How to Establish a Pre-Existing Substantive Relationship for Real Estate Syndication

There are eight main steps when establishing a pre-existing substantive relationship regarding your real estate syndication. Chances are your deal is based on a 506(b) exemption, which means you CAN’T GENERALLY SOLICIT or ADVERTISE! One way to prove that your deal is compliant is by verifying that you have substantive pre-existing relationships with your partners.

So, what constitutes a substantive relationship? The SEC provided some guidelines based on a positive no-action letter they received. While these aren’t necessarily the end-all-be-all of establishing a pre-existing relationship, they are great guardrails when you are planning your deal and seeking out investors. So let’s dig into them!

Send a Questionnaire

Start by sending a questionnaire. The questionnaire can be online and may even be a pop-up form on your website. The objective is to gather information about the prospective investor. This questionnaire should be pretty in-depth since you are essentially trying to take the risk temperature of the investor. You’ll want to understand their goals and their investment philosophy. You’ll also want to understand their net worth, cash flow, and ultimate goals with their investment. 

This questionnaire is just the first step in a series of communications you’ll want to engage in to be sure the relationship is established. Be sure to keep records of any electronic or written communication from the moment you send the questionnaire. 

Meet In Real Life!

Having an offline, personal conversation with the potential investor once they’ve completed your questionnaire will go a long way in helping them decide whether investing in your deal is the right choice for both of you. You don’t want to be talking to someone with a high-risk product who really needs more short-term cash flow. The purpose of the meeting is just to document the investment experience and make sure the fit is right. 

Whether you meet in real life or have a Zoom meeting online, the important thing for establishing a substantive relationship is to maintain records that the meeting occurred and that you were discussing the potential investor’s investment experience, goals, and strategies. 

Send an introductory email and maintain online contact

You’ll definitely want to send an introductory email and maintain contact online to show that there is in fact an established pre-existing relationship. What the SEC is really looking for is that there is indeed a relationship. Not only have you determined that your syndication is an appropriate investment, but you’ve also given the investor the opportunity to reach out, ask questions, and participate in the entire process. Taking the time to determine whether an investor is sophisticated enough and has the requisite financial and business acumen to evaluate the risks of the investment. 

Use a third-party credit service

Using a third-party credit service is another way for real estate syndicators to establish a pre-existing substantive relationship with potential investors. This involves using a service that collects and verifies information about an investor's financial standing, such as their credit score and history of debt repayment. By using a third-party credit service, syndicators can obtain objective information that can help determine whether an investor is suitable for the syndication and whether a pre-existing substantive relationship exists. 

This information can be used to assess the investor's financial capacity, investment experience, and investment goals, which are all important factors in determining their suitability for the investment opportunity. By relying on a trusted third-party credit service, the syndicator can ensure that they are making informed decisions and complying with SEC regulations.

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Encourage the investor to explore your website

The investor may not be eligible for a specific deal at the time but you may want to consider walking them through past deals to see if they understand how your working relationship will be in the future. Encouraging potential investors to review the syndicator's website is an effective way to establish a pre-existing substantive relationship for a real estate syndication. By visiting the website, investors can learn about the syndicator's experience, past projects, and investment philosophy, which can help them to determine whether they share similar investment goals and values.

The website can also provide investors with detailed information about the investment opportunity, including the terms of the syndication, the potential risks and returns, and the expected timeline for the project. By encouraging investors to review the website, the syndicator can demonstrate their transparency and professionalism, which can help to build trust and establish a pre-existing substantive relationship. This can also help the investor to make an informed decision about whether the investment opportunity is right for them.

Maintain frequent contact

Maintain contact with your potential investor and as always, keep records of said contact! Again, you don’t want to find yourself in a situation where a deal doesn’t work out and investors play the card that you had solicited them to join the deal. 

This can be done through regular communication channels such as email, phone, or in-person meetings. By keeping investors informed about the status of the project and providing updates on any significant developments, the syndicator can demonstrate their commitment to transparency and their willingness to engage with investors.

Additionally, regular communication can help to foster a sense of community among investors and provide them with an opportunity to voice any concerns they may have. By maintaining frequent contact, the syndicator can strengthen their relationships with investors and demonstrate their commitment to a successful investment outcome. This can help to build trust and increase the likelihood that investors will continue to participate in future syndication opportunities.

It is critical that you are documenting all of these steps. The burden will be on you in case a deal goes south and an investor claims there was no pre-existing relationship. 

Premier Law Group is here to help guide you through the process to establish a pre-existing relationship with your syndication investors. 

Reach out now for a consultation and start making amazing deals!

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This blog post is intended to provide general information and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship with Premier Law Group.

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