In todays email:

• 🤓 Syndication Paperwork Explained

• 🧐 Order Which The Documents Are Created

• 😌 Typical Steps For Investing As LP (Limited Partner)

Syndication Paperwork Explained

If you have ever been involved or invested in a syndication as a limited partner you will find that at times it's very confusing. I found myself asking what paperwork is needed for what purpose, questions about where to find pertinent information about the investment, when to sign the paperwork, etc. I was confused when I started. I was not quite sure which document was for what purpose and did not feel confident in signing these documents without knowing what I was signing. So this newsletter is dedicated to helping unravel the mysteries of syndication investing and hopefully put you on better footings than I was when I started.

I will go through the detailed explaination below but in short there are 3 main documents. In simplified terms they are:

1. Subscription Agreement - The investor commitment to invest

2. Private Placement Memorandum (PPM) - Disclosure of the investment details and risks

3. Operating Agreement - Governs the operations and rules of the LLC syndication vehicle

Syndication documents, such as the subscription agreement, private placement memorandum (PPM), and operating agreement are essential legal documents used in the process of raising capital from investors for various types of business ventures. These documents serve different purposes and play distinct roles in the syndication process. Here's a detailed explanation of the differences between these documents:

1. Subscription Agreement:

   • Purpose: A subscription agreement is a legally binding contract between the issuer (the entity raising capital) and the investor. It outlines the terms and conditions under which the investor agrees to purchase a specific number of securities (e.g., shares, membership interests) in the company.

   • Key Elements:

     • Investor information: It includes details about the investor, such as their name, contact information, and any representations and warranties made by the investor.

     • Investment terms: This section specifies the number of securities being purchased, the purchase price, and the payment terms.

     • Representations and warranties: Both the issuer and the investor make certain representations and warranties regarding their respective obligations, responsibilities, and financial standing.

     • Subscription process: The document typically outlines the process for completing the investment, including any required legal or regulatory compliance steps.

2. Private Placement Memorandum (PPM):

   1. Purpose: The PPM is a comprehensive disclosure document provided to potential investors to provide them with detailed information about the investment opportunity and the issuer's business. It's crucial for regulatory compliance and investor due diligence.

      • Key Elements:

        • Business overview: The PPM includes an in-depth description of the issuer's business, including its history, management team, and the industry it operates in.

        • Risk factors: It highlights the potential risks associated with the investment, both specific to the issuer and general market risks.

        • Use of funds: The document outlines how the funds raised will be used, such as for operations, expansion, or other purposes.

        • Financial information: The PPM includes financial statements, including balance sheets, income statements, and cash flow statements, which provide a clear picture of the issuer's financial health.

        • Terms of the offering: This section describes the terms of the investment, such as the type and number of securities offered, minimum investment amounts, and any potential restrictions or limitations.

        • Disclosure: The PPM is a document that provides investors with a comprehensive understanding of the investment opportunity, enabling them to make informed decisions. Issuers are legally required to provide this document to potential investors.

3. Operating Agreement (or Partnership Agreement for LPs):

   • Purpose: The LLC operating agreement is specific to limited liability companies, while the partnership agreement serves a similar role for limited partnerships (LPs). These documents establish the internal governance structure and rules of the entity and outline the rights and responsibilities of members or partners.

   • Key Elements:

     • Member/partner roles: The agreement defines the roles and responsibilities of each member or partner, including management responsibilities and voting rights.

     • Capital contributions: It specifies the initial and ongoing capital contributions of each member or partner and the distribution of profits and losses.

     • Decision-making processes: The document outlines how important decisions are made within the entity and whether certain actions require unanimous consent or a simple majority.

     • Transfer restrictions: The agreement may contain provisions regulating the transfer of membership interests or partnership interests, which can affect the syndication process.

     • Customization: LLC operating agreements and partnership agreements are highly customizable and can be tailored to meet the specific needs and goals of the entity and its investors.

In summary, subscription agreements are legal contracts between investors and issuers, PPMs provide comprehensive information to investors about the offering, and LLC operating agreements govern the internal operations and governance of the entity raising capital. These documents serve distinct purposes but are often used together in the process of capital syndication, especially for ventures structured as limited liability companies or limited partnerships. It's important to consult legal professionals to draft and review these documents to ensure they comply with applicable laws and regulations.

Order in which the documents are created

Typically, the order in which these syndication documents are created and eventually signed goes as follows:

1. Operating Agreement - This needs to be established first when setting up the LLC investment vehicle. It is usually drafted initially by the company/sponsor raising the funds.

2. Private Placement Memorandum - The PPM is then prepared and distributed to potential investors for their review. This allows them to evaluate the specifics of the investment opportunity.

3. Subscription Agreement - Once investors have reviewed the PPM and conducted due diligence, they sign the Subscription Agreement if they wish to commit funds to the investment. The sponsor collects the signed agreements.

4. Closing - The closing date is set once the offering amount is subscribed. At closing, the investors wire their funds and in exchange receive their membership interests in the LLC per the Operating Agreement.

So in summary:

1. Operating Agreement

2. PPM

3. Subscription Agreement

4. Closing

The Operating Agreement has to come first to legally establish the investment vehicle. The PPM provides the details to help investors decide whether to participate. The Subscription Agreement then captures the investor's commitment and funds are exchanged at closing. This is the typical order for properly documenting a private syndicated investment.

Typical steps for investing as limited partner (LP)

Here are the typical steps a limited partner (LP) investor would take when participating in a real estate syndication investment:

1. Evaluate the Offering: The LP reviews the private placement memorandum (PPM) and conducts due diligence on the investment opportunity to understand the business plan, risks, projected returns, etc.

2. Understand the Structure: Familiarize yourself with the legal structure of the investment, which may involve a limited partnership, limited liability company (LLC), or other entities.

3. Legal Review: If you are inexperienced and just getting started then you the LP may want to have an attorney review the PPM and partnership/operating agreement to understand legal terms and obligations.

4. Due Diligence:

   • Investigate the Sponsor: Research the background, experience, and track record of the sponsor or syndicator. This includes reviewing their prior real estate deals or investment projects.

   • Financial Review: Assess the financial health of the investment property or business. Analyze the financial statements provided in the PPM.

   • Property Evaluation: If the investment involves real estate, consider conducting or reviewing property inspections and evaluations to understand the physical condition and potential for improvement.

5. Make the Investment Decision:

   • Evaluate Risk Tolerance: Assess your risk tolerance and make sure the investment aligns with your financial goals and risk preferences.

   • Complete Subscription Agreement: If you decide to invest, complete and sign the subscription agreement provided by the syndicator. This legally commits you to the investment, and you should follow the document's instructions for submission and payment.

   • Sign LLC Operating Agreement (if applicable): If the investment is structured as an LLC, sign the LLC operating agreement or partnership agreement, which governs the internal operations and governance of the entity.

6. Funding the Investment: Follow the instructions in the subscription agreement to transfer the funds required for your investment to the designated bank account or escrow account.

7. Closing: Once the offering is fully subscribed, the closing date occurs and funds are released from escrow to the partnership/LLC. The LP receives their partnership shares.

8. Receiving Distributions: The LP begins receiving distribution checks per the partnership agreement as property income is earned and distributed. Distributions are usually made monthly or quarterly.

9. Tax Reporting: The LP receives a K-1 form each year detailing their share of income, losses, credits, etc. for inclusion in their tax returns. Be aware of your tac reporting requirements and make sure that you comply with all applicable federal and state securities laws and regulations which may simply involve confirming your accreditation status or meeting specific investor requirements.

10. Investment Management: As a limited partner, you typically have a passive role in the investment. The syndicator, as the general partner, is responsible for managing the property or business.

11. Exit Strategy: Understand the exit strategy outlined in the PPM. Syndications often have a predetermined holding period and exit plan, which may involve the sale or refinance of the investment.

12. Communication: Keep in contact with the syndicator and monitor the progress of the investment. The syndicator typically provides updates and reports on the investment's performance.

So in summary, the LP reviews, commits funds, signs an agreement, transfers funds, receives shares, gets distributions, tax reporting, and eventually exits. Investing in syndications can be a complex process, and it's crucial to perform thorough due diligence and seek professional guidance to make informed decisions. Additionally, consulting with legal and tax advisors is highly recommended to ensure compliance with all relevant laws and regulations.

We would love to get your feedback and your thoughts! Let us know which topics are of interest or where you need more clarity. Just respond to this email directly 😌 or email [email protected].