Who is the missing Intermediary when Real Estate Sponsors are raising capital?
Raising capital for real estate projects is a complex process that often requires the involvement of various professionals to ensure compliance, efficiency, and the best financial outcomes. While real estate sponsors frequently turn to legal advisors, financial analysts, and broker-dealers during their capital-raising campaigns, there is often one critical professional missing from their team—the tax advisor.
Missing this key player can be a costly mistake. A tax advisor can significantly impact your fundraising.
Keep reading and learn more.
The Overlooked Role of the Tax Advisor in Real Estate Capital Raising
When real estate sponsors set out to raise capital for projects, their focus is often on securing financing, regulatory compliance, and investor relations. However, the tax implications of raising capital, especially in large amounts, can sometimes be overlooked. This oversight can have serious financial consequences, including unexpected tax bills, missed opportunities for tax savings, and poorly structured deals, all of which can significantly reduce profits.
An anecdote comes to mind: A real estate development company was preparing to raise $10 million for a new luxury apartment complex. They assembled a team of financial analysts, legal experts, and marketing professionals but overlooked the inclusion of a tax advisor. It wasn’t until they completed their capital raise and began filing taxes that they realized they could have structured their equity offering in a way that would have reduced the tax burden on both the company and its investors. The absence of a tax expert ended up costing them hundreds of thousands of dollars in unnecessary tax payments—money that could have been reinvested into the project.
In this example, the real estate sponsor learned the hard way that understanding tax liabilities and benefits is just as crucial as financial modeling or legal compliance. A well-structured deal can reduce the overall tax burden, enhance investor returns, and make the project more attractive to potential investors. This is where the tax advisor’s role becomes critical.
How Technology Helps Companies Raise Capital Under JOBS Act Regulations
The JOBS Act has opened up opportunities for companies to raise capital in ways that were previously restricted. Regulations such as Regulation CF (Crowdfunding), Regulation A+, and Regulation D have allowed companies, including real estate sponsors, to reach a broader pool of investors. But with these opportunities come challenges, particularly in staying compliant with various tax and securities laws.
Technology plays a crucial role in helping companies streamline the capital-raising process while maintaining compliance. Technology Platforms by companies like Kore simplify the complexities of running a compliant capital raise by automating much of the regulatory paperwork, tracking investor contributions, and ensuring that offerings are conducted within the bounds of the JOBS Act regulations. This technology enables real estate sponsors to reach both accredited and non-accredited investors more easily, expanding the investor pool and providing greater flexibility in structuring deals.
Once a raise is completed, it’s important to continue using technology to manage shareholder relationships and compliance. Tools like Shareholder Communications facilitate ongoing communication with investors, keeping them informed of project updates, issuing reports, and enabling online voting. Cap table management tools are another essential component, helping sponsors keep track of who owns what, ensuring transparency, and avoiding ownership disputes.
Even with advancements in technology, the complexities of tax issues surrounding capital raises cannot be fully resolved by software alone. Collaborating with a tax advisor from the beginning is crucial. Integrating technology with expert tax guidance ensures that the capital raising process is not only streamlined but also structured to maximize tax advantages.
Challenges Facing Companies Raising Capital
Raising capital presents unique challenges that go beyond finding investors. One of the biggest hurdles is navigating the regulatory roadmap—understanding which exemptions under the JOBS Act are most appropriate, ensuring all filings are accurate and timely, and maintaining ongoing compliance. This requires working with trusted partners such as a FINRA Broker-Dealer, legal counsel, and technology platforms to streamline the process.
But even with the best partners in place, one common mistake companies make is focusing too much on the financial details and neglecting the story behind their project. Investors, particularly in the private capital markets, invest in people as much as they invest in numbers. They want to know the sponsor’s vision, the social and environmental impact of the project, and why this specific opportunity is worth their capital.
Here’s where a well-rounded team of professionals, including a tax advisor, becomes even more critical. A tax advisor helps ensure that the project is structured in a way that maximizes investor returns by minimizing tax exposure, which in turn makes the investment more attractive. Investors want to know that their potential returns will not be impacted by unnecessary taxes, and having a tax expert on board shows that you’ve thought through all the details.
Raising capital for real estate: 7 Steps you need to know
To ensure that tax efficiency is part of the capital-raising process, here are 7 steps real estate sponsors can follow:
- Assemble Your Team Early: Include a tax advisor alongside your legal, financial, and broker-dealer partners to ensure all angles are covered.
- Evaluate the Tax Impact of Each Financing Option: Whether you’re raising capital through equity, debt, or a combination, understanding the tax implications of each structure is crucial.
- Choose the Right Exemption: Consult with legal and tax advisors to determine whether Reg CF, Reg A+, or Reg D is the most suitable option for your raise.
- Leverage Technology: By utilizing dedicated technology platform providers, such as Kore, you can streamline the capital-raising process and ensure compliance with securities laws. Follow through with cap table management and shareholder communication tools after the raise. Kore offers an end-to-end solution, from pre-raise preparation to post-raise shareholder communications and management, all within the same environment, minimizing multi-vendor friction.
- Structure Investments with Taxes in Mind: Work with your tax advisor to structure the deal in a way that benefits both the company and investors from a tax perspective. This includes considerations such as pass-through entities, depreciation, and capital gains treatment.
- Monitor Regulatory Changes: The tax landscape is constantly evolving. Ensure your tax advisor is proactive in staying updated on new laws and regulations that could impact your capital raise or ongoing operations.
- Prepare for Tax Filings Early: Don’t wait until the last minute to consider tax implications. By working with a tax advisor from the start, you can avoid scrambling when tax season rolls around.
No Shortcuts to Raising Capital
Raising capital in real estate goes beyond finding investors. It involves planning, collaboration, and strategic moves, especially when it comes to managing taxes. Yes, technology makes this smoother—automating parts of the process, making sure you follow regulations—but the expertise of a tax advisor is invaluable. These professionals help you structure deals that minimize tax burdens and maximize returns
Whether you’re a startup or a seasoned company, educating yourself on the regulatory landscape and working with trusted partners—legal, financial, and tax advisors—is essential.
This way, you’ll be more prepared to handle the capital-raising process, attract the right investors, and avoid expensive mistakes.
