Structuring Waterfall Provisions in LLC and Partnership Agreements

Navigating Complex Distribution Structures, Minimizing Negative Tax Consequences

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Wednesday, April 19, 2017
Recorded event now available


This CLE/CPE webinar will provide guidance to corporate and tax counsel on the various methods of structuring waterfall distribution provisions in LLC and partnership agreements. The panel will examine a variety of economic and tax considerations in the provisions, such as approaches to drafting priority returns (internal rate of return vs. preferred return, compounding, time value of money and the use of Excel references), relationships between distribution and allocation provisions, tax distributions, profits interests, and liquidation provisions.

Description

In LLC and partnership agreements, the waterfall provisions are heavily negotiated clauses that describe the priority in which distributions of cash and assets will be distributed among the entity’s members and partners.

The sequential order of the waterfalls is critical to ensuring the waterfall provisions work as intended and the distributions conform with the substance of the deal among the partners. Structuring waterfall provisions requires an understanding of payment priorities, economic terms and tax implications.

Counsel drafting and negotiating waterfall distribution provisions must ensure that the clauses are consistent with the economic arrangement of the parties. But, they must also ensure that the waterfall provisions are consistent with the partnership tax allocation provisions to avoid adverse tax consequences for the entity and its members or partners.

Listen as our authoritative panel discusses considerations and best practices for structuring waterfall provisions in LLC and partnership agreements, including the economic and tax impact of the clauses.

Outline

  1. Waterfall provisions, generally
  2. Determining/drafting waterfall provisions
  3. Understanding economic arrangement of parties
    1. Addressing tax considerations
    2. Specific waterfall considerations
  4. Priority returns
    1. Different waterfalls for different events (cash-flow vs. capital proceeds)
    2. Tax distributions
    3. Liquidation provisions
    4. Effects of capital contributions
    5. Profits interests
    6. Capital shifts
  5. Tailoring tax provisions to waterfalls
    1. Economic importance of allocations
    2. Addressing initial capital accounts
    3. “Layer-cake” allocations
    4. “Target” allocations
    5. Gross vs. net allocations

Benefits

The panel will review these and other key issues:

  • What are the different types of waterfall provisions and when should each be used?
  • What are the key considerations and best practices for counsel drafting and negotiating waterfall provisions in LLC or partnership agreements?
  • What are some pitfalls to avoid when tailoring partnership allocation provisions to waterfall provisions?

Learning Objectives

After completing this course, you will be able to:

  • Determine the appropriate waterfall structure for cash-flow vs. capital proceeds events
  • Recognize tax consequences to waterfall provisions
  • Identify layer-cake allocations
  • Distinguish gross vs. net allocations

Faculty

Afshin Beyzaee, Partner
Liner, Los Angeles

Mr. Beyzaee heads his firm's tax practice and is also a member of the firm's corporate department. He provides clients tax advice in a variety of planning matters, including structuring taxable and tax-free mergers and acquisitions, business reorganizations, real estate transactions, and issuances of debt, equity, hybrid, and derivative securities. His clients include publicly traded and privately held corporations, partnerships, business trusts, S corporations, private equity and real estate funds, financial institutions, and trade associations.

Michael J. Kiely, Partner
Liner, Los Angeles

Mr. Kiely's legal practice spans all areas of real estate, including finance, development, and land use. He has extensive experience representing developers, sellers and buyers, investors and promoters, lenders, and real estate joint ventures, with a particular emphasis on projects involving the intersection of private real estate development and government. His practice includes a substantial public/private partnership, or P3, emphasis, including governmental facilities development projects, mixed-use and transit-oriented development projects, and public finance.


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Tax Law Advisory Board

Patrick Derdenger

Tax Partner

Steptoe & Johnson

Edward Froelich

Of Counsel

Morrison & Foerster

Daniel L. Gottfried

Partner

Hinckley Allen

J. Leigh Griffith

Partner and Practice Group Leader - Tax

Waller Lansden Dortch & Davis

Mark S. Lange

Partner

BakerHostetler

Lori Mathison

Partner, Cross-Border Transactions Tax

Fraser Milner Casgrain

Christian M. McBurney

Partner

Arent Fox

Suzanne Ross McDowell

Partner, Tax-Exempt Organizations

Steptoe & Johnson

Todd Reinstein

Partner, Corporate Tax and Due Diligence

Pepper Hamilton

Alex Sadler

Partner

Morgan Lewis

Susan Seabrook

Shareholder

Buchanan Ingersoll & Rooney

Peter Stathopoulos

Managing Director, State and Local Tax Practice

Bennett Thrasher

Eric Tresh

Partner & Co-Chair, State & Local Tax Practice

Sutherland Asbill & Brennan

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