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October 22, 2019

71. Syndication Entity Structures and Other Legal Issues

In this episode, Brandon and Thomas are joined by Kevin Caiaccio and Trey Chancellor of Caiaccio Law Firm, who specialize in commercial real estate law. Today they will discuss a variety of legal topics related to real estate syndication including entity structuring, legal issues when acquiring and disposing of properties, tax strategies they see their clients use, and much more.

When Should a Deal Sponsor Add an Attorney to their Team?

When is your earnest money going hard on a deal? As it’s a sellers market, you want to loop an attorney in early. If your earnest money is not going hard immediately, you could wait until signing the letter of intent. Best practice is to have an attorney as a key member of your team from inception. These purchase and sale agreements are heavily negotiated and law firms will specialize in this. Be cognizant of dead deal costs as a potential offsetting factor.

Entity Structure for Syndication Deals

It’s not one-size fits all, but there are common characteristics. Commercial real estate is almost exclusively acquired, managed, and sold through LLCs. Often there will be several layers of LLCs. The structure of ownership can determine the function of the LLCs, as there are property owning entities and a GP manager entity. Investors will be members of a property owning entity or members of a separate parent or member entity. The fees will be paid in the GP entity so they can be split and passed down if necessary. When it comes to decision making in most syndications, the GP generally has full control over the deal.

Another consideration is the debt source. The lenders could have certain restrictions and convenants on the ownership structure and sizeable contributions may come with certain underwriting standards.

GPs should come with their own LLC to segregate liability from deal to deal. There’s also usually a splitting of fees to GPs and this entity gives you the flexibility to split this easily.

Legal Considerations for GPs

You must understand you’re taking someone else’s money. Using someone else’s money comes with certain fiduciary responsibilities and obligations. With this, you must disclose everything. You must disclose decisions, plans, and risk. A private placement memorandum will help you disclose all risk to limited partners and allow for informed decisions. When you’re taking risk with the money of others, disclosure is key.

Aspects of Acquisition

GPs need to understand the deal they underwrote and the deal they bid on. They need to have their team in place for accounting, legal, and financing matters. Clean title is the key to the whole transaction. For the most part in commercial real estate, acquisitions are “as-is” – the due diligence is the responsibility of the buyer.

Aspects of Disposal

Selling the property without retained liabilities is important. You want to avoid closing a deal, distributing funds to investors, and then dealing with a lawsuit. It’s important to know liabilities have been extinguished, there should be a limitation on the timeframe and potentially funds or a reserve set aside for any issues or final accounting or bookkeeping fees.

Legal Considerations for LPs

LPs must understand the deal terms and the fees paid out to the syndicator or GP before they give out their capital. How will distributions function? Feel comfortable with the GP as you’re giving your money to them. You should also understand the tax side of things given the passive loss rule.

When Should a CPA be Roped In?

A good real estate team will have a CPA on their core team. When you’re putting together a deal, you need to understand the structure. There are many tax implications, so a CPA should be looped in at the start during drafting. These tax issues need to be taken care of well in advance of a filing date, and a tax expert can catch these items at the start. It’s easier to get things right the first time than fix things along the way.

Tax Strategies for LPs

In a situation where in the GP will incur fees, if the equity investor wants these fees deferred this can be written into the operating agreement. It would have to be paid upon return of capital. There are several other tax strategies in investors should be aware of. Cost segregation studies are important for depreciation deductions, and this depreciation needs to end up in the right place. An allocation between personal property and real property can reduce your basis if properly done. 1031 Exchanges allow you to defer taxes you’d need to pay today and roll the funds into a new property.

What’s the Favorite Tech at Caiaccio Law?

DocuSign allows for secure remote execution of documents. You can’t sign promissory notes, guarantees, or deeds, but everything else can be done with DocuSign. Electronic filing of deeds adds efficiency to the acquisition process by decreasing the turnaround time.

Cybersecurity is very important – two-factor authentication has reduced risk to data breaches or targeted wire fee fraud.

Connect with Kevin Caiaccio and Trey Chancellor on LinkedIn

Learn more about their work here: www.clf-attorneys.com

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