Episode 108 – The Art of Investor Involvement in Reg D Syndications and Investment Funds

When you’re designing an investment fund or a syndication, one very fundamental idea is whether or not your investors are going to have a vote, whether or not they get to vote on major decisions. This video, which is a blast from the past, was made for top real estate brokers, real estate developers, and people who wanted to go from being in a business to doing syndications and investment funds of their very own. I also had people who were working for investment funds or REITs as part of the program.

What I wanted to instill in them, and what this video is about, is how you deal with that question of major decision making. Now, if your major decision making is done with all of your shareholders getting to make a vote, this video is spot on. But even if they don’t get a vote, even if you have complete control and complete voting authority, this is still fundamental. Why? Because your investors should have a voice. Whether or not they actually have a vote as a legal matter, you should always make sure that your investors have a voice in it.

I think it’s a good idea to have a vote on those very major decision-making things. See what it is. Now, it’s possible that you’re not going to follow it. And if you don’t follow it, that’s fine. But just make sure it’s well-reasoned and that your investors understand. So everything should be structured in such a way that investors have a voice. And that’s what this video is about.

We’re talking about operations, we’re talking about communications. And in this video, we’re talking about voting. Voting is important. It is spelled out in your operating agreements. Sometimes there are decisions that need to be made by the investors. So the first thing we need to do when we’re talking about voting is determine if a vote is needed.

Now, most of the time, the property manager or the asset manager, the syndicator, is going to have the authority to make the decision for the investment. Most of the time. But there are things that sometimes I will choose to make more palatable to investors by giving more voting control to them. Choosing when to sell is a perfect example. I would almost always have that be something that is votable by an investor because they feel in control of that investment. I wouldn’t let them have necessarily the voting right to choose one tenant over another if it was a multi-tenant building. But there may be things that you decide are in your best interest to allow your investors to vote on and may help you make the decision.

So the things you need to know are first, if you need to do a vote at all. And second, what percentage of the vote you need. Is this a majority? So 51%? Or is it a super majority? 75%? Whatever it is, you need to know what that vote is, and we’re going to talk about where you put that in just a minute.

Then you need to also know how you quantify votes. I almost always would put it in a pro rata voting situation where the investor gets to vote based on the percentage of the equity that they have. There may be some situations, however, where you’ve decided to make it vote on a per-investor basis. So the person who has 1 million invested gets the same amount of a vote as somebody who’s invested 1000. If that’s the decision you made, that’s fine. We just need to know that.

I’m going to walk you through basically how I would talk to an investor when it’s something that I think we need to vote on. So it’s calling that vote. First, read your operating agreement and understand how voting takes place. You’re going to need some of the data from there anyway. But make sure you understand it as best you can.

In my email, I would say, “Dear [Name],” I put that there mostly to make sure that you understand this is an email. I would first thank them for investing with you. They’re trusting you with a lot of money, let’s thank them. Second is a summary about what is going on. Here I’m talking about a summary of the whole property from the very beginning. So we purchased this property three years ago, for such and such. And it’s been performing well. Just a nice narrative so that the investor can understand the backstory.

Now, they probably do understand it, but maybe they own a lot of different things. And it’s very easy to get it confused. And they would just like it all in one place. Do them a favor, show up like a professional and give them a nice narrative to show that you’re the trustworthy person that they believed you were. So I’d talk about the initial progress. And then I’d go right to the situation that you were voting on. Is it time to sell? Whatever it is, and your basic idea about what it is.

Here, you want to support whatever you want to do, but I wouldn’t necessarily be heavy-handed on it. So you want to be somewhat convincing. But you certainly don’t want to be so persuasive that people are being forced to vote one way or another. But you certainly have a right to an opinion. And they should understand that this is your basic recommendation based on your professional knowledge.

The next section I would talk about is the financial impact. This is an investment. So how is this going to impact their bottom line? Are you projecting out an IRR of 14%? And this is going to make it so they have an IRR of 15.2%? Fantastic, let them know. If you’re projecting it out that it’s actually going to be a 9%, but here’s why I think we need to do it anyway because of these risks, make sure they understand what that financial impact is. So that way, they can at the end of the day know what it is.

For example, if I was going to be describing recommending the sale of the property, I would identify what that financial impact is. I would say, “Our list price would be approximately [X] less costs for brokerage fees, and for escrow, title, etc., is going to be that much.” And then I would probably say projected sales costs because it’s probably going to be less than your list price. I would then put in the total amount of equity and the return per share.

That’s just an example if I was talking about selling the property. I would put something like that just so that they understand as much of the impact as possible. They can make a good decision for themselves how they want to vote. Put numbers that are favorable to you and numbers that are not favorable, but just give them the full picture. You’re a fiduciary; give them everything they deserve.

And then I would put down your recommendation. So I would allude to my recommendation in the situation. But I would put my recommendation in its own section so that they can clearly see it. And here’s your opportunity to be more persuasive. Do not be heavy-handed. But be reasonable. You want these people to stay investors with you.

And then call the vote. Here we’re talking about what the question is. So the question is whether we should put property of Blackacre on the market for $4 million now, within the next three months, hiring this brokerage company. Whatever it is, whatever that question is, we put it there and make it clear. So they know exactly what they’re voting for. We don’t want any ambiguity when it comes to this.

And then I think it is useful to say, give the basis of why they’re voting. So I put “Subject to the operating agreement in paragraph five,” or whatever it is. Then why they are voting, that this isn’t one of the decisions that a manager gets to make. This is one of the ones that investors get to make. So you’re calling them out.

And then what vote. So in something like “In order to approve, this vote requires…” Now if it’s 51% or more, whatever we’re putting, we’re giving what that percentage is that we talked about earlier, what that percentage of the vote is. So that they know how close is it going to be, is it a super majority, whatever it is.

I would then put in a line that’s very clearly marked that says “A vote in favor,” and actually, we probably put this in bold. So that way, they can see exactly what they’re voting for very quickly. Again, not hiding the ball, and then “How to vote.” Please send an email or reply to this email with how you wish to vote or something like that. And then now you’ve got a very nice email that’s calling for your vote.

And then lastly, as those votes come in, you’re starting to do a tally. So I would do something like this: you’ve got a list of all of your investors. If they aren’t voting, that’s 100% of the vote. And this is assuming that they’re voting pro rata. Then I would do “Vote in favor” or “Opposed.” I like to do this and have this as a real document because then it’s very clear that I’ve done what I need to do.

I could also, I do think that we want to keep this private, but I could also put Investor A, Investor B, Investor C, Investor D. Just so that it’s more private. And then I would just mark, you know, this is in favor. They were opposed, in favor, in favor. And then now you’ve got a new tally. And so here you’ve got 75% of the vote in favor, 25% opposed, and I’ve got a nice spreadsheet that just shows the vote. And it’s very clear on what it was. And everything is documented.

So this is how we go through the process and document to do our votes. So whenever a decision needs to be made that’s subject to voting, now you’ve done it in a way that’s very fair. It’s very clear. It’s not heavy-handed, and it’s reviewable. So if there’s ever a question of whether you did your job properly, you’ve got it done. And now you’re showing up like a true professional, which also is going to build the trust with your investors. Even if they don’t get the way they voted.

Giving investors a voice is absolutely critical if you’re going to be successful. Happy investors mean that you are going to be a happy syndicator, investment fund manager, business. That’s what this video is really about, not just the formalities of taking a vote and how you do it, but just making sure that they have a voice and what that process looks like.

Now this video was put together specifically for real estate professionals. But if you’re not a real estate professional, if you were doing an investment fund or you’re doing a syndication of some other sort, or you’re a business raising capital, it still matters. You still have investors.

So if I can help you, my name is Tilden Moschetti. I am a syndication attorney for the Moschetti Syndication Law Group. If I can help you put together your own syndication Investment Fund, do the things that are necessary to raise capital for your business, whatever it is, I can help you stay in compliance and also help you keep happy investors.