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Madison Real Estate Syndication Law

Real Estate Syndication FAQ


1.  At what point should I bring in the firm in a potential deal?

Bring us in once you are comfortable you have a deal.  Many sellers ask for earnest money.  In that case, bring us in immediately so we can get started on, draft early access agreements and a title and survey review. At the very least, bring us in right after you sign the letter of intent.  Our area of expertise deals with the ins and outs of these contracts. The sooner the better in general, with the caveat of being wary of dead deals.

2. What type of Entity Structure? 

a. We often deal with LLCs, almost exclusively – Which means managers, members (or classes of members). Ownership is usually a GP manager entity, property owning entity (or multiple). Investors will be members directly in the property owner, or a parent entity. Fees Will be paid to GP or split among the group

b. A preferred return would be in the 8-12 Percent return range (distribution waterfall), paying interest on capital contributions.

        c. Decision making is left to the GP group, very much in control (exception is a JV partner).

        d.  Debt Source – always taken into consideration. You need to understand where the equity is and facilitate solutions to issues if there are agency requirements due to large equity percentages.

3.   Why do a GP LLC rather than a stake in the property LLC?

a. Segregate Liability.

b.  Usually some sort of splitting of fees that go to GP group, can do more behind the scenes by having a separate GP entity.

4.  At what point can a syndicator, if at all, give stake for accepting capital?

This is fine as long as the Co-GPs are up front with disclosures as to who is involved in the transaction, we want to avoid any sub-raisers or sub-sponsors to avoid issues with securities laws.  You have to wary of these sub layers.

5.  What legal issues do GPs need to worry about during acquisition process?

a. Security Fiduciary Obligations.

        b. You would start by disclosing everything, full disclosure of risk.

6. What does GP need to worry about when dealing with a seller?

a.  Understand what they are bidding on

b. Understand loan terms, due diligence

c. have their team in place (loan, legal etc)

d. Clean title! Make sure everything is accurate (due diligence)

7. Legal Aspects with Selling

a. Negotiate Liability

b. Manage how long liability survives post-sell, limitations to that period

c. retain funds in reserve for final accounting, to ensure clean break

d. Your mentality should be, that things are done right during acquisition, and treat the property as if it will turn around and be sold

8. What should Limited Partners be aware of?

a. Understand the basic deal terms

b. Understand the fees being paid out to the syndicator

c. Understand who you are giving your money to

d. Understand how you will receive returns for your equity, what the allocations look like for a given year.

9. When should the GP’s look into getting a CPA?

a.  A good team has a CPA as part of it, who comes in from the outset

b.  The accountant should be checking tax implications

c.  Again, get it right at the outset then go back and fix it

10.  What are the best tax strategies related to syndications?

  1. Equity investors can structure deferrals of fees to GP long term capital gains rather than ordinary income
  2. Want to make sure depreciation deductions get to the right place (GP and LP) 
  3. Allocate purchase price between real and personal property, lower cost basis (use a cost segregation study) – bifurcate real and personal property
  4. Appeal the assessment and lower the assessed value every spring!
  5. 1031 Exchanges – allows deferment of taxes
  6. Carried interest is 3 years for GPs