I want to launch a small apartment portfolio- best entity structure.

I'm hoping to launch a small ($5mm-$10mm) apartment portfolio in Florida. I will be the fund manager, but will have no equity. It will be funded by 5-20 partners found by direct solicitation (no advertising) only and will consist of private equity. Is there a more advantageous and easier business structure than the standard Private Equity Fund? Complying with the Federal Securities regulations sounds like an expensive burden that would not be conducive to such a small fund. Please advise. Thank you.
In General Area - Asked by Michael J. - Nov 30, 2010
Report Abuse
Answer this Question

Answer(s)

Rob B.
Chandler, AZ

Michael....
Please seek appropriate legal advice for the following information. There are also packages available on-line that will set you up. However, in answer to your question, you may use a Limited Partnership, an LLC or an S-Corporation as a general rule. You should likely use a Rule 506 offering of Regulation D of the Security and Exchange Commission (or Reg D 506)
Rule 506 of Regulation D allows a company to raise an unlimited amount of capital, as long as the company satisfies the following standards for an exemption under this rule:
• The company can raise an unlimited amount of capital;
• The company does not use general solicitation or advertising to market the securities;
• The sale of the company’s securities can be to an unlimited number of accredited investors and select few other purchasers.
• Unlike Rule 506 of Regulation D, all non-accredited investors, either alone or with a purchaser representative, must be “sophisticated”. This means that they must have “sufficient” knowledge and “experience” in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
• The company, i.e. the seller of the securities, must be available to answer questions by prospective purchasers;
• Financial statement requirements as for Rule 506; and
• Purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering.
It will be important to have a clearly written memorandum regarding your offering and an operating agreement for the entity. The memorandum is often referred to as a “letter to your investors’ attorneys”, and is also wisely called “a parade of horribles”. If you ever have an investment go wrong, you will want to be sure that you have disclosed everything about the risks as well as the possible rewards. The operating agreement is important because this is what you will be agreeing to do in the operation of the investment entity. It is essential that you have a good qualifying document that you require all prospective investors to fill out prior to your accepting them. This document should make sure that they acknowledge receipt of all the material you are required to give them. It should also cause them to verify that they are sufficiently qualified to invest with the group. It will tell you who is financially qualified to become an accredited investor and that all non-accredited investors have an acceptable level of sophistication.
Generally, you will be allowed up to 35 non-accredited investors.
I offer all this to you from practical experience and not as legal advice. The legal advice in what you are planning should not be that expensive. However, you should not proceed without it. Good luck Michael…. Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: rob@capratecommercial.com

Nov 30, 2010
Report Abuse
Angelo O.
Owner/Investor
Atherton, CA

form an LLC

Nov 30, 2010
Report Abuse
Scott F.
Broker/Agent
Austin, TX

Michael,
There are several points that will need to be addressed as you take on this venture. If your partners are going to be passive investors, it sounds like you are entering into a world of securities and would recommend that you contact a good securities attorney to advise you.
If you think complying with Federal Securities laws are expensive, not complying with them is even more expensive.
You may want to explore a tenant in common structure so partners can 1031 exchange in and out of the fund.
There are many questions that you will want to have answered and info you'll want to disclose before accepting any money for a fund raise and making a final decision as to whether you need to go the securities route including....
- Are you a broker?
- Are you collecting fees?
- Are you taking ownership?
- Are you going to sign for the loan?
- Do you have a pre-existing relationship with your partners?
- Are your partners accredited investors?
- Are apartments suitable investments for your partners?
- Are all of your partners in the same state as you and the subject property(ies)
- If you are going to be the manager and have no equity, do you mean you will not retain an ownership interest in the property or that you will not put capital in?
-If you are not putting capital in, what qualifications do you have to manage such a fund?
- Do you have a PPM?
These are the questions that both prospective investors and lenders will want to know.
Hope this helps.
Scott Friedson

Nov 30, 2010
Report Abuse
Jamiel C.
Owner/Investor
Richmond, VA

A standard private equity fund would be a C or S corporation. Why? Because of liquidity. Valuing the entity based upon the assets it manages or holds, passes value to the shareholders. This is not the case with L.L.C's, or L.L.P's where value, where liquidity, and thus financing is more difficult due to legal components. If, for instance you hold all of the properties in one L.L.C, or L.L.P, were a tenant to sue you regarding an occurrence that took place in one of the building assets, he or she could lay claims to all of the other buildings under its corporate umbrella. Each building should have its own separate corporation, and even business checking account. Finally, all of these small corporations can then be placed under a C or S corporations' protection for the purpose of bringing in equity partners. Remember, they like the C and S corp, because of its legal freedoms, and would be enticed by your separating all of your apartment buildings as their own L.L.C subsidiaries, protecting the portfolio as a whole, from the liabilities of any one building. You can also use the L.L.P to hold the subsidiaries, as it allows you to function as a general manager, as well as a stake holder. This is also true with an L.L.C. You may wish to setup a for fee, or free consultation with a corporate and tax attorney to see just how the myriad of strategies can be honed to fit your investment criteria.

Nov 30, 2010
Report Abuse
Raymond L.
Broker/Agent
Tulsa, OK

Ideally you would want to have a Corporation as the holding entity and each property held in an independent LLC

Dec 1, 2010
Report Abuse
Michael J.
Fort Lauderdale, FL

Thanks guys! I appreciate your input. It looks like I'll be framing the entity structure per standard Private Equity Fund practices after all. The business plan is coming along nicely and I already have my boilerplate PPM. Should be ready to start dialing for dollars soon. Thanks again!

Dec 3, 2010
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question