So you think it’s time to sell? Well, if you structured your syndication the way that I normally do, you’ll want to give investors the right to decide whether or not it’s time to sell the property. That way, they feel like they are a part of the action. A lot of syndicators don’t do this, and it’s a mistake. Bring that decision-making process to the investor at exactly the right time, when they’re going to be thinking about what they are going to do with the money that you’re about to give them in that final distribution. Maybe they’ll decide to do another syndication with you. This could be the difference between you being a one-hit wonder vs. a serial syndicator.
Let’s walk through the voting process. Most of the time in your operating agreement, a member or a body of members can call a vote; the manager almost always has that right. And a lot of times members have that right as well. So the first thing you need to do is first determine if a vote is needed. And if it is needed, that’s decided. If it’s not needed, it doesn’t mean you can’t still ask for a vote. If it’s a power that the manager has, then you can decide what those rules are and still ask for the vote, but then still make the determination at the end of the day. Just know that if everybody votes a different way than you were going to go, it could bite you!
Once you determine whether a vote is needed, you’ll want to look through your operating agreement and determine whether votes are based on a per-investor basis, or a pro-rata by ownership basis. Most of the time, they’ll be pro rata, but occasionally they’re per investor.
You also want to know what percentage is needed in order to be successful. Sometimes it’ll be a majority. Sometimes it’ll be a supermajority. And what’s that definition of supermajority? It could be unanimous, or close to it.
You’ll also want to look at things like a proxy. In other words, if somebody doesn’t vote, do you get to vote for them? You’ll also want to know what constitutes a quorum: if you are the only person voting and no one else shows up, does that still count? Know those things upfront, because they are the formalities that you want to make sure you hit. They’re all in your operating agreement.
At the end of the day, you don’t want an investor coming back saying you did something you weren’t supposed to do. Check and double-check your operating agreement.
Getting the Vote
How do you actually ask for that vote? Usually you can send it in an email, and to make sure that people get it, ask them at some point to at least respond to you in some manner. You can also use some sort of mail tracking to ensure receipt.
First, thank them for being an investor with you, for trusting you with their money, and give them good news about where things are at. Then summarize exactly where you’re at, starting at the beginning. Cover what assumptions were made going into this property, how long you thought the hold period would be, what the projections were based on how much money we thought we’d make everybody. Reiterate these details in a summary fashion.
Then, go through the situation of where you’re at today in the market. Discuss exactly what properties like this are generally trading for right now. It’s important in this summary section to be very, very objective. This is not a persuasive writing section, and you want to be seen as a very objective syndicator, so just cover the facts.
Once you’re done with the summary section, go to the financial impact section. Here’s where you can answer things like, if we sell now, what do we project the sales price will be? What’s that effect on the investment as a whole? What’s the IRR impact? What’s the ROI? What is that going to look like on the performance? That way, they can compare based on what they thought their investment would do, versus what they think it may do if they hold on to it. Give them the real numbers in order for them to think about the decision carefully.
The next section is your recommendation, and this is the place to be persuasive. Don’t be overly persuasive or condescending (I wouldn’t say anybody is an idiot if they don’t vote for this!) But let them know why you think it’s such a good time to sell right now. There is an inherent conflict of interest a lot of times for the syndicator to sell at any specific point. Shorter term holds will generally make the most amount of money in a syndicator’s pocket. And so as you’re being persuasive, don’t overdo it so much that it suddenly calls into question why you care so much.
The next section is where we call the vote. Start out with something like, “Subject to paragraph 10.2 of the operating agreement, the manager is entitled to call a vote on questions on liquidation of assets…” or something like that. This gives the actual basis in the operating agreement for why you can call the vote. Then say what percentage of the vote is needed. Again, frame it as “Subject to paragraph 10.7 of the operating agreement, we would need a majority vote in order to liquidate assets…”
Make the next section very, very clear. You’ll state, “A vote in favor of this means…” It needs to be clear that if they vote in favor of it, we are going to put this property on the market and hopefully sell within a certain period of time. Then you want to put in, “A vote opposed to this means that we will not put the property on the market, but we will continue to hold it for an indefinite period of time until such time as another call for a vote on the issue of liquidating the asset that’s been that has been put forward.” That way you’re very clear about what you mean if you say yes, and what you mean if you say no.
Lastly, you tell them how they can vote. Send me an email, give me a call, complete this online form, whatever works for you. Once you’ve done that, collect and tally the votes. I don’t recommend communicating exactly who’s voting in which way, or how a vote is looking. Certainly, call people to remind them to vote if you haven’t received their vote yet, but try to keep the state of the vote quiet because you value the confidentiality of your investors.
The section in your email where you’ve called the vote is your opportunity to be persuasive, but you should never appear as if you’re attempting to sway the vote in any other dialogue.
Are you ready to get started with your own syndication and need a private placement memorandum? Moschetti Law Group is a real estate syndication law firm and we’d be happy to meet with you to put together your Reg D PPM from a syndication attorney and guide you through the process of launching your own offering.
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Tilden Moschetti, Esq., is a highly sought-after syndication attorney with nearly two decades of experience. His clientele ranges from real estate developers and startups to established businesses and private equity funds. Tilden’s expertise in syndication law comes not only from his knowledge of syndication and securities law but from real, hands-on experience as an active syndicator himself in every real estate product type and nearly all markets in the US. His knowledge and experience set him apart and established him as the Reg D legal services leader.
