Partnering v. Syndications Part 2


In our last blog, we covered the considerations that determine when you might be engaged in a partnership or a syndication. And, if you fall in the syndication category, then you’ll need to comply with SEC regulations. Or, if it’s an actual partnership, then you do not. That is an important question to answer and not always as clear cut as you might think. There are a lot of variables and uniqueness to your specific deal that can make a big difference in the answer.

In today’s blog, we are going to cover the legal structures of these two types of investing techniques. Let’s start with a syndication.

A syndication is almost always an LLC structure. But, before that, you will also need a Private Placement Memorandum (PPM). This is a business plan with the terms of what you’re offering that will be giving to potential investors. You may also need a Subscription Agreement. This is an investor’s pledge to contribute to the deal at the stated terms before the syndicators actually need the investment. Then at some point the Subscription Agreement is “called,” and the investor will wire funds at that time, completing the exchange. Then, of course, there is paperwork to be submitted to the SEC and to states in which you are raising funds.

Now let’s talk about the operating agreement for the LLC. The biggest difference here from other LLCs, including partnering ones, is that there are different “classes” of members. For example, the syndicators usually get some percentage ownership in the LLC in exchange for their services. This membership will have certain terms. Then, the investors who are just putting up cash will be defined in a different class with different terms. This way you can treat the two different groups of people differently, but still as a group. In fact some complicated syndications will have 3 or more different levels of membership!

The different terms usually come down to two areas: control and money. On the control side, there may be differences in how the members vote (or who can vote) to run the LLC. These terms are usually structured to keep nearly all control of the LLC in the hands of the syndicators and not the investors. There is where the “silent” investor definition comes from. The investors are “silent” as to control of the company.

For the money, there are 4 considerations you need to understand:
1. Contributions: providing cash to the LLC
2. Distributions: getting cash back from the LLC
3. Tax Loss Allocations: who gets the tax deduction if the LLC runs a loss
4. Tax Gain Allocations: who bears the tax burden if the LLC runs a profit

All four of these can be defined differently. If the company needs more funds, who puts in that money? If there are profits to give out, who gets first dibs? Very often the cash investors will get paid back their investment before the syndicators take any profit. Tax losses can also be given exclusively to cash investors since they are the ones with money involved.

The point is, all four of these financial considerations can be “customized” to fit your offering. And having different classes of members makes it easy to treat those groups differently. Your job is to understand how these play out from an accounting and logistical perspective so you can explain it to the different groups of partners.

While a syndication will almost always be an LLC, if you are partnering, you have some options. The LLC route is a tried-and-true structure to use when partnering. It can be as simple or complicated as you need to fit your situation. It provides a single entity to run everything through for bookkeeping and accounting. It provides liability protection for the members. But it may be more structure (adding expense) than you need.

A joint venture agreement (JVA) can also be used to define the relationship among the partners. A JVA is just a contract that spells out the terms of the partnership. It is not a business entity and does not come with any liability protection (thus, the JVA should always be between business entities, not individuals). A JVA cannot get a bank account and does not file a tax return. Also, a JVA cannot own real estate so you will have to decide how the partnership will own the property. All bookkeeping is done by each individual partner. However, it can be quicker to form and less expensive than a full LLC.

Some investors will use a real estate trust to own the property. The trust is, in turn, owned by the different partners in some percentage ownership. Then, they will use a “beneficiaries’ agreement” to define the partnering relationship. This agreement looks a lot like a JVA! But the labels are different. Again, the trust does not provide liability protection, so entities (your investing LLC) should be used. It also does not get a bank account, nor does it file a tax return. However, you can use one set of books (one partner, for example, is in charge of all bookkeeping) and then the final number can be divided by percentage among the beneficiaries.

You’ll see above that there is one agreement in each of the different structures that is really the “partnering” document. In an LLC, it’s called an operating agreement. With a JVA, it’s called a joint venture agreement. With a trust, it’s called a beneficiaries’ agreement. Some of the labels are different, but the terms—like, management, voting, control, distributions, tax allocations, etc. that we mentioned above—are the same across each of them.

So, to really understand partnering, you need to understand how the terms on management and money affect the partners. This can get complicated and are beyond our discussion in this blog.

If you need more information, you can check out our Getting Started: Partnering guidebook available on my website, link below!

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
(801) 560-2180


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