Syndication VS Joint Venture: Which Is Better?

All right. Hello and welcome back to another episode of Multifamily Strategy. I'm Christian Osgood, your channel host. I was trying to get the whiteboard connected. That's why I'm like 5 minutes late here, but that's okay because we can still turn this camera right around and still see exactly what we're working on today. So welcome to the rest of my upstairs. Guys, today we're talking about syndication versus joint venture. There's a lot of different ways to take out a piece of real estate. However, what structure is correct? Which one should you use? Is there one that is better than the other? How do you get paid to do all of them? We're going to share that today on today's episode. Here we go. So going over to the whiteboard, which should be screen sharing, but it doesn't feel like it today. So while I learn how to get that to go, let's start with JV. So what is JV? A JV is a joint venture. This is simply a partnership between two parties where— or two or more parties where you have multiple partners in on a deal. It's a very simple structure. It's all documented in your operating agreement. And each person is going to be an owner of the individual LLC. So in this case here, let's say we have Person 1, Person 2, and Person 3, who apparently has a very large foot. These 3 people here each own 33% of an LLC. They're all equal partners. They all went in on a deal. They all put in equal cash and that LLC owns a building. Now, effectively, each of these people have 33% ownership of the building. You know how partners— now, when we're talking about deal debt equity, you have your deal that comes first. That is how much money, how much cash flow you have day one, how much cash flow you're going to have. How much equity do we have? What price did we purchase at and what is it going to be worth in the future? All of that is owned by these three equally in their entity. It's clean, pretty easy to do. You always want to make sure that when you're putting these together, you have clear ways of how it will be broken up, dissolved. It's not a marriage. You want to make sure that you have an easy and concise way out if anyone wants to exit, but overall a very simple structure. This is correct for 99.9% of deals. And you can customize these however you want. When we talk about creative finance, a lot of people skip creative equity. This could be different equity splits. This person could actually own— maybe this person has— we'll do super easy math for Christian sanity, but they have 30% and this person has 36% and they put in a little bit more money. Or they put in a little bit more effort, you can have it 50, 25, 25, however you want to reward them. But if you have a deal where you need additional capital, you might have this person as the operator. I'm gonna give him a little hard hat. He might be the operator. Maybe he brought a total of $0 to the deal. We needed $100,000 to close this theoretical deal. This guy here, easy math, say he brought $45,000, and this guy brought $55,000. There we go. So this right across the top, this is a perfect structure or a basic structure customizing the different debts and equities. You can do this in a joint venture. It is unbelievably simple. And it's typically just a single level. You're a JV with a few partners. If you want to get really crazy with it, sometimes you'll have your interest as your own LLC and there'll be two layers, but these are super, super simple. So what is a syndication and why is it different? First of all, this you want to use anytime you have 5 or less partners, or if you have a partner who is 100% passive, doesn't attend any ownership meetings, isn't responsible for any decision-making, has no active role, passive investor, the IRS law says we must file with the SEC. You are creating a security, not a partnership. If you are partnered and everyone has a role in the LLC, a clearly defined role, and you have less than 5 people or 5 or less, JV every time. Let's migrate to syndication. So what is a syndication? We are filing either what's called a 506(b) or a 506(c). 506(b), you're not allowed to openly market. This is only with people who you already know and have an existing relationship. If you're wondering what counts as an existing relationship, it's going to be anyone who you've had multiple points of contact with over multiple mediums. The golden rule is we've talked over 3 different mediums in 3 separate occasions. So if you've texted them, emailed them, and had conversations not about this deal outside of this transaction, it is now considered someone that you know. You can reach out to them as someone you know and say, hey, I had an idea based on our past discussions. I think this actually might be an interesting thing to do together., but it has to be people who are already within your personal sphere of influence. 506(c) is for accredited investors only. They must have a net worth of $1 million or more outside of the value of their house, or they need to make $200,000 a year over the last 2 years consistently. So you have to be either high income or high net worth. If your investors fit that criteria of people you already know, 506(b), or if you are marketing it online, a 506(c), and they are all accredited, syndication is an interesting way to take out deals. Now, why don't I like syndication very much? To file these, it's usually about $25,000. That's just out the window. That's legal fees. That is to file with the SEC. That is to get your lawyer to do everything. You're working with a securities attorney. You also have to create an OM, an offering memorandum, a PPM, private placement memorandum. You have to discuss your entire fee structure and structure. How do the general partners make money and how do the limited partners make money? They're more complicated and more expensive. They have more scrutiny, more moving parts, and SEC regulation. All of these are fairly negative. However, remember you have to have active partners. If you have 7 people funding a deal, there's no argument with the IRS that, hey, uh, everyone's active. I promise that. No, you're raising money from other people to close a deal. You're creating a security. You're making an investment. If they are just investors in a deal, you need to file this correctly. If they're people, you know, 506(b), easy peasy. If you are doing a 506(c), it's going to limit you to accredited investors only. Here's what the structure looks like though. So you have two groups right off the bat. You're gonna have the manager, just gonna abbreviate it here, the manager LLC. So this is typically its own LLC that owns the LLC. So here's your master LLC. We'll call this prime. We have a prime LLC. It's owned by the manager LLC and by the, LPs. This LLC will typically be your managing members. So in this case, we're buying a big deal. We're doing a multimillion-dollar capital raise. We have person 1, person 2, person 3. Now, in my last syndicated deal, this would be Christian Osgood, Caleb Osgood, and Mark Osgood. The 3 of us are the main operators. We're— and also Mark's son. So these 2 came in as one entity. They actually happen to be their own LLC. Caleb and Christian are partnered on deals and multiple deals. We are in our own LLC. Do you start to see why I don't love syndication unless you have to use it? Now I have an LLC owned by an LLC. This LLC will own 30% and the LPs, limited partners, will own 70%. And this can be a whole bunch of people. 1, 2, 3, 4, 5, 6. Now on a 506(b), you have up to 35 unaccredited investors, which is pretty much enough to raise for any deal within reason. However, we'll call this a 506(c). These are all accredited investors. These are the people who funded. They all get the same return. There's no custom returns here. The GPs get 30%, the LPs get 70%. You'll also have different rewards for them. Example, LPs get a 6% preferred return or a 7 or an 8 or whatever you negotiate. After that, money can be split like my last LLC that I did, 30, 70, With 70 going to the LPs and 30% of everything above 6% going to the managing LLC, the general partners, GPs. If you're following this and my crappy handwriting online, you might be saying, wait a second. So on the JV method, 3 people get together who want to do a deal. We assign their equity and now we sign an operating agreement that a lawyer drafts and we all sign it. And now we're all on the LLC., and then we close. Correct. That is so much easier than setting up all of this. We're filing with the SEC. We're going through the manager LLC, which is another LLC filing. The LPs are going to have their own Class B shares, which have these sort of returns or some sort of traditionally called a waterfall structure where they get this return up to 6%. Everything above 6%, they go to this. You have— then you have to do disclosures of all the money in this. Where is it all going? How is it all being used dollar per dollar? How much is going into CapEx, reserves? Are you paying an assignment fee or an acquisition fee to your GPs for putting together the deal? It can be a mess. Syndication is not wrong. It's just if you need to bring on 5 or more people, syndicate. If you have Brutally, honestly passive investors who want no role whatsoever other than bringing capital to your deal. Syndicate. 506(b) is easier than a C. Cs give you the ultimate flexibility. You can market online. Mistake people make: they market online after filing a 506(b). Illegal. Another mistake people make: they try to openly market a deal when you're in a JV, a joint venture. If you're openly marketing just for capital, you are creating a security you needed to have syndicated and filed a 506(b). You're actually in violation of federal law. That's really all you need to know, though, as far as your entity structures. We talk about deal debt equity all the time. When you're getting creative with your different distributions, you have the deal first. This is your cash flow, the property, the performance, your net operating income, all the things that go into making your deal your deal. After your deal, we find the best debt product that makes sense. This is going to be most of your money right here on most deals between these two. 75+% of your money right there. This is just figuring out how we want to structure the rest of the money. So in this example here, where's the last 25%? Your options are a JV, a 506(c), or a 506(b) if you happen to know enough people in your network to raise the capital, but You need more than 5 people or have truly passive investors. That's it. If it is a smaller group or a smaller capital raise, always JV. If you have it in your network and you know you can raise or reasonably sure you can raise, file as a 506(b). If you find you need to raise beyond that, you can always— then, then you look at being a 506(c), and that's where you can start marketing. If you originally file as a(b), find you need to raise more capital, Easy to switch to a C. You can't start as a C, openly market it, and then recategorize it as a B because you've already cheated and violated the rules. So that's your order of operations. First, JV. Second, if you need more capital or passive investors, do a 506(b) filing. If you need to market for capital and there's a larger raise, you're only working with accredited investors, you're moving to a 506(c). That's it. That's all you need to know about entity structure. I see this question all the time online. People get confused on what's the right structure for my deal. Is there one that's better than the other? No. Last thing I'm going to cover, how do you get paid on a deal? So the money works the same way. I like to get paid 1 to 2% of the purchase price when I purchase a deal. That is my compensation for using my relationships, my connections, my signature on the loan, my team's operations, which I typically discount, but the fact that my entire career is putting together this deal, putting together this team, and putting together this debt product, the deal, the debt, and the equity. I get a fee for that. In a JV, this is an assignment fee. Assignment fee. An assignment fee is simply I put it under my name and/or assigns, I build my team, I file my LLC, when I transfer the contract prior to close from Christian to the LLC, there's a fee. So here's me, the contract travels from me to the LLC, and this generates a 1 to 2% fee on the actual deal when the deal closes. So out of the closing capital, These people who get the exact return that we projected for them have been allowed into the deal. That is part of the math I present to them. It shows up on the final settlement statement. There's no surprises. This isn't the tricky, like, ooh, I snuck a fee in there. You're essentially wholesaling to yourself. That's where the money comes here. On syndicated, You have what's called an acquisition fee, functionally the same thing, but it's not generated when you transfer the contract. It is a fee for all of the things that go into syndicating. So the deal, the debt, the equity, structuring the deal, filing the 506(c). When you put these together, the GPs usually get a little bit less of the deal. Than you would get in a traditional JV. For this reason, your assignment fees are usually a little higher, usually 2 to 3%. I've seen some people charge upwards of 5%, which is insane. If your GP is getting paid 5% of the deal before the deal, like, happens on the front end, my opinion, you're overpaying them for what they did. But these are higher fees because they're getting paid a little bit more upfront for a lot more upfront work but they typically take a little smaller position in the deal than you typically would in a joint venture. Magic number for me, I like doing a JV when I own 51% or more of the LLC. In a syndicated structure, the common splits are going to be anywhere between 20 to 30% ownership of the overall deal by the GP team. That's it. That's all you need to know about the structures. I get a bunch of questions on them, so I figured let's just do this all on one live video. Now we're gonna go toss up some questions here on the screen. I'm gonna flip around to the other side because my screen share is not working. I can't actually see your questions on the whiteboard, so I'll be behind the computer. I'll pop off screen, I'll ask the question into my trusty mic here, and then I'll reappear on screen. This will be a fun new way to do it. There we go. All right, what do we got first? Oh, we have one question up here and it's thank you. All right, well, if you guys don't have any questions, that makes my job unbelievably easier. If you guys do have any questions, do feel free to ask. If you are watching right now and you're like, hey, this was a lot of stuff but you went over it pretty quickly, uh, good news is it's a live video, it's gonna get posted right after this so you can rewatch any section of it. If you have any questions, do let me know. If you want to join a community where you can actually ask me questions in real time for free just join our school community, S-K-O-O-L. There's actually a link on the YouTube channel, but check it out. It's Multifamily Strategy Community on Skool. We have thousands, I think about 3,000 investors right now in that community actively networking together, sharing deals, raising capital, posting deals the legal and correct way. It's a great place if you're looking to partner with people to actually meet people investing in your market, to network, to build your team so that you can use one of these structures, either a JV, a 506B, or 506C. Hope this helped. Since we have no questions today, which is A-okay with Christian because I got a new barbecue I got to work on, I will see you guys on the next episode. Nope, sorry, you posted too late. Actually, no, we do have one and I'm still live. I'm going to do it. Dave, Remember, you used to not like syndication. Have you warmed up to it over time, and what led to that? So to be fair, to be fair, my partner Cody Davis didn't like syndication. I still prefer JV to syndication every single time because it's simple. It's easy to put exactly what you want in it. You get exactly what you negotiate. Syndication has more rules, more regulations, more risk. And frankly, it's just more expensive to do. So syndication is not my favorite way to take out a deal. That being said, I did an $8.5 million deal this year, and because there's a little bit of renovation needed, it had a $3.7 million raise. I don't have one or two people who are like, oh, you know what, love the deal, let's toss $1.5 million into it. I just didn't have that in my immediate network. So JV, Not possible. 506(b), I don't have unaccredited investors who were all just like ready to throw in that amount of money. I didn't have it there. I probably could have done it through a bunch of smaller investors, but I already knew I'm looking for larger investors for this size. I'm like, let's go ahead and market this openly. To market openly, we need a 506(c). So, uh, I still stand by JV is your superior method. It always goes in the order of, can I JV it? If not, 506(b). Can I do that? If not, 506(c). So it's my least favorite of the three, but if you have an amazing deal and that's what your capital raise, it's really just the structure is going to dictate what it is that you need. That's all it is. And that question was right here, by the way, so you guys can all see that. It's a great question though. Um, I have warmed up to it. I've done some great syndicated deals. Not every deal I've done is syndicated. But when it is, uh, they have gone fantastically so far. The one other thing you have to do with syndication is you have to report regularly. So I just have a higher standard, which is fine. You should also do the same regular reporting when you do your JVs. It's just you're held to a higher standard on those, uh, so you just run everything really sharp and on your JVs and your syndications, and you won't feel it at all. Awesome. Well, with that, I will see you guys on the next episode. Thanks for joining. Christian Osgood out.