We advise clients across the country on how to organize their business plans into real estate syndications, and how to offer and manage participation by a class of passive investment partners. We also advise clients on how to organize real estate syndications to qualify investors for opportunity zone income tax incentives.
A real estate syndication involves a sponsor who identifies, acquires, and manages the development project, a class of passive investors who provide the equity required to close on a commercial or real estate loan product, and legal counsel advising on a range of corporate, tax, and securities issues. For sponsors, real estate syndications also offer a way to refinance their high-risk predevelopment equity to seed their next deal. For investors, real estate syndications offer a risk-adjusted opportunity for periodic distributions of passive income, coupled with the benefit of up-front tax losses and a share of back-end profits, with little or no active involvement.
What real estate syndication sponsors should know is that the offer and sale of any passive investment opportunity are generally regulated by federal and state securities laws, which gives rise to civil and criminal liability. Although the prospect of liability may seem onerous, there is a well-established framework that encourages capital formation for business ventures and ensures investor protections, which enables entrepreneurs and private investors to create partnerships that are greater than the sum of their individual parts.
Syndication sponsors (in the securities context, “issuers”) typically provide prospective investment partners with comprehensive written disclosures detailing pertinent facts about the offering, the issuer, and the associated investment risks. The legal instrument used to make disclosures is a Private Placement Memorandum (PPM).
Depending on the type of exemption that is best suited to the business plan, a PPM may be obligatory, highly recommended, or simply beneficial. It is essential for counsel to understand which category a client's offering falls into when providing advice on an exempt securities offering.
The disclosure components of a PPM often mirror the requirements in public securities offerings' registration statements. When a PPM is compulsory, it must comply with Rule 502(b)(2) of Regulation D of the Securities Act of 1933 and must contain specific crucial information. Counsel advises clients in making difficult determinations regarding the materiality and obligatory disclosure of information.
It is the responsibility of legal counsel involved in crafting or scrutinizing the PPM to perform meticulous due diligence. This process helps identify significant data about the issuer, its business, and the inherent risks associated with the issuer's business model and industry. Considerations include:
Real estate syndications serve as a powerful tool for sponsors to refinance their high-risk predevelopment equity and for passive investors to access potentially profitable projects, yielding passive income with minimal involvement. As with any investment, however, there are inherent risks, and both parties must be conscious of the legal implications, particularly concerning federal and state securities laws. We are committed to guiding our clients through this complex landscape, providing advice tailored to their unique situations, and helping them navigate these issues efficiently and effectively.
Our real estate syndication practice at SyndicationCounsel is nationwide. For more details about our services or to schedule a consultation about real estate syndications, please use our online contact form.
Opportunity Zones (OZ) are a federal tax incentive designed to incentivize the investment of private, pre-tax cash into the communities that need it most. In exchange for placing pre-tax capital at risk in private markets, taxpayer-investors are eligible for a temporary deferral of an imminent capital gains tax liability, as well as a 100% tax-free exit after the tenth anniversary of their investment. Since codification in 2017 federal tax reform legislation, the OZ economy has surged into a $30 billion class of private assets.
Syndicating an OZ project involves a sponsor who identifies, acquires, and manages the investment project, and passive investors who provide the equity required to close on a commercial or real estate loan product, together with counsel advising on a range of corporate, tax, and securities issues. OZ syndications involve a special set of rules that enables investors to qualify and elect for the special income tax advantages associated with OZ investments.
What deal sponsors should know is that the offer and sale of any passive investment opportunity — including for opportunity zone ventures — are generally regulated by federal and state securities laws, which gives rise to civil and criminal liability. Although the prospect of liability may seem onerous, there is a well-established framework that encourages capital formation for business ventures and ensures investor protections, which enables entrepreneurs and private investors to create partnerships that are greater than the sum of their individual parts.
Deal sponsors (in the securities context, “issuers”) typically provide prospective investment partners with comprehensive written disclosures detailing pertinent facts about the offering, the issuer, and the associated investment risks. The legal instrument used to make disclosures is a Private Placement Memorandum (PPM).
Depending on the type of exemption that is best suited to the business plan, a PPM may be obligatory, highly recommended, or simply beneficial. It is essential for counsel to understand which category a client's offering falls into when providing advice on an exempt securities offering.
The disclosure components of a PPM often mirror the requirements in public securities offerings' registration statements. When a PPM is compulsory, it must comply with Rule 502(b)(2) of Regulation D of the Securities Act of 1933 and must contain specific crucial information. Counsel advises clients in making difficult determinations regarding the materiality and obligatory disclosure of information.
It is the responsibility of legal counsel involved in crafting or scrutinizing the PPM to perform meticulous due diligence. This process helps identify significant data about the issuer, its business, and the inherent risks associated with the issuer's business model and industry. Considerations include:
Investing in OZ syndications involves risk, including the risk that the anticipated tax benefits will not be realized if the investment fails or otherwise does not comply with the Opportunity Zone regulations. However, the potential for significant tax yield can make these investments attractive to taxpayer-investors as well as the communities that the OZ tax incentives were designed to serve.
It is important to note that regulations related to Opportunity Zones can be complex, and the specific tax implications for any investor can vary widely depending on their individual circumstances. Consult with your professional advisors before making such an investment.
Our practice at SyndicationCounsel is nationwide. For more details about our services or to schedule a consultation about Opportunity Zone Syndications, please use our online contact form.
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