The journey from an investor’s initial interest to securing their financial commitments involves demonstrating the value and potential of the investment opportunity.

To draw real estate syndication investors, the syndicator must build trust and provide clear, compelling information about the project. This includes effectively communicating its alignment with their financial goals and the benefits that make it a worthwhile venture.

With this strong foundation of trust and understanding in place, you can transform interested parties into dedicated investors ready to commit their funds to your project. All it takes is following the step-by-step process outlined below.

Getting Ready for Investor Engagement

Before reaching out to potential passive investors, ensure you have your foundational paperwork ready:

  • Private Placement Memorandum (PPM)
  • Operating Agreements
  • Subscription Agreements
  • Pitch Deck
  • Company Brochure
  • Website

These essential documents provide legal clarity and signal your preparedness and professionalism to investors.

Next, focus on marketing your investment opportunity effectively. Craft a compelling pitch highlighting your real estate syndication’s benefits and potential returns. Tailor your message to resonate with your target audience’s financial goals and interests, highlighting why your project is a worthwhile investment.

Build a strong online presence with a professionally created website. This will significantly boost your chances of being noticed by investors looking for alternative avenues of diversifying their portfolios.

Your aim is to generate genuine interest and excitement about your project. Engaging visuals, clear data, and a strong narrative work together to show prospects the value of your investment opportunity.

506C Vs. 506B Syndication Framework

The primary distinction between a 506C and a 506B is that the latter does not require third-party verification of accredited investors, thus necessitating a few additional steps.

A 506C syndication allows you to publicly advertise your investment opportunity, both online and offline. This advantage enables you to attract a wider range of potential investors, all of whom must be accredited, which means they meet specific income or net worth criteria.

Unlike a 506B syndication, where you rely on pre-existing relationships with contacts, 506C demands thorough investor vetting. The verification process typically involves third-party services to ensure compliance.

For the sake of this discussion, let’s assume you are executing a 506C syndication.

Steps to Lock in Investor Pledges

Simplify the process of securing your investments by following this process in chronological order: 

1. Tentative Commitment

Because it’s important to ensure that your prospects grasp the intricacies and benefits of the investment you’re offering, have your subscription agreement ready at this stage. They should review this document, preferably with their attorney or another advisor, before giving their tentative commitment.

Simply put, this is a verbal commitment they provide after thorough and transparent discussions with you. Once these are secured, you can move forward to formalize them.

2. Investor Accreditation

It’s generally advisable to use a third-party verifier for this process as they can provide an independent, objective assessment. Should there be future due diligence concerns regarding your investors, you can demonstrate that you utilized an external verifier.

These are the four evaluation methods third-party verifiers use:

Income Test

Investors must meet the income criteria of $200,000 annually for an individual or $300,000 jointly for combined, such as siblings or husband and wife.

Net Worth Test

An investor’s net worth should be at least $1 million, excluding their primary residence.

Securities License

Recent legislation has allowed individuals with a securities license to qualify as accredited investors.

Professional Letter

A letter from a knowledgeable professional, such as a tax accountant, certified public accountant (CPA), attorney, or financial advisor, attesting to their financial status is also required.

Your prospective investor needs to fulfill just one of these criteria for the third-party verifier to issue a certificate, which is typically valid for 90 days. Hence, timing is critical when performing this evaluation. Make sure it happens close to the time of receiving the investor’s funds.

3. Subscription Agreement

This documentation serves as a clear, binding framework that demonstrates the seriousness of investors’ commitment. It outlines the investment terms, conditions, and obligations for both parties. More importantly, it sets a professional tone and guarantees everyone is on the same page, ready for the next phases of your real estate syndication.

Once the investor is satisfied, both parties will determine and agree on the exact investment amount, and the investor will sign the subscription agreement.

4. Firm Commitment

In this stage, the investor is ready to wire the funds to your bank. Once you confirm receipt of the money, you sign the subscription agreement, which signals that you acknowledge their verification.

Handling Investor Capital for Real Estate Syndications

As the real estate syndicator, the decision on whether the funds should be sent directly to your bank or to an escrow account is yours to make. 

In some cases, it might be more convenient to use an escrow company to hold the funds safely until all investment conditions are met. If you’re new to syndication and haven’t yet built a solid reputation, you might face issues with wiring funds directly to the bank. However, holding a license can enhance trust, as it provides additional accountability and deterrence against any dubious activities.

Keep in mind that proper management of investor capital is not just about security; it also reflects your professionalism and fosters trust among your investors. Transparent handling of investors’ money is a vital aspect of building long-term, trustworthy relationships in real estate syndication. Clearly communicate each step of the process to your investors so they understand how their funds are being managed and when they can expect the next steps.

Equally important is timeliness — having the capital ready for the closing stage is essential for a smooth transaction process.

Completing the Closing Procedure for Real Estate Syndications

The closing procedure represents the final and most crucial stage of securing investors in your real estate syndication. To ensure everything proceeds smoothly, double-check that all funds are correctly deposited in escrow accounts and that all essential documents are ready. This includes verifying that investor agreements and other legal paperwork are complete and accurate.

As the closing date approaches, maintain clear and open communication with your investors. Provide updates about the timeline and address any last-minute questions or concerns they might have. It’s also important to collaborate closely with your legal and financial advisors to troubleshoot any potential issues that could arise.

Preparation is another key aspect of closing. Draw up a checklist to ensure no detail is overlooked, from confirming wire transfers to finalizing legal documents. Being thorough in these steps prevents unexpected delays and demonstrates your commitment to a professional and organized process.

By managing this stage with diligence and transparency, you not only secure the necessary funds for your project but also reinforce the trust and confidence your investors have placed in you. A successful closing marks a significant achievement and serves as a solid foundation for the successful execution of your real estate syndication project. Need a real estate syndication attorney who can guide you in the legal aspects of securing your investors’ commitments? Shams Merchant is the leading real estate private equity and syndication lawyer representing clients award-winning real estate projects in all 50 states. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, the Austin Business Journal, BisNow, and The Real Deal.