Updated: Jan 9
You found the perfect multifamily property. It’s in the right location, with a stable area around the building. The price is in the range you were looking for, and the property fits perfectly with your value-add strategy. Now you’re ready to present it to your passive investors, and you’ve prepared your PPM (private placement memorandum). The only problem: your potential investors are raising objections to your proposal, threatening to prevent the deal from going forward.
Actually, objections are presented all the time with real estate deals. If you’re the syndicator, you must have the facts, figures and answers ready so you can quickly respond to those objections and keep the deal going. As has been said a countless number of times in everything from the Boy Scouts to medical procedures - be prepared. If you’re prepared in advance before the objections or questions are raised, there’s a good chance you’ll satisfy the objector.
If you’ve been a syndicator for any length of time, you’ll find that the same objections are raised over and over again. There may be some variance, but overall, they’re considered “universal objections.” That makes it easier for you to prepare yourself with the answers needed to respond to those objections. Let’s look at some of those objections and the answers that can satisfy the investors.
“What if I have to sell my shares?”
As a sponsor, you have a business plan that is designed to make money on every real estate deal you’re involved in. That business plan will include a proposed holding period, the time it takes before the deal will realize the proposed gains you anticipate and be ready to be refinanced or sold. Many new passive investors wonder what will happen if they need access to their investment during the hold period, so they raise the objection about “liquidity.”
Another similar objection raised is if they must gain access to their investment, can they sell it to one of the other investors or to someone else? That would depend on your original agreement, where you would spell out the answers to these questions/objections. Most multifamily properties are purchased as an LLC, or limited liability corporation. You purchase shares in the LLC when you invest in the property. The LLC’s agreement will determine whether or not an investor can sell their shares to another party. Knowing the arrangement regarding selling the shares in the PPM is important, so you can be prepared ahead of time and inform passive investors accordingly when asked about it.
In some cases, the sponsor will vet the new investor the same way they had vetted the original investor. If they meet the criteria established by the sponsor, then the sponsor may allow the shares to be sold to that new investor. In other cases, the sale of shares is prohibited. An investor should know in advance what is possible and whether or not he or she can tolerate the risk.
But there’s a bigger issue to consider, and that has to do with the SEC (Securities and Exchange Commission). If the SEC considers your real estate deal a security, it can regulate what happens. How can you determine if it is a security? It has to meet 4 specific criteria:
• It has to involve raising capital
• There has to be an expectation of profit
• There has to be a “common enterprise,” in that the investor and the lead investor or sponsor are on the same side of the deal