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Solutions For Real Estate Investors
Private Placement For Investment Real Estate: Where To Begin
By Dave Kohl
More and more high end real estate investment opportunities are available now, but fewer investors can afford to execute the “big deal” on their own. However, the process of finding the best partnership fit has been streamlined.

The majority of real estate partnerships looking for “broader” participation need to follow SEC regulations. This is whether it is for a public or private company seeking to raise capital for one or more large real estate investments.

It was the Securities Act of 1933 which provides exemptions for a Private Placement (also known as Private Offering) from federal securities registration. Thus, the Private Placement “market” is sometimes referred to as the “exempt market” when it comes to securities laws and the public markets. In order for a company to raise public funds, it needs to file a prospectus with the SEC in every state (and/or province) in which it plans to sell securities. This includes real estate shares.

Issuing a Private Placement is how an entity attempts to raise money for its operation(s). A Private Placement is, most often, more affordable and can be implemented quicker than actual public offerings. When done properly, the process of determining the amount of funding needed, selecting a potential deal, and preparing the offering should all take place within 7 to 21 days.

STEPS TOWARD COMPLETING YOUR PRIVATE PLACEMENT

To get started, the company (or “syndicator”) determines the amount of money it needs to raise from the Private Placement. Next is choosing just one potential deal to design the “equity offering” around. This is where some investors make their first mistake. It is extremely important to choose just one deal. Keep in mind that many investors are looking to make a “yes” or “no” decision before selecting one deal ahead of others.

If consulting with an attorney regarding getting started for the first time, there are several factors to review. These start with determining the number of investors and the amount of capital needed to be raised. This step is not as “obvious” as new syndicators often assume.

For example, suppose the project requires an initial investment of $50 million. It is easy to think that you would need five investors at $10 million each. However, the pool of investors willing to invest $10 million, combined with the number of them ready to invest that amount “now” severely limit the possibilities for success.

Consequently, the goal might be to seek, for example, 25 investors to each contribute $2 million, or 100 investors at $500,000 each. The lower the individual share amount needed, the more chances to get it.

ATTORNEYS OR SOFTWARE

Meanwhile, the attorney can also help with determining a number of “non-accredited” investors, if going with a Reg D 506 offering. Or, it could be “accredited” investors using a D506c exemption. Additional factors include whether some or all of the investors would have voting rights, and what, if any, fees the syndicator will charge.

It is possible that our Software could eventually save between $8,000 and $20,000 in (typical) legal fees and guidance. Our Program is designed to coordinate the syndication platform while facilitating your raising of capital.

Choosing the type of investors to work with is the next important step. Some investors overlook the fact that Rule 505 and Rule 506b each allow for as many as 35 non-accredited investors.

Accredited investors (D 506 c) can be less time consuming to work with, as well as being better able to withstand risks. Reg 506c also provides a “General Solicitation Exemption”.

Unaccredited investors generally face more stringent reporting standards and requirements in comparison. In addition, the Private Placement requires audited financial statements and other data per Rule 502b.

The scope of a specific investment project may also help to determine the most practical source.

Although the SEC Revisions in 1992 eliminated the requirement for companies to file a PPM for investors, many groups continue the practice to this day. Doing so provides potential participants with descriptions of the project along with the background on the management of the company.

Moreover, the Private Placement Memorandum can show the organization’s initial capital structure along with the potential risks and rewards involved in the investment. Of course, the disclosure must be consistent with any and all applicable state and federal securities laws and regulations, while appealing to the appropriate caliber of a potential investor.

Ideally, disclosing as much information as possible at the start of the process leads to a more smooth and expedited campaign. Understanding this process could make the difference of having enough time to pounce on the right investment opportunity.
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