How to Structure a Debt Fund | Real Estate Syndication & PPM Best Practices

Structuring a debt fund involves mastering the critical legal and financial elements necessary for success. Real estate syndicators, fund managers, and developers must carefully craft private placement memorandums (PPMs), secure compliance with SEC regulations, and design clear operational agreements. Debt funds operate like private banks, pooling investor capital to make secured loans, often backed by real estate assets. Key considerations include setting investor classes, establishing returns, securing collateral, and minimizing risks through proper documentation and disclosure. By adhering to Regulation D rules and implementing sound financial structures, sponsors can confidently raise capital and build lasting investor relationships. This guide offers a comprehensive look at best practices for launching and managing a successful debt fund.

Read more about creating a winning private placement memorandum: https://www.moschettilaw.com/what-is-a-ppm/

Read more about effective Regulation D offerings: https://www.moschettilaw.com/reg-d-offerings/

Moschetti Syndication Law Group is a boutique syndication law firm, serving small and growth-bound syndicators, as well as private equity firms. Our attorney, Tilden Moschetti, is determined to keep the firm’s ‘boutique’ size so we can tailor the services to each client’s unique needs without turning the firm into a faceless factory churning out private placement memorandums or passing unnecessary overhead expenses onto our clients. (As our client, you’ll only pay a fixed fee, so no surprises.) As for the client experience, we give real-time answers with Tilden Moschetti without making you book an official appointment or get passed along to associates or paralegals. We’ll work with your ambitions and overall vision to help you close the current deal and fill in that ‘missing’ piece – whatever you need – to keep adding more syndications to your portfolio. We keep syndicators syndicating (TM).

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Episode Transcript

(00:00):
Launching a debt fundsounds simple enough, right?

(00:02):
Raise some money, lend it out,make returns, but if you don't
set the structure up exactlyright, legally, financially and
with investors trust that dreamcan collapse fast. So let's walk
through how to build a fund thatlasts and scales. I'm Tilden
Moschetti, founder of MoschettiSyndication Law. I help fund

(00:24):
managers and syndicators set upbulletproof structures that
protects them legally and keepstheir investors happy. Today I'm
going to show you exactly whatyou need to know to build a debt
fund the right way from thefirst dollar to your first
distribution.

(00:53):
When people hear debt fund, theyusually imagine something
complicated, but the conceptitself is simple. You're raising
money in order to lend it out.That's it. Instead of owning an
asset like an apartmentbuilding, your fund acts more
like a private bank giving outloans to qualified borrowers.
Your investors don't wantspeculative returns. They want

(01:15):
predictable, contractual incomeand debt. Funds can lend into
many spaces, real estate, bridgeloans, small business,
expansion, acquisitionfinancing, even litigation
finance. But knowing what a debtfund is naturally leads to the
next question, how do youlegally and structurally protect

(01:36):
yourself while you're runningit? Well, your first real step
is building that entity thatowns and operates the fund.
Usually it's either an LLC,giving you tax flexibility and
easy management, or a limitedpartnership, great for setting
up clear manager versus investorroles. If you pick wrong and

(01:57):
it's just not a tax headache,you could be personally liable
if a borrower sues or if aninvestor feels misled. Choosing
the right entity isn'tglamorous. It won't impress your
investors, but it's absolutelyfoundational for everything
you're going to do next, becauseonce your legal shell is built,

(02:19):
it's time to figure out how themoney inside it will flow. If
your entity is the house, yourfinancial structure is the
plumbing, you'll need to knowwhat interest rate you're
charging the borrowers. Is itfixed? Is it adjustable? Are you
adding origination or servicingfees? How often are you paying

(02:40):
distributions to your investors,monthly, quarterly, and are you
realistic about cash flow?Remember, borrowers might pay
late. Investors don't likehearing sorry the check's late
too. Planning your fees, yourpayouts, your reserve policies
right now isn't just smart, itbuilds the system your investors

(03:02):
will rely on later, and once thefinancial flow is designed, the
next job is making sure you staycompliant while moving that
money. So let's be crystalclear, when you're taking
outside money, you're insecurities law territory, almost
every debt fund will rely onRegulation D, usually 506 B, or

(03:24):
506 C, 506 B, if you're raisingprivately through existing
relationships, or 506 C, if youwant to advertise to the world
but only take in creditedinvestors, whichever path You
pick, you must file your form Dwith the SEC handle State Blue

(03:45):
Sky filings wherever yourinvestors live, you see,
compliance isn't anafterthought. It's the guard
rails that keeps your fundalive, and part of compliance
and building credibility isshowing investors everything
clearly before they write thatfirst check, here's where you
set the tone for your fund, yourdocuments, your private

(04:07):
placement memorandum, or ppm,spells out every risk, every
fee, every promise you're makingand not making. Your operating
agreement explains how decisionsget made. Good documents don't
just protect you from lawsuits.They show investors that you are
serious, that you areprofessional, and you know

(04:28):
exactly what you're doing,because once those documents are
signed and investors come in,the real job starts managing
relationships. Investors don'tjust want returns, they want
communication. So setexpectations early. What
payments to expect, how oftenupdates will come, what happens

(04:51):
if things don't go exactly toplan? Just be clear. Be
consistent. Be transparent. GoodReturns. Build loyalty.
But good communication buildssomething even more valuable,
reputation, and speaking ofprotecting your reputation,
nothing does that better thanmanaging risk from day one, no

(05:12):
loan is bulletproof. Borrowersdefault, market shift, stuff
happens. Smart managers keepconservative loan to value
ratios, diversify acrossmultiple borrowers, industries
and geographies have clear plansready for loan workouts and
recoveries. Risk Managementisn't what gets you the first

(05:35):
investor check, but it's whatkeeps you from losing the next
10 investors. Which brings us tothe most important lesson, most
mistakes aren't flashy. They'rebasic, using bad templates for
legal documents, advertisingimproperly without choosing the
right Reg D path over promisingguaranteed returns, LAX

(06:00):
underwriting that brings inrisky loans. When you're
building a fund, it's easy tothink you can clear things up
later. Don't set it uprighttoday, and you'll avoid massive
headaches tomorrow. Debt fundsaren't complicated, but getting
them right requires you to buildon solid foundations, legal,

(06:23):
financial and relational. If youwant help setting up a debt fund
that attracts investors,protects you and grows the right
way, reach out to us. I'm TildenMoschetti, thanks for joining me
now go and build something thatlasts you.