When you buy an apartment building with a syndicator, you are not buying real estate. You buy a security. Yes, a security. Sound strange? Perhaps. The reason you buy a security is that the syndicator creates an LLC (Limited Liability Company) which they manage. The LLC owns the property, and each investor owns a portion of the LLC. Since it’s a security, which normally requires registration, most syndicators try to avoid going through the registration process, which is long and expensive.
The SEC (Securities and Exchange Commission) allows syndicators to “skip” registering their securities if they offer them to accredited investors. Agree with their logic or not, the SEC believes that Accredited Investors are capable of accepting economic risks associated with investing in unregistered securities. However, there are specific requirements for those wishing to qualify as an accredited investor.
Who are Accredited Investors?
Without getting into too many legal terms, according to Regulation D of the Securities Act of 1933 you are an Accredited Investors if you:
Made at least $200,000 of annual income in the previous two years, or $300,000 for a married couple.
Have a net worth in excess of $1,000,000, excluding the value of your primary residence.
So I am an Accredited investor, so what?
Rule 506c allows syndicators to market their deals – but only to Accredited Investors. As an Accredited Investor, you have access to marketed passive investments, which non-Accredited Investors don’t have access to. You will need to prove your eligibility as an Accredited Investor, but you gain an advantage many don’t have.
What if I am not an Accredited Investor?
The other part of Regulation D - Rule 506b - allows investors who are not accredited, to participate in a syndicated deal, if they are “sophisticated.” The law defines an investor as sophisticated if he or she has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment. Last year, over $36B was raised in syndications; and generally speaking, over 85% of all Regulation D offerings are Rule 506b.
The SEC limits each deal to a maximum of 35 sophisticated (and non-accredited) investors. Since syndicators cannot advertise investment opportunities for non-accredited investors, sophisticated investors who wish to invest should be active and network with syndicators to get access to deals. The law requires syndicators to have pre-existing relationships with sophisticated investors, so building relationships with syndicators is key to gaining access to passive investments.
About the author
Ellie is the founder of Blue Lake Capital LLC, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie". She started her career as a commercial real estate lawyer, leading real estate transactions for Israel’s largest development company. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She graduated from the MBA program at MIT Sloan School of Management and holds Masters in Law from Bar-Ilan University in Israel.