Over the last several years, many people have invested in private real estate syndications. What many investors may not be aware of is that the sale of an interest in a real estate syndication, which is considered a security, is usually regulated by State and Federal Laws.

A real estate syndicator must either comply with the State or Federal laws regulating the sale of interests in the real estate investment or he must make sure that his investments are exempt from the laws. The 1933 Securities and Exchange Act is the governing law in the US. This Act is highly regulatory and compliance with it is very difficult and costly. However, the act has an exemption clause which is call “Regulation D.”

In order to comply with regulation D, a form must be filed with the SEC disclosing information about the people syndicating the property (the syndicators) and in addition providing a list of all un-accredited investors.

An accredited investor is 1) Any person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; 2) Any person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

In addition, the syndicators must also file an exemption form with each state in which an investor lives at the time the investment is made. Once all the proper filings have been made the syndicators must also insure that they comply with specific guidelines controlling how they advertise to prospective investors.

The syndicators cannot sell the interests in the properties by any form of general solicitation or general advertising published in any newspaper, magazine, or similar media or broadcast over television or radio. They cannot be sold at a seminar or meeting whose attendees have been invited by any general advertising.

If the syndicators have followed all of these guidelines then they must also provide certain disclosures in any investment prospectus they provide to investors. The prospectus must:

1. Show where the property is located.

2. Tell the type of real estate and interests in real estate in which they may invest. For example, office buildings, apartment buildings or shopping centers.

3. Explain how the property is going to be paid for. What, if any, loans will be used, and how much the down payment will be.

4. The syndicators must state if the property is intended for an income property or a capital gains sale.

5. They must state if they intend to buy more than one property and if so, what percentage of the capital raised will go towards each property.

6. Outline, briefly, the principal terms of any lease of any properties to be purchased, or any option or contract to purchase or sell any properties.

7. Outline, briefly, any proposed program for the renovation, improvement or development of the properties, including the estimated cost thereof and the method of financing to be used. If there are no present plans for the improvement or development of any unimproved or undeveloped property, so state and indicate the purpose for which the property is to be held or acquired.

8. Describe the general competitive conditions to which the properties described above are or may be subject.

9. Furnish the following information with respect to each improved property.
(a) Occupancy rate expressed as a percentage for each of the last five years.
(b) Number of tenants occupying 10% or more of the rentable square footage and principal nature of business of such tenant.
(c) Principal business, occupations and professions carried on, in, or from the building.
(d) The principal provisions of the leases between the tenants referred to in (b) above including, but not limited to: rental per annum, expiration date and renewal options.
(e) The average effective annual rental per square foot or unit for each of the last five years prior to the date of filing.
(f) Schedule of the lease expirations for each of the ten years starting with the year in which the registration statement is filed, stating (i) the number of tenants whose leases will expire, (ii) the total area in square feet covered by such leases, (iii) the annual rental represented by such leases and (iv) the percentage of gross annual rental represented by such leases.
(g) Each of the properties and components thereof upon which depreciation is taken, setting forth the (i) Federal tax basis, (ii) rate, (iii) method and (iv) life claimed with respect to such property or component thereof for purposes of depreciation.
(h) The realty tax rate, annual realty taxes and estimated taxes on any proposed improvements.

This is a summary of the necessary information to be provided to any prospective investors. If a syndicator has failed to comply with the Federal and State filing requirements and regulations or failed to disclose the necessary information, he may be subject to civil liability. Any investors may be entitled to a “right of recession,” or a return of their investment. If you have invested in a real estate syndication and think you may have a right of recession, you should consult an attorney on the matter.
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Michael Botton, Esq. is an attorney at law, serving the community since 1998