Can Your Contractor, Property Manager or Lender Invest in Your Syndication?
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Yes, a contractor, property manager, broker or lender can invest in your syndication like any other investor, if they qualify under your exemption. But a vendor who is also an investor creates a conflict of interest that you must disclose to every investor. Keep the vendor's contract on market terms and decided separately, and never trade a job for an investment. Money in exchange for a contract looks like a kickback and can mislead the other investors.
Why would a vendor want to invest?
A contractor wants the job and a share of the upside. A property manager wants the management contract and alignment with the owner. A broker wants a seat at the next deal. A lender wants a stronger relationship. These can be fine motives, but each puts the vendor on both sides of the table.
What is the conflict?
The other investors are relying on you to get the best price and quality from vendors. A vendor who has also invested has a reason to pad a bid, to be paid sooner or to be treated generously by a sponsor grateful for the money. That is a related party conflict. See related party fees and conflicts of interest.
What must you disclose?
The vendor's role, the size of the investment and any terms that differ from other investors, the vendor's contract and fees, and any relationship with the sponsor. Material facts that are left out can make the offering misleading under Rule 10b-5 (17 CFR 240.10b-5). Put it in the offering document, and update it if it changes (material changes during a raise).
How do you keep the contract at arm's length?
Take at least two or three bids on large work, compare scopes, document why you chose the winner and have the vendor's investment handled by someone other than the person who picks vendors. Keep the contract terms the same as for an outside vendor, and give the vendor no special payment timing. See the property management fee and the construction management fee.
Can you trade work for equity?
Be careful. Giving an interest to a contractor or manager in exchange for services is compensation, not an investment, and should be disclosed as such and priced fairly. It is different from a sponsor's promote. If the contractor is also contributing money, keep the two parts separate on paper.
What about a lender investing?
A lender who also holds equity may have different interests when the loan is in trouble. Agency and bank loan documents often limit the lender's relationship with the borrower, and some require disclosure of owners (lender beneficial ownership disclosures). Read the loan documents and tell the lender before you take their money.
Our take
Vendors who invest can be your best believers. They are also the easiest way to lose investors' trust. Disclose them, hire them fairly and keep the money and the work in separate boxes.
Trade-offs and who this is not for
- It can reduce your vendor choices. You are choosing the vendor who earns the work.
- Not for sponsors who need a vendor's money to win the vendor's contract.
- Common mistake: mentioning the vendor's investment only after problems arise.
- Not a substitute for counsel on related party disclosure.
Related guides: Verifying accredited investors, Investor onboarding checklist and Lender ownership disclosure.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from friends and followers who already trust them, under Rule 506(b) or 506(c). We are software, legal document preparation, escrow coordination and verification services. We are not a law firm, broker-dealer, investment adviser, funding portal, bank or escrow agent, and we do not hold investor money: investors wire their money to escrow at Enterprise Bank & Trust, in the deal's name.
A single place for the offering documents and investor updates makes it easy to disclose a vendor relationship once and show it to every investor. Check your exemption rules before accepting a vendor's money. Flat fees, never a percentage of the raise (see pricing). Create your free sponsor page.
FAQ
Can my contractor invest in the deal he is renovating?
Yes, if he qualifies as an investor, you disclose the relationship, and his contract is at market terms decided separately.
Can my property manager be an investor?
Yes, with disclosure. Review the management agreement for conflicts, and make sure the fee is market.
Can a broker who sold me the property invest?
Yes, with disclosure. Be careful that the broker's commission and investment are not tied to each other.
Do I have to tell investors?
Yes. A material relationship with a vendor belongs in the offering documents.
Sources
This article is general information, not legal, tax or investment advice. Talk to a securities attorney before you market an offering. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.