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Finding Capital In A "players Only" Club
By Tony Seruga, Yolanda Seruga and Yolanda Bishop
The world of commercial real estate is sometimes looked upon as an exclusive “players only” club. Many people believe that only the people with money are involved. They believe that the “rich get richer” and “it takes money to make money.” In reality, these clichés hold little weight. The truth is that anyone can get involved if they know how to go about doing it. If you don’t have capital, you can get it. Raising capital is at the heart of every successful commercial real estate transaction.
The most important general rule in raising capital for a real estate deal is that it does not have to be all your money. Many people are hesitant to invest in commercial real estate because of the relatively large investment. They probably don’t have the money required by themselves. If you don’t have any money, you’ll need to familiarize yourself with the concept of “OPM” or other people’s money. Of course, these “other people” will require some sort of incentive to give you their money, but it will be well worth it. Whether it is a lending institution or a private investor, OPM can get you in the game much faster. Sure, you can take the long road and save a little bit every week until you can buy commercial real estate. The only bad part about that is you’ll be 90. In order to get in the game while you can still enjoy the fruits of your labor, OPM will need to be involved. Once you come to realize this, you can focus on the best way to go about obtaining it.
Some people are deterred from arranging a deal because of the apparent complexity of OPM. The hardest part is finding an investor that has the money. They may ask one or two people and get discouraged. If they do find an investor or two, they are overwhelmed by the paperwork. They don’t know how to structure the transaction. While it can seem like a lot to do, don’t let it get you down. Just make sure you determine how the funds will be distributed, how the results will be reported, and what determines the end of the project. This procedure can also be referred to as syndication.
Syndication is a way to gather substantial amounts of capital regardless of personal credit or capital. A syndicate is basically a group of investors that pool their money together in order to buy a more expensive piece of property. You may not be able to find that one investor that has millions of disposable
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income. However, you can probably find several that can invest three or four hundred thousand. In this way, they get the benefit of purchasing a high-quality property without putting up all of the money. You as the broker get the advantage of being involved without putting up the money. You will find the property, manage it, and report to the investors. This way, both you and the investors will be happy. As the broker, you will need to understand a few key concepts. To set up an arrangement like this you will need a separate entity. One great example is the Limited Liability Company or LLC. This type of corporate entity has several advantages over other forms. It gives you the freedom from personal liability that a corporation enjoys without the double taxation. If you or one of the investors is named in a lawsuit, this will prevent the court from coming after the property. The property is owned only by the LLC. No one person has complete ownership. Then when it is time to report taxes, each member just files them on their own personal income tax. Depending on their percentage of ownership, that is the percentage of the income and expenses that they will claim. This is much better than the company paying taxes first, then the shareholders paying again. In order to start an LLC, the appropriate documents will need to be filed with the government. A registration fee will also need to be paid. Although it may be frustrating in the beginning, this is time and money well spent. It will save you much more money in the future. When you, as the one in charge of the syndication, find a potential property, a Private Placement Memorandum must be created. This is basically a document that informs all of the investors about the potential risks involved. It is much better to make everyone fully aware of what they are getting involved in upfront. You don’t want to do anything without the full knowledge of all parties. If something bad were to happen, no one can claim ignorance. Be sure to keep a copy of this after it has been reviewed by all parties involved. There are a few skills that you will need in order to be successful in this field. Being analytical is very important to finding the best deals. You should know spreadsheets inside and out. Many problems in real estate could have been avoided upfront with a little more time spent investigating. Another important trait is to be a skilled presenter. If you can’t communicate your idea to others effectively, why would they ever give you their money? They must feel completely confident in your abilities. Now that you’ve decided you can do it, what kind of investors are you looking for? Despite what you may have heard there are many people who have money. These people are always looking for a great place to invest it. The best investor to get is one who has more money than time. These people are usually busy in other professional careers. They are probably even involved in many other forms of investment. They didn’t get money to invest by being lazy. Therefore, you must go after the busiest people out there. If you can find a group of these people, you are well on your way. With these concepts in mind, there is no reason that you can’t get the capital you need for commercial real estate. Tony Seruga, Yolanda Seruga and Yolanda Bishop of www.maverickrei.com specialize in commercial and investment real estate. As of May, 2006, they and their partners are managing over $600 million dollars worth of new projects.
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