Syndicate or Fund - Which Offering Type is Better for You?

Choosing the right offering type — specified, semi-specified, blind pool or segregated — is one of the most important matters you’ll need to consider when creating a securities offering to legally pool money from private investors. In this episode, we examine the four to help you determine which is the best fit for your situation.

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Specified, Semi-Specified, Segregated or Blind Pool — Which Offering Type is Right for You?

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Edited transcript from the teleseminar ‘Specified, Semi-Specified, Blind Pool, or Segregated Offerings: Which Type is Right for You?’

Kim Lisa Taylor:

Good morning. Welcome to Syndication Attorneys, PLLC’s free monthly teleseminar. Today we are going to talk about different offering types. There are four different offering types that we're going to cover. 

But before we do that, Syndication Attorneys is a corporate securities law firm, and we help entrepreneurs create successful investment companies. And the way we do that is we teach you how to go out and confidently raise money, and introduce you to services along the way. So it's more than just providing you with legal documents and doing the filings that a lot of other people might do. Our goal is to help you gain the confidence so that you can go out and syndicate properties again and again and again. And we have many clients that have done just that, starting from perhaps where you are today, which maybe, you've not done anything yet, going on to syndicate 25, 26 properties.

So we're happy that you have all taken time out of your busy day today to join us. And it's important for us that you have done that, because this is an investment in your financial future, but not just yours, also the financial futures that you're going to be able to offer to your investors. So it's just a really important thing that you learn how to do this well and be able to help as many people as you can. In our calls, we don't focus on getting deals, we focus on finding investors and structuring deals with investors. So let's get right to today's topic.

Today, again, the topic is “Specified, Semi-Specified, Blind Pool, or Segregated Offerings: Which Offering Type is Right for You?” Let’s start by answering the question, what is a specified offering? Well, a specified offering is just that — you're buying one thing, okay, it could be real estate —  most often it is, most of my clients are buying real estate — but it doesn't have to be; it could be some other type of startup company or just some singular purpose … you want to start a restaurant, you want to build a development project. It doesn't matter what it is. But you're buying one thing.

What is the raise is going to cover? Well, you need to raise enough money to cover the entire cost if you're not going to be getting a bank loan. But if you are going to be getting a bank loan for a portion of it — which is advisable if that's available to you — then you're going to have to cover what the bank won't cover. 

Now, why is it important that you get a bank loan? Well, it's important to get a bank loan because the bank money is going to be cheaper than your investor money. Your investors are going to demand a little bit higher return than the interest that you might be paying to a bank. So if a bank loan is available to you, you'll definitely want to explore that option. If you're buying single-family, a fix-and flip-property or single-family hold, there are times that you might consider buying the entire thing by yourself. But usually when you're buying commercial property you're going to be using a bank loan to leverage a portion of that.

You're raising money, then, to cover everything else. What is that? That's going to include your down payment, any money that you want to be able to put into the property after you buy it for capital improvement, the closing costs, your due diligence expenses, your legal fees, what you've paid us, what you've paid your real estate attorney, and any acquisition fees that you couldn't pay to yourself. So, that's quite a bit of money. Usually, if the bank is going to finance 75 percent, you're probably going to be raising about 33 percent of that purchase price, because you're going to need a little bit more than just that 25 percent the bank won't finance in order to cover all these other things, so your acquisition costs.

How are you going to do that? Well, when we structure a specified offering, we're going to first set it up so that there's a minimum dollar amount you have to raise before you can use anybody's money. So that minimum dollar amount needs to be the dollar amount that you would absolutely have to raise to be able to close on the property, assuming that you're going to loan some of your own money into the property, or whatever other sort of short-term financial source you might have that can get the property closed.

You have to be careful here about borrowing money from people because the institutional lender is going to want to know where you got the money that you're using, and they're going to ask for the source of those funds, and they typically, in today's market, will not allow you to have subordinate debt. So you can't necessarily go out and borrow the money from somebody. Your parents could give you the money, or something like that, and that might be okay, but they don't want to see a promissory note. And you also have to be careful about bringing people in as investors short-term, because the SEC prohibits you from reselling the interest for more than, or for within, the first year of operations. Once you have investors in your deal, they are stuck in the deal for at least one year before you could even allow them to transfer their interest for any reason. So you need to make sure that you're aware of that.

That minimum dollar amount, again, is the amount you need to scrape together, your own money, and get that thing to the closing table. And so whatever that dollar amount is that you'd have to bring in from investors, that's your minimum dollar amount of your offering. Now we're also going to ask that you specify a maximum dollar amount of your offering. It's going to be a little bit more than what you actually mean to close, because you want to give yourself a little bit of contingency, one, in case the closing costs are not exactly what you've calculated, but also, in case you get into the property and you learn something new or you find out that there's an unexpected expense; you want to be able to cover that just by raising a little bit more money now, versus if you had already raised the maximum and closed on the property you would have to get permission from your investors and do a completely new securities offering for that, or you'd have to do a capital call from your investors, and that's not necessarily a good thing to do, especially right after you've gotten into a property.

So we'd like you to give yourself a little bit of a cushion. When you're figuring out how much money you need to raise, what's that minimum dollar amount, what's the amount that I need to be able to cover all of my expenses and pay myself back for anything I put out of pocket, and plus pay my acquisition fees, and then give myself a little cushion beyond that …what kind of a cushion might I want to have, a couple of $100,000 maybe, that I'd be able to raise if needed.

All right. So when can you use the money that you raised for a specified offering? Well, in the offerings that we raise, we typically say that you have up to 90 days to raise the minimum dollar amount, or such time if the property is no longer under contract, whichever is later. And the reason that we do that is that sometimes our clients will get extensions on their purchase contract  that will sometimes exceed that 90-day time period. So we want you to be able to extend that minimum dollar amount out until you've at least either closed on the property or 90 days, whichever is later. So that's your 90 days to break, and that's called breaking impound. When you actually get to that minimum dollar amount, and you're able to use the money to close on the property, that's called breaking impound.

Now, could you use the money before you get to the closing table? Could you use investor funds or if you raise the minimum dollar amount and then it hadn't gotten to the closing table yet and you still had another month to go, could you start paying yourself back for due diligence fees and your deposits and legal fees and all those things? Not recommended. Not recommended at all.

There's two things to consider: If you don't reach the minimum, then you have to give everybody's money back without deduction. So you can't use anybody's money before you ever reached the minimum. But if you reach the minimum and use people's money and then you don't close, then what?

Legally, you might be okay, but practically, you're probably not going to be in the syndication business very long. That's going to quickly get around to investors that you didn't give all their money back and you didn't close on the property, and you're not going to be in business.

Why is that? Well, you have to put some “skin in the game.” Everybody's heard that term. And your skin in the game is the money that you're putting up for the due diligence, the deposits, the legal fees, any extension fees, all of those things that you're putting out of pocket. If you don't close on that property, that is your risk. And so you have to close on the property in order to be able to get reimbursed for those things. Don’t ever plan on using investor money before you get the properties to the closing table, if you're doing a specified offering, because if you don't get it there, you need to give that money back.

All right. Then what about this maximum dollar amount? What if you only raised just that minimum dollar amount, but you have enough to close and you're going to close, but you don't have enough to pay yourself back? Well, you can continue raising money after closing up to the maximum dollar amount. And we usually give you up to one year from when you start your offering to raise up to that maximum dollar amount. The reason that we only give you up to one year is that if you're raising money for more than a year, then we need to refile your securities notices with the Securities and Exchange Commission and let them know that you're still out there raising money. If you had to reopen your offering after that one-year period, at that point, you would have to go to your investors and get their permission, but you have to start by asking them to put up the money in a capital cost.

All right. So what kind of structure do we use for a specified offering? We call it the investor LLC. That's usually going to be a manager-managed LLC that's going to sell off interests to investors. In a specified offering in most cases, that LLC is going to take title to the actual property. That company, since it's manager-managed, is also going to have a manager. The manager itself, we want to be another LLC. And that's just to give you some added protection, you and your management team, some added protection in case there was ever a lawsuit between the manager and the investors. But also, in case there's a change in people involved in management, then you wouldn't have to involve your investors in making that decision or help you make that decision. You can contain that all within the manager LLC, and as long as the manager LLC itself stays intact and remains as the manager or company, then there's no harm to the investors.

There are some cases where some lenders, once you get over a certain dollar amount, once your loan balance becomes $10 million or more, that the lender will actually require you to form a subsidiary title holding entity. And its sole purpose — it is called a single purpose entity — is to take title to the property and become the borrower on the bank loan. And the reason that the lender wants you to do that is called a bankruptcy remote entity. In case your investor LLC tanks, and you had to declare bankruptcy at that level, it wouldn't affect the lender and the bank loan, and then in some cases they may have some takeover rights on that subsidiary entity in the event of a foreclosure. So that's sometimes a requirement.

What kind of offering documents do you need for a specified offering? You're going to usually have a private placement memorandum, which is your disclosure document describing the offering and the risks of the offering to your investors. You're going to have an operating agreement for that investor LLC. You'll have a subscription agreement, and that's where the investors tell you that they meet the qualifications for your securities exemption and are entitled to invest. And then other exhibits that you create, well, one of the most important exhibits that you're going to create for a specified offering is going to be a property package. That property package is where you describe the property and you put your projections in there, you describe what the acquisition costs are, describe what your capital improvements you plan for the property are and what kind of exit strategies you're looking at, and how long you plan to keep it. So that property package is something that you're going to generate and give to us as we're preparing to write your offering documents.

The other thing that goes into a securities offering are the securities notice filings, and those are required in order to preserve your exemption. People that do their own documents, try to write their own documents or get somebody else's and copy and paste, they don't necessarily realize that you also have to do these securities notice filings. And the filings have deadlines; they are required to be filed usually within 15 days of when an investor's money becomes irrevocably, contractually committed. 

So what does that mean? Well, certainly by the time you close on the property and you use their money to close on the property, then it's become irrevocably, contractually committed. So the filings, we have to do filings with the FCC, something called a Form D, and then we also have to do filings with the state securities agencies.

What are the investor benefits for a specified offering? Well, they can drive by, they can look on Google, they can see the property, they can see it's a real thing, they can visit the property. And a lot of investors really like the fact that they're investing in a specific property and they choose which property they want to invest in.

All right. So let's go into some different structure types. The next thing is going to be a blind pool. So we talked about a specified offering, now we're going to talk about a blind pool. What's that? Well, a blind pool securities offering is really just where you have the very similar offering documents, but you're not buying a specific property, you don't have anything under contract right now, you have a business plan, or we call it an investment summary, that describes what kind of properties you're going to invest in. So you would talk about the types of properties that you're investing in, their geographic location, what kind of parameters, maybe you're looking for properties that have 100 to 300 units in the central United States, something like that. So you're going to describe all of that. And then you're going to have biographies of your team and you talk about who your team is and what kind of experience they have.

And then you should also be providing a track record, because usually, you're not going to have much success doing a blind pool offering until you have some experience with specified offerings with the same kind of property. Those are the blind pool offerings that are most successful. So if you were going to do a blind pool, then you would create, as far as your structure of the actual company, you would have this investor LLC again. And so, again, that's going to be manager-managed, and that's where you're going to sell off interest to investors and keep a portion of it for the management team. Then you're going to have a manager LLC, same reason as we said before, but in this case, you will take title to the properties at subsidiary level. So every time you get a property under contract, you will create a new subsidiary, single-purpose entity that will be formed specifically to take title at that individual property, and will get the bank loan on that property. And that will be required because the bank isn't going to allow you to commingle their loan and your investor LLC.

For a typical blind pool, a minimum dollar amount would be the amount you'd raise to acquire one property. So you know what size properties you're going to get. And then the maximum dollar amount would be the amount maybe that you would need to buy five of those properties. So, that's typically how blind pool work. It's not necessarily going to be open-ended so you can buy hundreds of millions of dollars’ worth of properties, it's usually going to have some finite purpose and your investment summary is going to describe that you're going to buy three to five or five to seven of these properties with that maximum dollar amount that you hope to raise.

You’re still going to have the private placement memorandum, still going to have an operating agreement for your investor LLC, you'll still have a subscription agreement, but instead of having a property package for a specific property, you're going to draft that investment summary. Now you can draft those yourself, and if you want to do that, on our website is an article called “How to Write an Investment Summary for a Blind Pool Offering.” I encourage you to get that. It gives you the outline of what that it should include, or you can hire us and we can write those for you, and we do that for a number of our clients.

What are the investor benefits? Well, there's diversity. If you're going to buy five properties instead of just one, if one of those properties isn't performing or maybe it's a repositioning project, there's going to be some period of time before it's cash flowing, then maybe you have some other properties that are offsetting that. And so it's not going to create a hardship for your investors where they have to wait a very long time before their property begins to produce, like could happen with a specified offering.

All right. So what's the next type we could look at? It’s something called a semi-specified offering, and that's really a hybrid between the blind pool and a specified offering. So, instead of having a blind pool where the only thing you have is your investment summary describing what you're going to do, in this case, you actually have one property under contract right now. You have one property under contract, but instead of doing it like a specified offering where you just raise money for one deal and close the offering, you're actually going to say you'll have a property package for that property, but additionally, you're going to write that investment summary just like you would for a blind pool that says these are the properties that we're going to buy, this is the first one, and this is what we're raising money for right now, and then we plan to buy three or four more. And that's going to complete our semi-specified offering.

Investor benefits for that one are going to be the same as for the blind pool. You potentially have diversity. But there's a risk in the semi-specified offering that you may never buy any other property because something could change. And that actually happened to me and my husband. We bought property in Ohio right before 2008, and we planned to buy three different properties in that area, and ultimately we ended up only buying one. And then, we couldn't get any loans to buy any other properties at that time, and decided not to find any more properties in that area. So there's a risk, and you need to consider that.

All right. So what is the fourth type? This is what's called a segregated offering. And that's where we go ahead and we write that investment summary and say these are the kinds of properties that we want to buy, and then we'd go ahead and write what we call a master PPM, if it has the risks for that property type, but you're not going to raise money until you get a property under contract. And at that time we would create a separate offering package just for that specific property. So in this case, you kind of have your structure in place, except that we're going to form the LLC when you get the first property under contract or form that investor LLC. And at that point, we would prepare a supplement to the private placement memorandum that's specific to that deal, describing how the money's going to be used just for that deal and what kind of returns we're offering just for that deal. The subscription agreement would be just for that deal and the securities notice filings would be just for that deal. So you can have separate properties, separate investors, and you're just raising money as you need it on a specific property.

And so, investor benefits here, it's really just a series of specified offerings. Just think of it like Apple … you invest in Apple, you don't own just iPhone, you own all the products that Apple produces. So, that's kind of what the blind pool structure emulates. In the segregated or the specified offerings you are actually offering interests in an individual property to your investors.

If you want to call us, you can call 1-844-SYNDIC8. And you can speak to either Charlene or me at that number. Or you can go to our website at syndicationattorneys.com. There are a lot of articles on our website that you can download for free. And then I assume that most of you have signed up at some point on our mailing list so that you can get on these calls and you can get our newsletters. 

Another thing that we have to offer to people that aren't ready to do a specific offering, is something that we call a Quick-Start Annual Retainer, and what that does is it gives you up to three hours of legal advice over the course of a year, and it's for a $1,000. If you end up doing an offering within the course of that 12-month agreement, then we would actually credit that $1,000 toward your lump sum fee.

But in addition, for a short period of time we're offering a bonus, which I called Quick Hit Marketing Sessions. And with those, there's no extra charge, it's part of your Quick-Start Annual Retainer, but we give you 12 sessions where you can have one-on-one with us, and we give you a marketing plan. So this is a marketing plan to ramp up your marketing system for your investors, and we will start working with you to develop the marketing materials you need to be able to go out and meet with investors.

And if you do want to schedule a one-on-one call with us, we do offer free 30-minute consultations. You go to our website, there's a button you can click and you'll see my calendar and be able to schedule an appointment. 

Well, with that, we're going to go ahead and close the call today. And I thank you all very much for taking time out of your busy day and listening. We will make this recorded call available and we'll send it out to everybody. 

Thanks a lot, and we look forward to talking to each and every one of you, whenever you have questions for us. Thanks so much.