A Six-Step Checklist for Establishing a Group Investment Partnership

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Follow this 6-step process to set-up your group investment partnership. This process covers critical functions a sponsor needs to complete to be successful.

1. Prepare the Private Placement Memorandum (PPM): In preparing this extensive document, the sponsor should engage the assistance of qualified legal counsel to make sure the document is properly put together. If you are syndicating your first group investment, then I highly recommend you obtain the guidance from local legal counsel.

2. Prepare the Offering Circular: To help expedite the marketing program, the sponsor should prepare a simple, one to four page brochure that includes the facts on the proposed offering.

3. Obtain Securities Clearance: Federal and state law clearance or registration must be complete before offering securities to investors. Each of the fifty states has different rules and regulation governing the sale of real estate securities.

"Fortunately, many types of securities and many transactions in securities, are exempt from state securities registration requirements. For example, many states provide for transactional exemptions for Regulation D private offerings, provided there is full compliance with SEC Rules 501-503. However, though certain types of offerings or transactions may not require registration, many states require filings or place additional conditions on exemptions available for many different offerings for which exemptions are available. The best advice, then, is before offering any security for sale in any state, experienced counsel should be retained to review the applicable state laws and take any action necessary to permit the offering to be made in the particular state."*

4. Market the Offering to Potential Investors: Now that your PPM is complete and is in compliance with state and federal security law regulations, you can market your investment opportunity to potential investors. Take the list of potential investors you have created and send your PPM to them. Since the PPM is confidential, make sure only the intended potential investor reads the contents. Finally, make a detailed record of all the potential investors that have received your PPM.

5. Review the Investor Subscription Package: As the LLC member interests are sold, each investor should send the copy of the subscription booklet and a check for the member interest purchased. The sponsor should carefully review the subscription booklet to make sure that all the requested information is completed and that the investor meets the suitability requirements of the transaction.

If any of the information is not correct, the sponsor should notify the investor to correct the information or notify the investor that they do not meet the suitability requirements. After careful review of this package, the sponsor should sign off on the various documents in this package.

6. Set up an Escrow Account for the Initial Contributions: Prior to any investor contributions being collected, the sponsor should set up an escrow account with a local bank. The bank should have a set of the instructions as to how and when to break escrow and to distribute these collected funds.

Another way to handle step 6 is to have each investor send money directly to the real estate escrow account. All of money from investors will be in the escrow account for closing of the investment property. Normally, from all the money sent to escrow from the investors, there will always be excess funds after closing. The escrow or title company will send the new buyer (investment group LLC) the balance of the funds. Take this check and deposit it into the new LLC partnership account. This partnership account will be used to operate the partnership until the property is eventually sold.