As a CPA, how often are you pulled into the LP Pship Agreement drafting conversation?

Question

Typically I see some OAs and PAs that grossly undermine the the goals of the investors. Undoing the mess via amendments, etc… always tends to be laborious and more expensive then getting these right the first time.

Why are CPAs seemingly not always in the room when GPs and their attorneys build out their RE Funds?

Why are  CPAs seemingly not always in the room when GPs and their attorneys build out their RE Funds?

Kory Reynolds · Answer

Account Closed thanks for the mention!

As Zachary mentioned, new syndicators have been popping up like crazy the last 5 years, and a lot of them are not as sophisticated, or don't have sophisticated advisors - they'll crank out an operating agreement and execute, and the following February tell their CPA firm "hey we have this new partnership!" Their tax advisor proceeds to let them know all the problems, and amendments need to be addressed by 3/15 of that year to be respected for the prior year :)

For the sophisticated investors...the CPAs are (almost) always a part of the conversation with the attorneys when there are LPs involved.  The attorneys are very good at liability.  Most are not as good at determining the accounting and tax allocations issues.  There are a few attorneys I partner with that we are a team when it comes to these documents.  Many other attorneys by default recommend that their client has their tax advisors review the agreements prior to execution.

So...they should be, and most tax advisers want to be in that room when the documents are being drafted, but we can't help when no one tells us what is going on.  An hour or two of our time might not be cheap, but it is a lot cheaper and easier than having to redo it all.

Jason Watson · Answer

100% agreed. I say similar words... attorneys are great at liability and protecting interests, etc., but they do not build OAs with tax consequence in mind. Some do. Most don't. And that's OK provided they bring in an accountant, and perhaps one with subject matter expertise in the partnership. I see a lot problems on valuation and redemption. Special allocation. Required distros for tax consequence.At the same time I kinda snicker a bit since the buyer... the investor... thinks they found the next Apple or Tesla investment (and they are clearly the smartest in the room), and then go off the rails when it all goes south, I can't help but shake my head and have a small giggle.A fool and their money soon go separate ways, Yes, but don't you wonder how they got together in the first place?

Account Closed · Answer

There are firms like @Kory Reynolds who likely have syndicators on their client list who could give more insight. Sydicators have popped up like weeds the past few years and not all of them are very sophisticated, some are downright malicious. In the worst case, I've seen contracts where LPs are made to personally guarantee the loan. I 100% agree CPAs and real estate focused accountants need to be consulting on these when they are made and give advice to their clients on the implications for their potential investment into someone else's fund.

Account Closed · Answer

It's not uncommon for CPAs to be left out of initial discussions when structuring real estate funds, and there are several reasons for this:

• Historical Roles: Traditionally, attorneys and general partners (GPs) have taken the lead in structuring real estate funds, with CPAs brought in later to handle tax and financial matters. This historical division of roles might lead to CPAs being excluded from initial discussions.
• Perceived Scope: GPs and attorneys may perceive the initial structuring phase as primarily legal in nature, focusing on regulatory compliance, fund agreements, and investment structures. While tax implications are significant, they might not be seen as central during the initial formation stage.
• Specialized Expertise: Attorneys and GPs often have specialized expertise in real estate law and investment strategy, which they prioritize in the early stages of fund development. CPAs, while essential for tax optimization and financial oversight, may not always be viewed as indispensable in the initial planning phase.
• Communication Gaps: There may be communication gaps or misunderstandings about the roles and contributions of CPAs versus attorneys and GPs. CPAs might not always be proactive in asserting their value in the initial structuring process, leading to their exclusion from early discussions.

However, recognizing the importance of CPAs in optimizing tax efficiency, mitigating risks, and ensuring financial compliance, it's beneficial for GPs and their legal teams to involve CPAs from the outset. By integrating CPAs into the initial discussions, real estate funds can be structured more effectively, with tax considerations and financial goals addressed comprehensively from the start, ultimately avoiding costly amendments and adjustments down the line.

As a CPA, how often are you pulled into the LP Pship Agreement drafting conversation?

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