Tax implications for Syndication LPs

[Jordan Northrup]

I'm a partner on a $3M syndication deal in Northern Virginia. We have 4 General Partners and a very small number of LPs. I have a small ownership percentage; I will make a larger return by contributing $500,000 to the deal. In my LP role, I can expect a 25% annual return of $125,000. The problem is, I don't have $500,000...I have to raise it. 

I plan to offer "my investors" a smaller annual return of say....15%, meaning my return would essentially be the difference in 25%-15%. How should this be structure to minimize my tax liability? If this were to play out, I'd only be keeping $50,000 of the $125,000. Is there a way to pay taxes on my portion and not the whole amount?  

[J Scott]

A couple thoughts:

First, it's a violation of SEC rules for you to get compensated based on the amount of capital you bring to the deal (unless you're a licensed broker). So, make sure that you play some other roles in the deal that justify your compensation.

Second, if you're looking to bring funds into the LP and take a fee/profit off of the top, you might want to consider creating a fund of funds, raising LP capital into your fund, and then deploying that capital into this deal and other deals.

The structure of your fund will dictate what's returned to your investors versus what you keep, and there will be no commingling of funds that will make taxes complicated.  

Also, that way you can be sure that your LPs have received the proper disclosures and there will be no confusion as to your role or the promote structure.

Finally, I would most certainly consult with a good security's attorney to ensure that all this is being done legally and that you are not violating any SEC rules.