Real Estate Syndication Mistakes: Why Your LLC Isn’t Enough to Raise Capital Legally

Shams Merchant (00:00)
Yeah, the easiest one is, hey, I’m just going to create an LLC and I’m going to have a bunch of people come into that LLC as members ⁓ and I’m going to give them ⁓ an equity interest in that deal and I’m going to use that LLC and then go buy real estate. That is not sufficient to comply with laws. You can’t just put a bunch of people in an LLC and raise capital that way and throw your hands up and say, hey,

You know, I’m just pulling together capital to go and invest in real estate. There’s so much more there that needs to be done in order to comply with securities laws. Because at that point, you have sold securities to people.

Cody Crabb (00:32)
Yeah.

Hello and welcome back to the Real Estate Pros Podcast. I’m your host, Cody Crabb. And today we’ve got Shams Merchant with us out of Dallas. Shams works with real estate syndicators, fund managers and investors on the legal and capital raising side of deals, from structuring syndications and funds to helping operators stay compliant while they’re scaling. Shams, it’s a pleasure. Thanks for joining us today.

Shams Merchant (02:16)
you

Thanks so much, Cody. Really excited to be on the show.

Cody Crabb (02:34)
Yeah, glad you could make it. So just to kind of start out, why don’t you give us a little information about how you got started in law, I suppose, but also kind of how did you drift toward real estate? Was that early in the process or did you just kind of find yourself slowly moving there and you just made a decision to hop over?

Shams Merchant (02:49)
Yeah, great question man. I always knew I wanted to be in real estate. I just didn’t know how I wanted to be in real estate. And after undergrad I decided I’m going to go to law school and become a real estate attorney. So that was always a goal from the beginning. And that’s what I ended up doing. I started out doing essentially commercial real estate transactions. What we typically call like a, I was like a dirt lawyer. That’s what we typically call it. Really focused on just a pure acquisitions and development side of.

commercial real estate. But that eventually transitioned.

Cody Crabb (03:23)
Not the most flattering

name, but I suppose that’s that we need those for sure.

Shams Merchant (03:26)
Yeah,

exactly. But that eventually transitioned.

into me representing clients on capital raising and on structuring investment vehicles because what I noticed was a lot of my clients were doing great projects, but they were using their own money. Eventually they had to then expand their businesses in order to do that, in order to do more deals, more projects, they had to go raise capital. And that’s where the SEC compliance work comes in. That’s where the syndication and investment structuring side and the capital

components come in. So eventually I transitioned most of my practice to structuring those types of vehicles and representing clients ⁓ in helping them raise capital, compliantly, and effectively, to grow and scale their real estate investment business. but at the end of the day, I’m still a real estate attorney and I can handle both sides of the coin. we can handle the full transactional aspects of a deal, but we’re also helping our clients from beginning, raise the capital, raise the equity,

raise the debt to go and do these large projects.

Cody Crabb (04:30)
So one question I’d have for you is, at what point does someone realize they’ve made a mistake when they first start raising money? So I’d be curious to see what’s an early mistake that you tend to see when people start first raising money that you can now spot because you’ve done this so many times.

Shams Merchant (05:38)
Yeah, the easiest one is, hey, I’m just going to create an LLC and I’m going to have a bunch of people come into that LLC as members and I’m going to give them ⁓ an equity interest in that deal and I’m going to use that LLC and then go buy real estate. That is not sufficient to comply with laws. You can’t just put a bunch of people in an LLC and raise capital that way and throw your hands up and say, hey, ⁓

You know, I’m just pulling together capital to go and invest in real estate. There’s so much more there that needs to be done in order to comply with securities laws. Because at that point, you have sold securities to people.

Cody Crabb (06:11)
Yeah.

Shams Merchant (06:18)
It’s as if you were a publicly traded corporation like Apple and you had 20 people come in and buy your stock. That’s essentially what you did. Right. And we know Apple is a highly regulated company by the SEC because you’re public.

Cody Crabb (06:21)
Yeah.

Shams Merchant (06:33)
all you did was the same thing, you’re just doing it privately, right? So it doesn’t excuse you from following the laws. And so that’s a big mistake people make is I can just take in money from friends and family, put them in an LLC and I’m solid. That’s not the case. You need to do it.

Cody Crabb (06:51)
But don’t make the mistake of thinking because

you’re like mom and pop or like you’re just doing this solo or you’re small that you have to kind of have, you have a different set of rules than one of the big players might.

Shams Merchant (07:01)
Correct. Everyone is subject to the same rules when raising capital, no matter if you’re raising $1 or $1 billion. It’s the same rules that apply. And you have to follow them. Otherwise, you’re breaching those rules, you’re violating the law, and you can be subject to a lot of ⁓ legal liability, penalties, fees, even jail time to some extent, because it can be a criminal violation as well.

Cody Crabb (07:30)
Wow, yeah, I mean, one wants, the only thing worse than committing a law on purpose is committing a law on accident. And so like that’s certainly not where you wanna go. ⁓ So I feel like, ⁓ well, obviously you serve a really important role in this sort of community. ⁓ when somebody, like when somebody’s starting out on, in any real estate investment venture, but especially the ones that, types that you work with, ⁓ when someone says like, I’ll figure out the legal side,

Shams Merchant (07:37)
Yeah.

Thanks

now.

Cody Crabb (07:59)
when I can or when it’s not so urgent. We already talked about what the dangers of that are, but I guess my real question is ⁓ when should someone start doing the foundation work for the legal part of real estate investing?

Shams Merchant (08:15)
I think the foundational part needs to be done in the beginning.

like anything, right? It’s the foundation for a reason. If the foundation is not built out properly, you’re gonna have a really hard time raising capital from investors. Because people that invest in real estate, like passive investors and limited partners, they know what they’re looking for. They know what documents they should be receiving. They know typically what a legal structure looks like that makes them feel confident to invest with you. So when you’re asking people to give you 50,000, 100,000,

million dollar checks. ⁓ You better believe that you’ve set everything up properly in order to be able to get that money otherwise they’re gonna spot issues really quickly and they’re not gonna feel confident to give you that investment. Even if the underlying deal is great, ⁓ you’ve essentially botched that relationship because you didn’t set it up properly. ⁓ So legal needs to be one of the top things that you do.

⁓ when you’re going to go out and start raising capital and start taking other people’s money to invest in deals.

Cody Crabb (09:24)
For sure. mean, it really is kind of the whole framework because I suppose the way you set it up also is going to depend on, that’s going to change a lot of other options that you have going forward and things. ⁓ what’s something that someone can do early on to kind of keep their options open? If someone’s like, I want to make sure that I set my entities up legally and stuff. One question that I always get is like,

Well, I wanna do it right, but I don’t know exactly what I’m doing. Like, I don’t know exactly what I wanna end up doing yet. I don’t wanna make a mistake now that will make it so that down the road I have to have a big complicated thing. Is there something, is there a way to kind of make it a little more broad? Do you get what I’m getting at? Like, is there a way to kind of broaden it a little bit to make sure that you cover your basses?

Shams Merchant (10:03)
Yeah.

I mean, I think the best answer to that question, Cody, is you build out a team, right? You build out a team of people that are gonna help you build this business. One of them includes your securities attorney, right? And you put them on the team early. That way, you have them when you need them to get started on creating a legal structure for you.

⁓ Most clients don’t know this, or most potential clients don’t know this. Clients of a firm know this, but potential clients, when they reach out, they don’t know that all the work that we do on the security side, it’s on a flat fee basis. So I give a lot of value to potential clients that reach out to me just to ask questions and to understand what exactly they need to get done in order to set this up. All that value we give, we give for free. We don’t get paid for that.

charge a client, only actually engage them when we’re to put the pen to the paper to set the legal structure up for them to assist them on the capital raising side. So up until that point, it’s free advice and we’re a resource to people who are asking the right questions about what do I need to do, what I need to set up in order to do this. So there’s no obligation to reach out to someone like me, for example, to ask that question. And then I can tell you exactly what you need to do.

you’re ready to do that thing, we’re here to help you actually set it up. ⁓ But there’s no cost to get that knowledge and that information from us. We’re here to be a resource to provide that to you so you can make the right decision.

Cody Crabb (12:15)
So you mentioned kind of getting the right people involved. ⁓ I would be curious, what does a good capital raising team look like? What Avengers do you have on your side when you’re, you know what I mean? Everyone’s got their role, but you know what I’m saying? What are they doing?

Shams Merchant (12:26)
Yeah.

Yeah.

Yeah, you got a couple of people, right?

First, like I mentioned, your attorney, your securities attorney slash real estate attorney, right? Those could be two separate firms or sometimes like for our clients, it’s the same firm, because we do all of it in-house. The second thing is you want to a solid pitch deck and marketing materials. So you might have a marketing team. Our firm can help with that as well in the sense that we have a great relationship with marketing firms.

specifically that work with syndicators and fund managers that can produce institutional quality marketing materials. You’re going to want potentially a broker that’s going to help you source deals unless you’re sourcing them grassroots on your own. You’re going to want the right software in place to help you accept capital contributions from investors, to help you manage your cap stack and your cap table and automate your back office because this

It’s not easy to manage 50 investors using an Excel sheet. There’s specialized software that you need to do that to help you take off all that administrative work off your plate. So those are just a couple of things that I would tell clients at the beginning to start thinking about in order to set up the structure and the vehicle and put in the right pieces in place to go raise capital right. And then when it comes to property specific,

team members like acquisition specific, you’re gonna want to have a lender that you like to work with lined up potentially for the debt side of things, potentially a debt broker that have people to go and inspect the property, so property condition inspection firms. We have a whole list of different things, but yeah, there’s a bunch of different services you’re gonna need in order to do this the right way.

trip up is they don’t have a lot of that thought out when they jump into it and then they’re scrambling to figure all that out. Luckily when people start working with us we actually give them like a list of things that they’re going to want to focus on and put in place before they raise a single cent from any investor. And once you have all that system lined up and you have the systems built out everything becomes so much easier from that point.

Cody Crabb (15:14)
Yeah, think, like you said, I mean, no one, you don’t know what you don’t know. And so it’s hard to kind of learn things that you may not have been expert in already a little bit. And so like if there’s a way to kind of bring people together, I mean, what would you say is a good way to kind of find some of these people? mean, what would you call, when you’re talking about bringing a quality team together.

⁓ What are some qualities that you’d look for in the team members that you would bring on?

Shams Merchant (15:42)
They have that experience in the asset class and in the type of investment that you’re doing. That’s fundamentally, you know, at least you have to have that experience. Other than that, it’s making sure the cost is consistent with the market and making sure they’re easy to, they’re accessible to you. They have the time to represent you and take on the work that you’re going to send them. And preferably someone local, depending on what you’re using them for, obviously.

it’s like acquisition related services, you want someone local. Our practice is national because we’re securities lawyers, we practice in all 50 states. So I have clients in all parts of the country ⁓ who engage us for our services. So we don’t typically need to be local. But if you’re talking about the property itself or the deal, you’re going to want local team members for that. Otherwise, everything now is done remotely like how we’re on this meeting. So as long as you’re comfortable at work,

with someone and engaging them from a virtual aspect, then it’s fine.

Cody Crabb (16:42)
That’s a skill too. mean, I feel like it’s a skill that a lot of us kind of developed a little bit over COVID and stuff, but I feel like that we don’t talk about that enough. having, you know, making contact virtually and being able to kind of gauge those things and engage people like that’s, that is a skill. And it’s, think, one that a lot of people need to get better at, to be honest with you. I do a lot of these meetings and I will tell you sometimes I’m like, I feel like I’m not even actually connecting with someone because it’s just like, they don’t know how to do this.

Shams Merchant (17:07)
Yeah,

right. And the one last thing I’ll add on to that is ⁓

When you’re engaging experts on anything, for example, I’ll just use myself as an example, as a syndication attorney, as a securities lawyer, you wanna look for engaging someone that’s also in the business as well, because then they can give you more practical advice and may take a more practical approach to how they’re helping you. aside from representing clients and structuring their investment vehicles, I have my own fund as well.

I invest in real estate myself and I think that that helps a lot when my clients hire me because I get exactly what they’re doing and what they’re trying to do and I’ve already made all those mistakes on the business side as well. Right? I can tell them, hey, here’s what I did to go raise X amount of capital. Here’s what I did to go find this deal. Here’s how I did this project. Here’s how much I made. Here’s the mistakes I made when I to buy this type of property. And it’s being able to give that extra knowledge to somebody.

that they’re not going to get from a lawyer who just practices law and that’s all they do, right? ⁓ We don’t do that. We’re all involved in the business. ⁓ You know, I invest with my clients too, right? My clients are bringing a great, they’re doing a great deal. I sometimes invest with them as well because why not? Yeah, I mean, if you’re doing a great project.

Cody Crabb (18:19)
Yeah, yep.

You’re like, hmm. Yeah. Yeah. Yeah.

Shams Merchant (18:35)
I’m going to want to be involved with it too as an investor myself. And I think that’s why lot of clients come to me is because they know they’re not just getting standard legal advice. They’re working with someone that has already done this too and continues to do this on a daily basis.

Cody Crabb (18:50)
Yeah.

Yeah. I use it as I kind of use the, ⁓ the weak personal trainer argument. Like if, like, are you going to go use a personal trainer that is super shrimpy and can’t lift anything? Like, no, of course not. You’re going to look at the smallest guy at the gym and go, I want that guy. He knows, he knows what he’s doing. So same kind of thing. Yeah. You want it? You want to get someone that clearly practices what they preach? Yeah. Exactly. Yeah. Like I look at the, all these courses.

Shams Merchant (18:55)
Yeah.

He’s done it for himself, so he can probably help you. Exactly.

Cody Crabb (19:18)
I look at all these courses and stuff online and it’s like earn a million dollars a month. I’m like, why are you selling courses then? If you’re earning a million dollars a month, why are you selling me a course on Facebook? You know what I’m saying? That brings a lot of trust, I think, right away.

Shams Merchant (19:28)
Right. Right.

Yeah, that’s exactly what I look for when I’m engaging experts myself is… ⁓

Whatever you’re pitching to me, whatever your service is offering to me, have you used those services yourself? And if you haven’t, then I don’t understand how I can trust you to deliver a great result for me if you can’t deliver a great result for yourself. And that goes exactly with those coaching programs and all of that, right? Some of them are, there’s some good ones out there because those people have accomplished great things and now they’ve bottled up that knowledge.

and they’re providing it to you. But some of them are like what you said, right? They haven’t done it themselves, so why are they teaching other people to do it? I mean, are you really gonna get the value out of that that you’re looking for if that person themselves is making most of their money selling a coaching program than actually doing the thing that they’re saying they’re really good at doing?

Cody Crabb (20:20)
Right.

Right.

Yeah, for sure, for sure. So, okay, let’s say someone is kind of thinking, hmm, maybe I should actually be getting in touch with Shams because some of this is sounding like I might need some help. At what point should someone realistically bring you or your firm into one of these conversations?

Shams Merchant (20:42)
I’ve been asked that question a lot of times Cody and over time ⁓ I’ve formulated a good response to it, which I think you’ll like is don’t hesitate to reach out even if you’re at such a very beginning stage like you could just be exploring real estate investing don’t hesitate to reach out because

You never know, like we can maybe point you in the right direction, right? You might not be a good fit to work with you at that time, but I can probably give you some good resources and people to talk to, things to look at that can help you make a decision about how you’re gonna take the next step of investing in real estate. Is doing a syndication right for you? I don’t know, but if you call me and ask me a couple questions and tell me what you wanna do, I can pretty quickly tell you if it’s the right decision or not. ⁓ And so I say call me if you’re in real estate.

Cody Crabb (21:10)
Hmm.

Shams Merchant (21:30)
and you’re interested in building a real estate business, you’re interested in raising capital, you want to do deals, you want to start a fund, you want to go buy multi-family properties, you want to go develop shopping centers, whatever it is you want to do, we do all of that and our clients do all of that. So there’s so many resources we have for you that we can give you even if you’re just at the beginning stages. So I would say no matter where you are in the process, give us a call. if you’re already doing deals, you’re already

Cody Crabb (21:56)
Awesome.

Shams Merchant (22:00)
looking to raise capital even better, then definitely give us a call because we can help you do all of those things.

Cody Crabb (22:06)
So how can someone

find you and get in touch if they want to do so?

Shams Merchant (22:09)
Yeah, easiest way to get a hold of me is via email, which is my first name, [email protected]. That’s CRE for commercial real estate, dot law. If you Google me, you can easily find me as well. I’m all over the internet, whether you take that as a good thing or bad thing.

Cody Crabb (22:29)
And you got one of those names like

I do where you don’t have to worry so much about finding the wrong shams, you know, I feel like that

Shams Merchant (22:36)
That’s right. That’s

one plus I have is that if you google my name, you’re only going to find one Shams Merchant.

Cody Crabb (22:43)
Yeah, I agree said Cody Crabb. Yes, I understand. Yes ⁓ Well, ⁓

awesome. So we’ll make sure to link all this in there for the people listening I appreciate you coming on Thanks so much for giving us some of your time and thank you listeners also for doing that too If you liked what you heard today if you want to get started in the in the legal side if you want to get some some quality advice Highly recommend you reach out to shams and make sure you don’t miss another episode so you can get more

Awesome advice like this. Shams, it’s been a pleasure. Thank you so much for joining us today.

Shams Merchant (23:15)
Yeah, thanks so much,

Cody Yeah, I love the opportunity to be on this show. It’s fantastic. Thank you so much.

Cody Crabb (23:21)
Great,

thanks man.