Legal Question in Business Law in California

Real Estate Syndication LLC.

I am a CA based real estate investor. I plan to purchase commercial real estate outside of the state of CA. I would like to syndicate these out of state acquisitions.

Do I have to form a CA corporation(schedule S or C corp.) to be the ''manager'' of a Delaware based LLC. since I am based out of CA?

I plan to sell ''units''(company interest) of the LLC to ''accredited investors'' in order to enable me to purchase these properties,the LLC. will go on title but I will personally guarantee the loan.

Asked on 2/02/06, 7:55 pm

4 Answers from Attorneys

Gregory Cartwright The Cartwright Law Group, APLC

Re: Real Estate Syndication LLC.

This is far too complicated a series of transactions for you to handle on your own or to consult the internet. If you are interested in doing this properly and avoiding future lawsuits from these "accredited investors" find yourself a lawyer, and have it done correctly. This is truly a case of an ounce of prevention being worth more than a pound of cure.

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Answered on 2/02/06, 8:11 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Real Estate Syndication LLC.

I absolutely agree with Mr. Cartwright that a non-attorney must not attempt to raise investment money from strangers without the advice and counsel of an expert attorney at every step of the way. Issuing securities (and this is precisely what you're proposing to do, in whatever terms it may be couched) is a very slippery slope, and serious consequences attend every misstep.

The fact that the investors are, or are supposedly, accredited, doesn't make it a bit less risky.

I'll pose a few questions to you while trying to answer a couple of your specific questions:

(1) You say you are "a CA based real estate investor" then later say "since I am based out of CA" -- which is true? Perhaps you mean you are personally in California but the target properties are outside California. The answer in any event is that you don't have to form a California corporation.

(2) However, you do have to consult Delaware law to determine who or what can be the manager of an LLC formed under Delaware law. Delaware probably allows any person to be a manager, regardless of residence, but equally likely also requires a resident agent for service of process.

(3) Why, though, use a Delaware-based LLC unless the target properties are in Delaware? This "must be based in Delaware" business is largely nonsense, and greatly increases the complexity of your organization and may diminish its credibility to investors. Your LLC or other business entity should be based where the target properties are, and if you buy properties in more than one state, perhaps you should have an LLC or other owning-operating entity in each state.

(4) Lender policies differ, but many will require the title-holding entity (the LLC) to be the actual borrower, since this simplifies securitization of the loan, but they'll probably accept your offer to act as a guarantor.

Remember, don't sell "units" or any other kind of security to a stranger, however "accredited" he may be, until every aspect of your deal has been gove over by a securities lawyer and is either registered or it is determined that the proposed offering is exempt under a recognized exemption in federal law and the laws of every state in which the offering might be made.

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Answered on 2/02/06, 8:56 pm
Christopher M. Brainard, Esq. C. M. Brainard & Associates - (310) 266-4115

Re: Real Estate Syndication LLC.

One potential problem with your proposed structure that I see, is that you will have to register in the other states as a foriegn company doing business there. If you knew you were going to only buy real estate in one other outside state, it might be better to just form your LLC in that state. Otherwise I think it appears sound if you can qualify your "accredited investors." I would be pleased to become involved with your project, you will need contracting, entity formation and structuring. Thank you for your consideration.

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Answered on 2/02/06, 10:24 pm

Re: Real Estate Syndication LLC.

Using a Delaware-based LLC is not in and of itself a bad investment idea, as it does give you some flexibility with real estate investments. This is especially true with Delaware series LLC's, which in essence may be able to keep each property (and the investors in each) insulated from liability for other investors and other properties. However, these are complicated and intricate legal issues that simply aren't going to be addressed by a "one-size-fits-all" LLC formation.

To my knowledge, Delaware does not require the manager of an LLC to be any particular entity. An individual will do. However, you may want to consider your risk exposure before agreeing to take on the management of the LLC outside of a liability shielding entity, such as a corporation.

I agree with Messrs. Cartwright, Whipple and Brainard that you do really need to have competent legal counsel to create the appropriate entities with which to solicit membership interests and manage your LLC. This is definitely not something you want to download from the internet or do on the cheap. Further, the accredited investors from whom you seek investments will want to see a stable management team in place, including appropriate attorneys, accountants and property managers, before investing money in your projects.

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Answered on 2/03/06, 12:42 pm

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