If you’re putting together a real estate syndication or any kind of syndication or fund, one question you may have is: can you get a bank loan on that property or those assets, while simultaneously raising money through equity from your investors? We’re going to go through that. My name is Tilden Moschetti. I am an attorney with the Moschetti Syndication Law Group. We specialize in Regulation D Rule 506b and 506c syndications and help syndicators like yourself put together those offerings.
Can you take traditional financing while you’re also putting together a syndication? The answer to that question is yes, you can. As part of your analysis, certainly the bank or whoever that lender is, is going to get paid back first. So first and foremost, they always get their money back first, and all of your investors need to come second to that. They need to know that you’re going to be taking that financing, so you need to disclose it and make sure that they know.
In order to get that financing, the banks typically are going to ask for a guarantor. Now, if it’s a non-recourse loan, where they can’t go after the borrower for anything except as part of a foreclosure, they still are going to need a guarantor for what they call “Bad Boy carve-outs.” These carve-outs state that in the case of fraud, of course, they can still go after that person. So they still need a guarantor for that limited scenario.
For a traditional loan, which is currently the vast majority of loans and are recourse loans, they will still require a guarantor. That guarantor is typically you, the sponsor, or could be some other person somehow affiliated with the investment vehicle itself. Sometimes what syndicators will do if they don’t have the financials to be able to qualify as the guarantor is they will pay for the guarantee. They will pay for a guarantor from one of the investors, and they do this by offering a finance fee. So they charge a finance fee of maybe 1% to the entire investment, and that money gets paid to the guarantor, one of the investors, so that they get compensated for the risk level that they’re taking on.
The other thing that banks will oftentimes require is they want to know that there is no one in this part of the syndication that owns more than 20%. Typically, it’s 20%, but I have occasionally heard about it at 10%. Most of the time, it’s 20% that the underwriting requires. If anybody owns more than that, then they need to sign on the loan itself. Typically, we don’t disclose names to the banks of all of your investors. So if somebody is going to own more than 20%, they need to know that they probably will have to have their name disclosed, and they will also have to sign on the loan.
In short, the quick answer is yes, you can use traditional financing, hard money financing, all those different vehicles in order to raise money, raise additional capital for the purchase of assets for your investment vehicle itself.
My name is Tilden Moschetti. I am an attorney with the Moschetti Syndication Law Group. We specialize in Regulation D Rule 506b and 506c offerings, helping put those offerings together for real estate syndications, businesses, anybody who needs outside investment in order to raise capital from outside investors to make those asset acquisitions possible.