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What Should I Look For In A Sponsor?

BY GREG BROWN, REGISTERED REPRESENTATIVE AT VENTURE.CO BROKERAGE SERVICES, LLC.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of VENTURE.co.

Private, online real estate investments are risky. Just. Like. Every. Private. Real. Estate. Investment. Ever.

There are more conservative products if you don’t like risk.

But if you are intrigued by online real estate investing, and I think you should be, read on. (Online real estate investing is not going away.)

You will rarely hear me use the word “crowdfunding”. You’ve probably heard the word bandied about in association with real estate investing. And you may also hear that crowdfunding is “disrupting” and “democratizing” real estate investing right before our very eyes.

With all due respect, “crowdfunding” is not what is happening with investment real estate. The investment process is simply moving online and away from cigar smoke-filled rooms in the back of the country club clubhouse. Sidebar: that’s not really where this happens. I’ve been in commercial real estate over 20 years and never made a deal there. I just like the visual.

All that said, crowdfunding is one of the reasons we’ve all seen a market flooded with deals that should otherwise not see the light of day. Putting together an offering package is not hard; if a deal sponsor can put together a website and manage the legal work in under $10K, they can technically create an offering. Putting together a good deal is a different story. But it can be hard to tell what’s what when you’re looking at an overwhelming number of deals.

I would be especially thorough in considering deals using the Issuer Exemption that have not been fully vetted and underwritten by a FINRA-licensed broker-dealer.

Sponsors need to know the market comparables, the new development pipeline, and the economic drivers, not just be able to cut and paste them from a market survey into an offering memorandum.

Real estate is not a commodity: it requires active, and preferably experienced, management.  When looking at a deal, I go straight to:

  • Who exactly is responsible for the deal being curated in the first place?
  • Who is going to mind it going forward?

A credible deal sponsor should have:

  1. Connectivity to the asset type. It is riskier to back a sponsor with a track record in office buildings who has suddenly pivoted to self-storage facilities. Or, a homebuilder who now wants to raise money to build a grocery-anchored shopping center.

This isn’t to say that a sponsor can’t exit an area of expertise to create a new one. There are plenty of successful real estate owners who own different types of assets. I’m just flagging it as risk-IER. Anything you do for the first time has risk. If you can handle that risk as an investor, proceed with caution. If not, stay in the right lane and find the next warehouse deal from a sponsor that has already done five warehouse deals.

  1. And/or connectivity to the submarket. There are real estate investing challenges that technology is still years away from solving. One of these is having local market knowledge. This is why high-level economic and demographic data is about as useful to a specific real estate investment as a Facebook political rant.

Top line data does not cover the political and economic power dynamics of a specific submarket. For example: is there a plan afoot to widen a road? Is there risk of a development moratorium because of a shortage of infrastructure capacity? Could there be a flood of competing products developed to devalue your investment property? You need the sponsor to have boots in-country to tap into the undercurrent of activity.  They need to know the market comparables, the new development pipeline, and the economic drivers, not just be able to cut and paste them from a market survey into an offering memorandum.

I will qualify the above by saying that the size of a deal sponsor could blow your normal considerations out of the water. Clearly, large companies have the scale and ability to draw upon assets that smaller deal sponsors do not, so keep that in mind. Sponsors can also partner with local experts, but make sure those local experts remain part of the deal going forward.

Just stay away from the deal sponsors channeling their inner Lewis & Clark.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

Investor Management Services and VENTURE.co Team Up to Offer Clients Best-In-Class Technology Along With Broker-Dealer Services

Charlotte, NC and Burlington, VT:

Investor Management Services (IMS), the leader in software for commercial real estate firms to manage their investors and assets and the only complete solution for investor management, and VENTURE.co, a registered broker-dealer with technology solutions tailored for how securities professionals, advisors, issuers, and sponsors attract and retain investors, announced today that they have entered into a strategic partnership.  This alliance will deliver best-in-class technology to VENTURE.co’s clients, along with capital raising through a registered broker-dealer for IMS’ clients.

Real estate accounts for over $100B in the private investing marketplace, yet only a small fraction of this activity has moved online.  At the same time, long-standing federal rules have changed, now allowing General Solicitation (under certain conditions, via the 506(c) exemption to the Securities Act). The combination of technology and business services offered by IMS and VENTURE.co address challenges faced by real estate deal sponsors and issuers seeking to realize the opportunity of General Solicitation, while remaining compliant with federal and states securities law.

“We set a goal for 2018 to form partnerships with firms that add value and streamline processes for our respective clients. In partnering with VENTURE.co, CRE sponsors will be able to market investment opportunities to a very sophisticated investor base through their private capital markets platform, resulting in an efficient and seamless transaction,” said Ron Rossi, Vice President of Business Development at IMS.

“We see significant opportunities for our technology to enhance how investments in real estate are acquired and managed. While we have focused on developing best-in-class transaction solutions alongside our FINRA-registered broker-dealer, IMS has focused on simplifying complex investor distribution and reporting needs in real estate transactions.  This potent integration yields the leading marketing, transaction processing, and investment management suite,” said Aaron Pollak, CEO and Co-Founder of VENTURE.co.

About Investor Management Services (IMS)

IMS Logo

Serving real estate investment firms, Investor Management Services (IMS) is the leader in the investment management software space providing the only all-in-one platform.  We enable our customers to better serve their investors while improving the efficiency of their firm.  The IMS Platform includes an Investor Dashboard, Document Management and Sharing, Customer Relationship Management (CRM), Waterfall Distribution Processing, and Analytics.  For more information, please visit https://www.imscre.com/.

About VENTURE.co

venture-logo-color-notext-squareHeadquartered in Burlington, Vermont and with offices in Midtown Manhattan, VENTURE.co Holdings, Inc. is a financial services company focused on providing alternative investment solutions.  VENTURE.co Holdings, Inc. includes subsidiaries that specialize in facilitating private placements and providing technology solutions.  VENTURE.co Holdings, Inc. is the parent company of VENTURE.co Brokerage Services, LLC, a registered broker-dealer (Member, FINRA/SIPC) and VENTURE.co Technologies, LLC, a technology services provider.  For more information, please visit https://www.venture.co/.

Issuer Exemption Pitfalls

by Andrew Szabó CFA, Chief Compliance Officer at VENTURE.co Brokerage Services, LLC.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of VENTURE.co.

To raise capital in the market, the 1933 Act requires that a company issuing non-exempt securities must:

  •  qualify for an issuer exemption, or
  • employ a licensed broker-dealer, or
  • register itself in each state as a securities dealer.

Frankly, however, many issuers blunder, thinking they can employ the issuer exemption, while falling outside of it and leaving themselves at profound risk. This is especially common in the real estate field but is not limited to it. Let’s look more deeply at this problem.

Who gets to use the issuer exemption?

The issuer exemption was meant to provide a safe harbor for employees or directors of the issuer, so that small businesses could raise money more easily and inexpensively. This safe harbor would allow the issuer to avoid registering as a broker-dealer, as they are acting on behalf of their company, not buying and remarketing the securities of a third party.

Does state law create any perils in relying on the issuer exemption?

Yes, there are perils in part stemming from the patchwork of state regulations. In Maryland, New York, and Texas, for example, if you use any form of General Solicitation, then you lose the issuer exemption.

Must issuers follow the same state and federal regulations as a licensed broker-deal in relying upon the Issuer Exemption?

Absolutely. Such rules apply to such matters as accreditation, investor communications, document retention, escrow accounts, risk disclosure, conflicts of interest, related party transactions, Rule 10b-5, “forward-looking statements” and state registration, among others.

What about the use of finders–that’s not a problem, is it?

It can be a big problem. If any part of a finder’s compensation is geared to success in raising capital, or to a formula (such as one related to transaction size), that finder must be licensed in the securities business and affiliated with, and compensated through, a broker-dealer. If not, the issuer, the issue itself, and the finder are all at legal peril. The use of such finders is not always detected by regulators upon issuance, but this delict may well be discovered and pursued by plaintiffs or prosecutors if problems develop later with a deal.

Under the Issuer Exemption, is the Issuer subject to examination by the SEC and by state securities authorities?

Yes. And because many issuers lack sophisticated tools to preserve information about investment material distribution, including content, versions, who read the materials and exact timing, it may be difficult or impossible for such issuers to evidence important aspects of the capital-raising process.

Are there other dangers in relying upon the Issuer Exemption?

Yes, the SEC has ruled that if certain employees or officers of the issuer are paid chiefly to sell securities and have few other duties, they may be deemed “brokers” under law. Further, for issuers who bring more than one issue in any single year, there are strict regulations under the Issuer Exemption.

Is the VENTURE.co platform a marketing and compliance panacea?

No, of course not. What we at VENTURE.co do claim is a broad-ranging set of solutions that can be customized (with the help of our skilled staff) to meet a wide range of marketing and compliance needs. We also claim that our solutions dovetail well with, and greatly facilitate, the work of financial operations, compliance, legal and accounting professionals, whose services remain essential. However, with our tools, issuers may find that that they are spending less on routine compliance tasks, relying instead on these professionals for more complex judgments.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

VENTURE.co Presents at CBC: How To Raise Capital Online

By Greg Brown, Registered Representative at VENTURE.co Brokerage Services, LLC.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of VENTURE.co.

I was in Orlando, Florida this week to present to attendees of Coldwell Banker Commercial’s (CBC) Annual Conference on “How To Raise Capital Online.”  We walked through changes to regulatory policies, as well as the nuts and bolts of how to set up an online machine to raise equity for deals. We talked about how the JOBS Act (2012), specifically the possibility of “General Solicitation” under the 506(c) exemption, is a big deal for real estate capital.

The questions from the group were great, as many in the room really understood the power of increased access to capital through the use of technology.  It was exciting to watch the wheels turning in the heads of those in the room about how they could use the tools of VENTURE.co for their own assets and those of clients.

One great discussion had to do with asset recapitalization.  Many current owners of investment real estate would be interested in “taking some chips off the table,” but they don’t want to pay the associated taxes, or they don’t want to go through the struggle of trying to find something to exchange into.  We discussed using the VENTURE.co platform to help their clients source new slugs of Limited Partner equity, allowing owners to improve their cash positions as we get closer to the end of this real estate cycle (get back to me on the exact end-date).

Thanks for the time, CBC!

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

Why do Deal Sponsors Charge Fees?

By Greg Brown, Registered Representative at VENTURE.co Brokerage Services, LLC.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of VENTURE.co.

Putting together a real estate deal is similar to herding cats. But only if those cats are like the ones in the cult classic film Roar, in which a family and its pets, untamed lions (among other animals), are profiled. 70 members of the cast and crew were injured.

And I’m equating this to putting together a real estate deal? I kid. But not by much.

By the time a deal is ready for the investment stage, a sponsor has gone through many hoops to put it together. Saying it’s a lot of work is an understatement.

Now, when I say “deal”, I’m not talking about the creation of marketing slicks and 10-year discounted cash flows. I’m talking about the entrepreneurs who have a vision for a property or project and, at significant risk, attempt to create a vehicle for investment.

You get what you pay for in life. Except in Vegas, where you pay double.

In my view, the long-standing, inefficient sausage-making process that brings a deal to market, by its very nature, requires compensation. If something is easy, anybody can do it. But putting a real estate deal together is, once again, hard work and deserves just compensation.

Because here’s the reality: most opportunities die before they even get close to the stage for raising capital.

I bring this up because too many investors immediately zero in on the fees a sponsor charges in a deal. To me, this is wrongheaded. Here’s why: if a deal sponsor has a solid track record and is offering investors returns commensurate with the risk, “pay that man his money” (-Teddy KGB in the best scene of Rounders).

This doesn’t mean you should brush over a deal’s fee structure. You should focus on it. Just be smart about analyzing it.

  • Make sure the sponsor’s fees aren’t too heavily front-end loaded. The sponsor should have skin in the game down the line, when things could potentially go bad.
  • Is the deal sponsor using fees earned as equity in the deal? If yes, this is not necessarily a bad thing. It shows the sponsor is willing to put their money where their mouth is—and that is a good thing. I would be much more concerned if a sponsor charged a high fee, up front, with little or no reason for the sponsor to ensure the project’s success in the future.
  • When comparing different investments make sure the returns you are comparing are both before fees and after fees. Sponsors are required to disclose all fees. However for return calculation purposes, some sponsors may present the returns not inclusive of all fees associated with a deal. Just make sure you know what the returns are projected to be NET of ALL fees.

If an investment fits your investment goals and has the fundamentals to be successful, don’t be in a hurry to prejudice that deal because it has a significant fee to the sponsor. You get what you pay for in life. Except in Vegas, where you pay double.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

Meet Greg Brown

By Greg Brown, Registered Representative at VENTURE.co Brokerage Services, LLC.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of VENTURE.co.

Greg Brown HeadshotIf you are looking for windsor knots, french cuffs and real estate perspectives from the top of the ivory tower, this is not the blog for you.

To kick off this blog, let me say something brief about myself. I have a 20+ year career in commercial real estate. Currently, I am Managing Director of NAI DiLeo Bram in Central, NJ, and I’m also a Registered Representative (Series 7/63) with VENTURE.co, a FINRA-registered broker-dealer, where I lead the real estate division.

So why write a blog? Besides every blog on career advice on social media telling me, “You should write a blog”? Because I am passionate about making private real estate capital markets work more efficiently for stakeholders across the board.

For too long it has been nearly impossible for investors to efficiently source quality real estate investments. I aim to be part of the solution. I’m tackling a variety of topics including: how to look at real estate deal sponsor fees, what to look for in a deal sponsor, how to think about assumptions in real estate modeling and reviews on specific deals I find compelling.

So who should read my blog?

  • Current or potential private real estate investors (this likely means you’re accredited) who would like some guidance on cutting through all the noise to sharpen their investment decision-making.
  • Deal sponsors who want to bring transparency and efficiency to the deal-making process—and want to understand what investors these days are struggling with.
  • Anyone who thinks applying fintech to private real estate investment can make the investment process much better.
  • Your mom. I promise she’ll think I’m awesome.

If you are looking for windsor knots, french cuffs and real estate perspectives from the top of the ivory tower, this is not the blog for you. If it is, I hope you stick around. Talk soon.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.