Legal Question in Real Estate Law in California

There is a lot you are missing from this and this is a far more complex question. You have a number of legal requirements when dealing with securities in this manner.

Best,

Daniel Bakondi, Esq.

The Law Office of Daniel Bakondi

870 Market Street, Suite 1161

San Francisco CA 94102

[email protected]

415-450-0424

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Mr. Bakondi is right that you have a great deal of legal work to be done on this venture. To answer your direct question, however, it would depend on how you structure the finance and ownership of the venture. If you are personally borrowing 65% of the money and then investing it, then you would be entitled to 65% ownership of the enterprise. Just as you don't know if your investors are coming up with cash from their bank accounts or drawing on a line of credit for their shares, they shouldn't care where you get your share. If, however, the enterprise is going to own the building and take out the loan, then the investors are borrowers too so there is no reason you would get credit for the loan funds. In that situation the normal and fair practice is to allocates shares by the percentage each investor, including you, puts into the down payment, since they are all borrowing the 65% loan money, not just you. The promoter, you, generally either takes a share that is a little larger than his contribution to the down payment, but not a lot larger, just enough to compensate him for the extra work of organizing the whole thing. The other way it is commonly done is the promoter gets a share equal to his contribution to the down payment, and then takes a fixed fee for organizing the venture, or if there will be active management of the enterprise, the promoter becomes an employee of the enterprise and draws a salary for his compensation.

"My" investment? If any bank makes a 65% loan, it will be making on the combined strength of the tenant's credit and commitment to pay rent, and the appraised value of the building. Your presence in the deal is more that of a penniless promoter, and even if the bank loan is with full recourse to you, the investors who will have the other 35% will not look at you as having placed any capital at risk.

The number of shares is meaningless. You could sell 1 share to one investor for $3.5 million, or 3,500,000 shares at $1 each to 35 investors, each taking 100,000 shares, or any other numbers.......it's still 35%.

It used to be an IRS rule that a principal or investor in a real-estate venture such as a limited partnership had to meet "at risk" tests to take depreciation, and meeting the IRS rules helped overcome suspicions that the general partner was under-committed finacially. I am a bit rusty on those rules today, as the last such deal I worked on was 20+ years ago, but the IRS rules might also provide a test of the fairness of a general partner's investment vis-a-vis his profit share.

How can you lock in a credit-worthy tenant when you have neither a building nor financing? That's a pretty good trick! The rest of your proposal reflects a certain naivete about how real-estate ventures are put together. Among other things, don't solicit investments from non-insiders without consulting (retaining) a securities lawyer and having a professional-quality disclosure document (prospectus) prepared. Don't pay a broker an advance fee to find you a loan. And don't fail to have the real-estate lease negotiations conducted through a licensed real-estate professional.