Investment ??

[payontues]

If I gather a group of investors to purchase and re-develop a property, is it legal/feasable/ethical for me to earn interest from the money that is invested?

For instance; I control the 10 million dollars that is invested. It sits in an interest bearing account for at least a year while the deal is being put together. Can I use that interest as my income???

Any feedback is appreciated.

[eich41]

Typically you would want to establish yourself as an LLC, for instance as payontues, LLC. The project would be established as a Limited Partnership, with payontues, LLC as the General Partner. From there it depends on how you establish the fee structure. In a project such as this the norm is to pay payontues, LLC a management/development fee, and a % of the total profit (for example; payontues, LLC will receive a management development fee of 100,000 dollars paid in advance, and a 20% fee of net profits). You could make the fee payable upfront or on an ongoing basis, it really just depends on how you want to set it up.

So to answer your question, yes and no. You wouldn't be able to just stick the 10 million in a high yield savings account and pocket the interest. That money would simply be put into the pool of profits to be divided up among the investors. Now let's assume that when the project is complete the property is sold for 19.5 million, and you had made 500k in interest for a total profit of 10 million. You would receive 20% of 10 million (2 million) plus your initial 100k for a profit of 2.1 million. Your investors would then divide up the remaining 8 million based on their proportionate share i.e. if you had four investors who each originally put up 2.5 million a piece they would share the profit equally and get 2 million each.



Edit: If you were doing something on a much smaller scale like rehabbing a house with an investor this wouldn't be necessary. But if you're doing multi-million dollar deals with multiple investors you're going to have to formalize the structure of the deal. As a bonus it limits your liability to just the project that you're working on. So if the project tanks and your investors want to sue you all they will be able to get is what's in the LP. Your LLC would be protected, and more importantly, you could not be sued personally.

[eich41]

Also, you should note that you will want to consult with a lawyer. Although it's not necessary to form the LLC and LP, which can be easily done on your own, you will most likely have to create a private offering memorandum, and may have to possibly register with your state securities agency.

[BusinessAdviser]

Also, you should note that you will want to consult with a lawyer. Although it's not necessary to form the LLC and LP, which can be easily done on your own, you will most likely have to create a private offering memorandum, and may have to possibly register with your state securities agency.

I couldn't agree more with the advice to consult with an attorney. Unless you are creating a corporation, I don't know that you need the private offering memo, but as you get into these complex businesses, don't make the mistake of trying to wade your way through the legal waters on your own.

[eich41]

I couldn't agree more with the advice to consult with an attorney. Unless you are creating a corporation, I don't know that you need the private offering memo, but as you get into these complex businesses, don't make the mistake of trying to wade your way through the legal waters on your own.

States will sometimes view this as a security because you are soliciting investors. Therefore they require that you give them a POM, stating the risks of the investment, the operating procedure, how the funds will be managed, the distribution of profits, etc. etc. etc.

[BusinessAdviser]

It all depends on the state, the number of investors, etc. But as Eich said, consult an attorney.

[payontues]

Thanks for the info. I am thinking of seeking very small investments from thousands of people and in return they recieve repective shares in the deal. I know of a guy that is trying to buy a casino by selling partnerships at $360/each. He is offering 100,000 partnerships or shares and seems to get an amazing response.

this is part of his agreement;

This is an agreement between , Inc., who will be referred to in this agreement as The Developer and __________________, who will be referred to in this agreement as The Investor. The Developer is in the process of obtaining financing to acquire an existing Casino/Hotel. The Developer plans to renovate the Casino/Hotel to fit a theme of an Italian design. The Investor agrees to invest an upfront $360 on or before March of 2008. The Developer agrees to use The Investor's funds to acquire an existing Casino/Hotel along with other investors funds which will complete the financing of this acquisition.

The Developer agrees after receiving the entire investment of $360 to issue The Investor an ownership stake in the Casino/Hotel which will be split with 100,000 partners. The entire stake that all of the 100,000 partners will have ownership rights for is 49% of all of the Casino/Hotels earnings. The Developer agrees to pay each investor their share of the Casino's profits on a bi-weekly basis.

[eich41]

Is this guy putting 51% of his own money into the deal? If not I guess there's a fool born every minute, or 100,000 of them.

[payontues]

no he is using the investments for the downpayment of the casino but i agree with you, it's foolish.

[eich41]

That's too funny. He's taking absolutely no risk, and reaping 51% of the profits and 51% of the equity in the casino. It's not a terrible concept, as it's much easier to get 1000 people to give you a dollar than 1 person to give you 1000 dollars, but the way he has the profit structure set up only an idiot would give him a dime.

Anyways, good luck with your project. Let me know if you want any more info or some cash flow modeling/financial projections/feasibility studies on your property if it gets to that point. You can PM me, and I'll give you my contact info.

[payontues]

thanks for the info?

[ccalley]

He would most likely need to register as he is offering 100,000 "partners" a chance to invest their dough. Replace the word "partners" with "shares" as he labels those that participate in the scheme as "The Investor". I'm 99.9% sure that nearly all states will consider the offering a solicitation for a stock purchase and nail him for not registering and filing the appropriate schedules and docs. Additionally, regardless of the "investor" language, any offering of 100,000 is going to surpass most state limits and grab some attention via a complainer. Chances are you can't keep all 100,000 people happy.

[Cole Taylor]

Yes he would have to register, no he wont be able to keep 100,000 people happy although I supose the number will be much lower based on higher than single unit subscriptions...still.

$72,000,000 valuation LOL

Your friend will get C&D letters from every state he sells into.

As Eich41 stated the way to do it is to to be the general partner or managing member and recieve "X" in compensation. Just an FYI, the portion of the project that is sold off to investors is usually 80-90 percent.

As far as state and federal securities laws are concerned they apply regardless of an entitys corporate structure. Be sure to check each states blue sky laws and realize that in some states, i.e. CA, State law supercedes federal.