Syndications Made Easy – Avoiding Legal Traps

Aviva (00:00)
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This week on Commercial Real Estate Secrets, we have Richard Crouch. Richard Crouch is a partner at Woods Rogers and he specializes in commercial real estate law and has for about two dozen years. Mr. Crouch, thank you for being on the show today.

Richard Crouch (00:37)
Thank you, happy to be here.

Aviva (00:38)
I'm really looking forward to diving into a part of commercial real estate that I think often gets overlooked and might be one of the most important parts. So can you tell us a bit about how you got started in commercial real estate law and yeah, a bit about where you come from and what got you here today?

Richard Crouch (01:03)
Yeah, so we're actually in the mid -Atlantic area by the Virginia Beach, Norfolk area. And so I actually moved back to the area where I grew up, which I was happy to do. And I was very fortunate. The firm I've worked, or that I currently work for is the same firm that I worked for from the beginning. And I had to do two very good mentors. One was very good on the, I guess, the technical tutelage. It was an excellent attorney. And the other mentor,

basically taught me everything they don't teach you in law school in terms of how to manage and retain clients and how to answer the direct question that you're asked by clients and not waste their time. But to really impart into me the mindset that time kills deals and that being responsive as well as obviously being proficient is critical to getting deals done. So,

very blessed to have them. And I've basically been practicing for 23 years now and have enjoyed all of it.

Aviva (02:00)
So in your day to day, what type of deals are you working on? What's your specialty and what do you work on the most?

Richard Crouch (02:12)
Yeah, we do. Basically, if it touches on commercial real estate, we handle it. So anything from acquisitions to dispositions to revise to commercial leasing, land use, tax credit deals are all things that are within our wheelhouse. I would say our bread and butter. Although we represent both the lender side and the borrower side, most of our clients tend to be syndicators and doing syndications, putting deals together.

And that's really the ideal matter for us because it involves the larger scope of services and it has the most potential pitfalls if syndicators move too quickly and don't check all the boxes and take all the steps that they need to. So I like being able to basically help them realize their vision, but also keep them out of trouble at the same time. So I would say basically syndications, private placements are where we do most of our work.

Aviva (03:10)
So for the listeners, how would you describe what a syndication is?

Richard Crouch (03:16)
Sure. Anytime you have, whether you call them a sponsor, basically the person who puts the deal together, whether they're buying an office building, a shopping center, a multifamily project, basically when they're approaching their various investors, they'll find the property, locate the property, line up the financing for the property, and then they'll basically send out, we call it a private placement memorandum, and there are a couple...

additional documents like operating agreements that basically encapsulate the terms of the deal, the return that investors are going to get, and mechanically how a lot of that is supposed to happen. And so once they've raised all that money, raised all that equity, they interface with the attorneys, CPAs, lenders, brokers, etc. to bring the deal to completion. But that's a pretty broad view of what a typical syndication would be. And you see them in just about

every sector of commercial real estate.

Aviva (04:15)
Curiosity, have you seen an uptick in syndications in the last decade or is that my own? Am I making that up?

Richard Crouch (04:26)
Prior to 2022, the beginning of this increase in interest rates, we were actually seeing quite a bit of it. When interest rates had gotten very low and a bubble of sorts had been created, there was a pretty high transactional volume at that point in time. For me, I've definitely seen cycles because I've been practicing long enough that I practiced through the Great Recession where basically syndications

stopped completely for different reasons, although it did slow. I think the fundamentals as to why it slowed back in 2009, et cetera, and a couple years thereafter that followed are different than what you're seeing now. But right now syndications have slowed because of higher interest rates, as well as higher than expected insurance costs and maybe maintenance costs, but primarily interest rates.

it's a lot harder for these syndicators to basically find a deal that works from a cashflow perspective. So we're pretty fortunate to still be busy because we still handle general corporate work, leasing matters, et cetera. But a lot of that, like I said, bread and butter practice area of syndications has slowed, at least for the time being, until we start to see some relief in interest rates.

Aviva (05:41)
Sure. Out of curiosity, as an attorney looking at a syndication, do you ever see a syndication where you don't think it makes sense and do you have input or do you refrain from giving input in on the deal?

Richard Crouch (06:01)
Yeah, for some, if it's a particularly small deal, the paperwork, the legal work, et cetera, associated with doing a full -scale syndication with a pretty comprehensive private placement memorandum might not make sense. I mean, I definitely always want to encourage clients to be thorough and to handle all the filings they need to and to correctly paper the transaction.

But usually for some of the larger transactions where you may have as many as 30 investors and say you were buying an office portfolio, that's going to be one where you're definitely going to have to have mechanisms in place that determine how distributions are handled, how certain corporate governance aspects are handled, as well as day -to -day operations. And that's also the type of matter where you're going to have a lot of high net worth investors where if something goes wrong,

or isn't properly documented, they're going to have the financial wherewithal to sue a promoter or a syndicator if the deal's not performing. So I'd say on a lot of those larger deals, it definitely makes sense, particularly if you're also getting complex financing involved as well.

Aviva (07:12)
It's super interesting. Now, before we started recording the show, you had brought up a new act that has come into place, the Corporate Transparency Act. Can you explain this to me as if I were a fifth grader?

Richard Crouch (07:30)
Sure, sure. Well, it actually became effective January 1st, 2024. It had been enacted 2022, but it took a while to basically be implemented. And a big part of it was they just wanted to make sure people were aware of it. It pretty much affects just about every syndication that we see. And the short of it is it's legislation that's designed to combat money laundering.

And so basically information is going to be have to be entered into a federal database. BOSS is the acronym for that. And it's with the Treasury Department. And basically it's so they can track the flow of funds. And usually what's going to trigger this reporting requirement are the people that will have to report it is if there's any owner or member of an LLC, for example, or any company.

that has more than 25 % of the ownership. There are certain criteria that they're going to have to enter their address, a copy of their passport or driver's license, and other details related to the transaction or to the individual involved. The sponsor or the syndicator of a particular LLC or particular project is going to have to enter their information as well.

And then they have requirements that the company applicant, who would be somebody like me, that oftentimes forms the entity, has to enter all of their data as well. And there are different increments for when this has to be reported. So if the entity existed before January 1st of this year, they have basically a full year to comply if the entity is formed after January 1st of this year, but before the end of this year.

They have 90 days to comply and then after that pretty much any time an entity gets formed in the future, they're going to have to comply within 30 days. So it's one of those things that comes and goes very quickly and it's easy for it to slip off people's radar. But there are there are civil and criminal penalties for not complying. The civil penalties can be up to $500 each day that the violation continues. The criminal.

penalties can be imprisonment for up to two years and or a $10 ,000 fine. So it's one of those where it's not insignificant. And a lot of people, a lot of people don't really want to comply because particularly as investors, they don't necessarily want everybody to know what they're invested in. I guess the good news is this is a database that only is going to be used by the federal government. So it's not like.

any person off the street can access this information. So I guess that's to the extent there's a silver lining at all, that's part of it. And I guess the other good news is it really is something that you only have to do one time in terms of entering your information into this database unless some of that information changes over time. And then you basically, every time that happens, you have to update it within 30 days of that particular change.

So again, it's pretty far sweeping. There are a list of exemptions. There's 23 different types of entities that are exempt from the list. And a lot of those entities, just my oversimplified explanation as to who would be on that list, would be certain entities that might be publicly traded, certain financial institutions. A lot of the folks that already submit this type of information to the federal government anyway, don't have to, in addition, comply with

the CTA or Corporate Transparency Act. So it's here and a lot of us didn't think it would actually get through just because there was so many objections to it, but it definitely looks like it's constitutional and here to stay.

Aviva (11:15)
Well.

Is there any type of legislation that requires syndications that were put together prior to January 1st, 2024 to comply with the CTA?

Richard Crouch (11:33)
So if the company that was formed for that particular syndication is still active, they still hold the asset, they do have to, in pretty much all cases, comply with the CTA for this. The only exceptions I can think of to that would be if maybe you formed an LLC in 2017, you bought an office building, that office building has since been sold, and you've allowed the entity to basically lapse.

Or it may even still be in existence, but it's not being used for anything and you're going to let it lapse. Those will be ones where you don't necessarily have to comply with the CTA because it's going to basically be an inactive entity not used for any other purpose. So I would recommend that if people have some of those off -the -shelf LLCs that they're just kind of keeping around for whatever, I would go ahead and file articles of cancellation if you don't want to have to also do the CTA compliance.

related to that. Just so you can affirmatively show this entity no longer is in effect or of any particular use and so you're basically affirmatively canceling its status or its existence.

Aviva (12:41)
Do you foresee or expect more legislation to impact syndications in the future?

Richard Crouch (12:50)
No, I mean, there are certain things that people are always mindful of. I will say in the last couple years, there has been more of a focus on any investors that are doing 1031s. And you can do 1031s related to a syndication. You have to be very careful how you paper it. Because with 1031s, the particular procedures that are in place require that you basically be co -owners of the property rather than simply an investor.

a partnership. And so that's the key in a lot of the tenancy and common documentation that's required is you have to basically make it look like it's not a partnership, which is a little bit of a farce because what else could it be? I mean most of these deals are put together as partnerships but basically if you fit within that particular box and you document it accordingly you can avail yourselves to the benefit of a tax -deferred exchange when the property is sold.

but it's very critical to follow all of those steps that are needed. So I guess long story short on that is I have seen more scrutiny on 1031s to make sure they are in fact tenancy and common arrangements rather than traditional partnerships. And so that's one thing to be mindful of. Other ones are just making sure that if you do have one of the exemptions, like rule 506 for accredited investors,

there still is an online filing that you can do to basically affirmatively claim that exemption. And that's one thing that we do for all clients, because a lot of people will, they'll still do an operating agreement. They'll still probably have a PPM and they'll just stop there once the deal is done and they don't do that additional filing. And that's another one of those things where you just want to make sure every I is dotted and every T is crossed. Cause again, if you have an unhappy investor, particularly one that has money to actually,

alleged there was some mishandling or some some misappropriate filing or anything like that. You just want to make sure that everything is buttoned up to avoid any sort of claims like that.

Aviva (14:48)
Hey, my father put together probably a dozen syndications between 1999 and 2015. And rule number one was always do good to your partners. And my attorney has always said to me, if you do the right thing, you never get in any trouble. And...

Those are words to live by because it also always seems like when you do the wrong thing, it's for jump change.

Richard Crouch (15:17)
Yeah, I always I use the quote and I, I, I ascribe it to Mark Twain. Who knows if he actually said it, but he's the one I quote, that an honest man doesn't have to remember what he said. and, I think, I think it's very true. And so, that's one thing that I definitely impart to my clients that are putting deals together is be transparent, be upfront, sure have disclaimers, but also have all the disclosures. If you're not even sure whether you need to include the disclosure.

In terms of fees and and so on, it definitely avoids a lot of headaches down the road.

Aviva (15:49)
can only imagine. And you know you can make a great living by being ethical and doing the right thing. You don't have to be you know you don't have to shorthand your partners to still make a good living and make yourself money make them money and that's...

Richard Crouch (16:09)
Yeah, for a lot of folks, I mean, attorneys are in this group as well. And I would imagine anybody who's raising money, your reputation is your currency as well. So cutting corners and stiffing vendors, providers, investors, definitely not a good practice and definitely catches up to you sooner than later.

Aviva (16:28)
Yeah, well, I hope you and I both know nothing about that. You're an attorney, you have to know, it's your job, but I'll still steer clear of it. So something I don't talk about very often about syndications is exit strategies. What are common exit strategies that you see within syndications and...

Richard Crouch (16:34)
Alright.

Right, right.

Aviva (16:53)
the syndications that we run are just buy it and hold it. So I'm curious what exit strategies look like.

Richard Crouch (17:00)
Yeah, yeah, it's one of those things that tend to get discounted too often because people, as you can imagine, are particularly if it's early in their career, are so excited about that deal and lots of the details don't get properly papered and they assume this deal can't lose. It's like falling off a log and we'll basically refine those details later. And then of course, when the asset doesn't perform as contemplated,

Memories tend to get fuzzy, selective, and outcome determinative as to how distributions were supposed to be handled, how things were supposed to be managed, and so on. So a lot of the exit strategies I see, they can be ones where at a given point in time or upon a certain event, you know exactly how things will play out, or they can be circumstances where the asset hasn't performed and one of the members wants to

disassociate in some way and basically what are the mechanisms for that. So a lot of what I see is you'll see they go by different names sometimes you'll see shotgun clauses or just buy sell provisions that have a predetermined mechanism for determining what that fair market would be for fair market value would be or who would perform that analysis and determine that.

And then basically what sort of notice you would have to give, what sort of rights of first refusal the other members could have, what various hoops have to be jumped through before you could actually maybe sell your own membership interest to a third party. Cause a lot of the people involved, whether they're other investors or the syndicator themselves, they're going to want to retain control of the deal. So they are going to have restrictions on your ability to transfer it outside.

of the current, I guess, basket of investors. And so usually if the manager themselves don't have the right to buy it, the other members are oftentimes are going to have the right to buy it. And you see different mechanisms like that. Sometimes the, the, I know when I say manager, it's basically I'm using it interchangeably with the syndicator. Sometimes they'll have the right to buy you out. Sometimes you'll have the right to buy them out. And you can negotiate for.

basically anything you want, but it's just important to pin down these details before things actually do go sideways. Some of the things I also suggest is you can try to capture every conceivable thing that could happen, but there may, in the universe of possibilities, there may be some circumstances where even if you have a great operating agreement, it doesn't quite...

describe what you're supposed to do in the applicable circumstance. So having some sort of alternative dispute resolution is recommended to in terms of having mediation and arbitration provisions to resolve certain disputes with the thought that it'll be a bit more expedited to do so, hopefully more cost effective to do so, but avoid situations where you're stuck in courts for months or years on end to resolve certain disputes. So that's most.

of what we see. Now in terms of planned events, you might have something where upon the sale of the asset, it very clearly delineates how things are broken down in terms of return of their initial capital contribution, maybe getting them caught up on preferred returns that they haven't gotten. And the same thing can happen during a refinance. That's pretty common too, in terms of making sure your investors are all caught up.

on their returns and that's also where the syndicator will basically recapture their subordinate return or their sweat equity piece to and basically what the hierarchy is there in terms of that how that'll happen. And you will have you'll have mechanisms as well that basically contemplate how distributions are handled just during operations in addition to when the asset gets sold or refinanced. So those are just some of the exit strategies.

we see and it's again there are there are hosts I mean they're probably no less than six seven that I regularly see but it's just best to paper it on the front end and really to have a good full conversation with the investors saying this is what's available what works best for your particular your particular deal so that's a lot of what's out there.

Aviva (21:20)
Let me ask you, if you have to give a new syndicator one piece of advice, what piece of advice would you give them?

Richard Crouch (21:29)
I would say it goes back to our earlier comment about being transparent. So basically fully disclosing any fees that they're looking to obtain, whether it's an acquisition fee, a disposition fee, or if they have a property management group that's maybe an affiliate of theirs, to fully disclose that as well as what percentage that property manager would be getting. Because you just don't want to have any surprise fees and you want to be able to

to explain with a straight face or have a comfortable conversation as to why a certain fee is due and owing and you don't want it to be hidden or questioned later. So that's one of the biggest pieces. I would say also if a particular asset or project is not performing as forecasted to regularly, and actually this.

even if it is performing well, to regularly have communication with your investors. Because nothing is worse than going on radio silence when they're either not getting the returns that they've been promised and not hearing any sort of business plan as to how things are going to be improved. So basically open and open access and constant communication would be another thing that I would definitely suggest.

And then I guess the last thing in this, this would be more in favor of a syndicator or promoter is again in a scenario where maybe you don't have the performance that you were hoping for to already have something in your operating agreement that basically says, okay, in the following events, the manager can be removed for cause and then very specifically define what for cause would be so that you don't get it.

into litigation as to whether it would be acceptable to remove them. And you could have things where if for two consecutive quarters, they don't pay the preferred return that's contemplated in the operating agreement, they don't propose a business plan within X number of days to correct the situation. Things that probably any good syndicator would normally do, but it's good to also have a mechanism so that you don't just immediately start having infighting when things don't go as planned.

Aviva (23:43)
It's like a relationship. Keep communication open and do what you say you're gonna do.

Richard Crouch (23:45)
Exactly.

Well put. Right, right. Right, absolutely.

Aviva (23:52)
So Mr. Crouch, before I have you tell the listeners where they can find you, follow you, or contact you, we end the podcast with the question, what is currently making you happy in your role in commercial real estate law?

Richard Crouch (24:13)
Yeah, I would say even though there are not a lot of syndications right now, just because numbers are hard for syndicators to make deals work, I do like being able to help clients of mine, not just in their celebrations and achievements, but also help them get out of difficult situations. And I guess you could say that is one benefit of being an attorney, is you get paid when things are going well. And...

Theoretically you get paid when things are not going well, but I know there are commercial realities associated with that too. A lot of it depends on how a particular asset's performing as to when you get paid. There's always an intention to pay you, but sometimes it might take longer than you think. But we do have certain clients, particularly if they're heavy in office right now where their loan either has matured or is about ready to mature, it's not easy to quickly refinance.

based on some of those valuations and we are helping them document how to basically do their loan modifications, what terms are going to be involved in that, the whole extend and pretend phenomenon that we keep hearing about. But we have been able to, in several cases in conjunction with that, go back and look at a lot of the capital contribution language. And this goes back to one of those things in terms of planning for the worst ahead of time as

you know, what do you do if you need more money to keep the project viable? And fortunately, in all cases, there are mechanisms in the operating agreement for additional capital contributions. And so we basically have had to go back to those sections and look at what notice needs to be provided, what happens to investors who don't contribute more, how they get diluted and what that process is. And so I'm glad.

that the documents spoke to the situation, even though things were great at the time it was drafted, but that now that things are not as ideal for them, that those provisions are there at least to give them guidance and to have a clear path to go forward. So I was happy to be a part of that. So in good times and bad, I'm happy to help clients.

Aviva (26:20)
Hey, what a cool, I've always looked up to anyone who could withstand learning law because it's so important for what we do and I do not have the wherewithal to do so. So I find it fascinating and this has been really informative for me and it'll be very informative for the listeners. So we appreciate your time. Mr. Crouch, where can,

Richard Crouch (26:48)
absolutely. Thanks.

Aviva (26:49)
The listeners follow or contact or find you online if you want.

Richard Crouch (26:55)
Okay, yeah, yeah, so my our our website is www and then it's WRVBlaw .com My email address, which is probably the best way to get a hold me is Richard .Crouch and that's like crouching tiger at WRVBlaw .com and then this may blow your mind. I'm going to give my mobile phone out.

757 -353 -0969. And I'm guaranteed to get that message as well. So if anybody has any questions.

Aviva (27:33)
Thank you so much for being on the show and for everybody listening. Stay within the confines of the law and we'll see you next week.