usually the answer is yes.
3) Whether the efforts are generated by someone other than the person who's investing, like some sort of promoter, or in the space we call a sponsor. In these deals, a sponsor where a GP that is raising the capital from investors. The investors are passive in the deal.
4) A common enterprise is if the investors are pooling together capital through the efforts of the GP to buy some sort of underlying investments. That's typically going to be real estate.
Jonathan Tavares
(508) 212-1193
jonathan@plglp.com
www.premierlawgroup.net
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