Why Syndicators Shouldn’t Draft Their Own Real Estate Syndication Documents

For real estate syndicators, the documents that outline the roles and responsibilities of each party protect the interests of everyone involved. These also detail the financial structure of the investment to ensure its smooth execution.

All this paperwork is not just for legal formalities. Rather, they serve as essential tools that help mitigate risks, provide clear guidelines, and establish a framework that supports a syndicator’s investment goals.

When properly drafted, these documents can significantly impact the success of your syndication efforts.

Let’s discuss the pitfalls of going the DIY route.

Complexity of Legal Requirements

The legal landscape of real estate syndication involves navigating a maze of regulations that vary by state and are further complicated by federal laws. These rules are intricate, and even a small oversight can lead to severe consequences.

Ensuring compliance requires not just knowledge but also meticulous attention to detail. Overlooking a single clause or misinterpreting legal terminology can result in penalties or legal battles, putting both your investment and personal assets at risk.

State laws must be adhered to, and they must be harmonized with federal requirements to ensure a smooth operation. This complication is compounded by the need to stay current with evolving laws, making expert legal guidance essential to avoid mishaps and guarantee all legal bases are covered.

Potential for Costly Mistakes

Drafting real estate syndication documents without the help of a legal professional can lead to numerous expensive errors. These mistakes often arise from misinterpreting complex legal terminology, omitting essential clauses, or failing to anticipate future disputes.

For instance, you might choose the incorrect jurisdiction for your offering. This could necessitate revising your filing documents or registering your offering in multiple states. The result would be complex legal compliance and tax issues.

And speaking of taxes, using the wrong entity or legal structure can have significant tax implications for you and your investors. Opting for a member-managed instead of a manager-managed limited liability company (LLC), or choosing a corporation over an LLC, can lead to different tax outcomes. Any ownership interest you take in exchange for managing the syndication might be fully taxable in the first year if not set up properly.

Such oversights can expose you to financial losses and lawsuits that consume both time and resources. Furthermore, improperly drafted documents can leave you vulnerable to liabilities that could be easily avoided. And when legal language is misunderstood or key provisions are overlooked, the investment itself is jeopardized.

Importance of Proper Structure

A well-structured document aligns with your investment goals as a syndicator. It also outlines your approach to exit strategies, should the investment not meet expectations.

Furthermore, it must ensure that all parties have a clear understanding of how the investment will proceed and what actions will be taken if things don’t go as planned. Without this clarity, the chances of a successful syndication decrease, and investors may lose confidence in the deal.

A skilled securities attorney can guide you in structuring your offering to ensure that both you and your investors are compensated correctly. Without professional advice, you might miss out on opportunities for syndicator compensation through acceptable fees or distributions.

Appropriate Use of Exemptions

Exemptions offer potential advantages such as reduced regulatory obligations and cost savings. However, correct application demands a deep understanding of their legal framework. Missteps in this area can lead to serious repercussions, including hefty fines or even the nullification of your entire investment deal.

You need to know which exemptions are applicable to your specific situation. For instance, some may allow you to avoid extensive registration processes, but only if they are applied accurately and appropriately. This requires an in-depth grasp of both federal and state regulations.

There are a number of exemptions available, each one comprising numerous provisions. Legal professionals, particularly those who specialize in real estate investments, have all this information at their fingertips. Engaging one ensures that you’re applying the correct exemptions that align with your investment strategy while remaining fully compliant with the law.

Furthermore, presenting documents is not the only requirement in a securities offering. You must also file a notice of your offering with federal and/or state agencies within specific time frames, usually 14 days from an offer or sale of a security to an investor. Failing to do so could void any applicable exemptions, and you could be liable for selling unregistered securities by the Securities and Exchange Commission (SEC) or state securities agencies, or both.

Avoiding Personal Liability

If you prepare your own offering documents, you increase your risk of personal liability. It’s standard industry practice to engage securities counsel for group real estate investments and syndications. Ignoring this could expose you to personal liability for negligence, and an attorney helps shield your personal assets from such exposure.

Also, you could unintentionally make misleading or conflicting statements about your offering or the property. These could put you at risk of personal and even criminal liability if those turn out to be false. A lawyer can help you avoid making such errors.

Failing to inform potential investors of the risks associated with your offering can result in ongoing liability throughout the duration of your offering as well. Your attorney can help you craft a complete disclosure that identifies all direct and indirect risks, some of which you might miss on your own.

The Bottom Line: Save Time and Money – Hire a Lawyer for Your Syndication Documents

Here are very good reasons for syndicators to NOT do this on their own:

1. Drafting legal documents that define the rights and duties of others is considered practicing law without a license. If others sign the legal documents you prepare, you are exercising unauthorized practice of law and could face prosecution as this is a criminal offense in many states.
2. Correcting or undoing a poorly structured or non-compliant offering will cost you far more in legal fees than hiring a competent securities attorney to help you get it right from the start.
3. No limited liability entity can protect you from legal violations. Public policy prohibits a syndicator from being indemnified by the syndication for securities violations.

Legal fees for forming a syndication can be reimbursed to the investor once the minimum offering amount is raised. Thus, you can consider your investment in qualified securities counsel as an insurance policy that protects you.

However, hiring the wrong attorney can be more costly. Ensure that the lawyer you commission is experienced in real estate syndication. Ask about the number of offerings they’ve handled recently and if they carry the appropriate insurance to cover securities offerings.

In summary, while the idea of drafting your own real estate syndication documents may seem appealing at first, the risks far outweigh the potential savings. Mitigating risks is central to successful real estate syndication and investing in expert guidance not only safeguards your investment but also protects your personal assets.
Need professional legal services for drafting your real estate syndication documents? Contact us today and start your offering journey on the right foot! Shams Merchant is the leading real estate private equity and syndication lawyer in Texas, representing clients in more award-winning real estate projects in the state than any other lawyer under 35. 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.