Syndication Operating Agreements: Key Elements for Real Estate Syndicators and Fund Managers

A real estate syndication operating agreement defines the rules for how a syndication or investment fund will operate. Learn about the essential components needed to protect both investors and syndicators, and ensure smooth management of the investment.
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An operating agreement is one of the core legal documents used in real estate syndication or private investment funds. It lays out the specific rules and guidelines for managing the fund or syndication, including key provisions such as the roles of general partners and investors, voting rights, distribution of profits, and decision-making processes. This agreement is critical for ensuring compliance and smooth operation, as it outlines how the syndication is governed and how disputes or issues are resolved. A well-structured operating agreement provides clear, all-weather guidance for both sunny and stormy times in the syndication’s life cycle.

Real estate syndicators, fund managers, business leaders, and developers need to pay careful attention to these agreements, ensuring they are detailed, comprehensive, and tailored to the needs of the specific syndication or fund. Operating agreements are pivotal in keeping all parties informed and aligned on the syndication’s management, from its inception through its ongoing operations.

Read more about Fees and Equities in a Syndication:
https://www.moschettilaw.com/real-estate-syndication-fees/
Read more about Crowdfunding vs. Syndication:
https://www.moschettilaw.com/real-estate-crowdfunding-vs-syndication

Moschetti Syndication Law Group is a boutique syndication law firm, serving small and growth-bound syndicators, as well as private equity firms. Our attorney, Tilden Moschetti, is determined to keep the firm’s ‘boutique’ size so we can tailor the services to each client’s unique needs without turning the firm into a faceless factory churning out private placement memorandums or passing unnecessary overhead expenses onto our clients. (As our client, you’ll only pay a fixed fee, so no surprises.) As for the client experience, we give real-time answers with Tilden Moschetti without making you book an official appointment or get passed along to associates or paralegals. We’ll work with your ambitions and overall vision to help you close the current deal and fill in that ‘missing’ piece – whatever you need – to keep adding more syndications to your portfolio. We keep syndicators syndicating (TM).

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Episode Transcript

Tilden Moschetti (00:00):
As a syndication attorney, one of the core

(00:02):
documents that I provide prettymuch every single one of my
clients is an operatingagreement. What is an operating
agreement for syndication or aninvestment fund? What needs to
be in it? What are thoseelements? How do I know if it's
any good? Let's talk about allof that in this video.

(00:31):
So if a private placementmemorandum is the kind of the
disclaimer document thatexplains the investment
opportunity to investors, thenan operating agreement is really
the rules that govern how thatsyndication, how that investment
fund is going to work. It is aabsolutely critical document,

(00:52):
not only because it's required,but also because it's what you
turn to at the end of the day tomake sure that you're making
your decisions in accordancewith what the investors need to
get. So it's that instructionmanual. Like I said, I like to
call my operating agreements,all weather operating
agreements. The reasoning isbecause I want to make sure that

(01:15):
if the if it's rainy weather orsunny weather, they can look in
the operating agreement and findout exactly what is supposed to
happen, and all of that's beenprovided to the investor, so
there's no questions later on.If there's a question on why is
the distribution, x, y, z, youcan point to the operating
agreement and said, Rememberwhen I gave you this document?

(01:38):
Here's exactly where it saysthat. That's the whole point of
the operating agreement. It's anagreement on how you're gonna
operate. Funny name, huh? So oneof the key points that needs to
be in an operating agreement isthe roles. And that's roles,
oftentimes, is kind of twofold.So on one hand, we have the
different kinds of members thatthere will be, so we have

(02:01):
members that are going to be theinvestors, right? So in an LLC,
by the way, that we havemembers, we don't have
shareholders. So those membersmight be investors. Typically,
we divide them up into classes,with Class A being the
investors, and then we'll haveother kinds of members, like the

(02:22):
manager or the sponsor, and havethose roles. Typically, I'll put
those as Class B or C or D orwhatever makes the most sense.
So those are the kinds of rolesfrom that perspective on who
those members are. But we alsoneed to know what they get in
part of those right? So do theyhave voting rights? Who has
equity, those sort of things. Sowe can kind of understand, well,

(02:44):
who gets to make the decisions,who actually owns the the assets
of the the LLC, so that's allincorporated as well. We
probably also talk about therole of the manager and make
sure that what's clear this iswhat the manager's role is. Most
of the time it will be managergets to make every decision, and

(03:05):
they are encouraged to checkwith the other members, is
probably what the outline isgoing to be. Might be different
in your syndication orinvestment fund. Another
important part of an operatingagreement for syndication or
investment fund has to do withwhat we call the capital stack.
So the capital stack is all ofthe capital, all of the money

(03:26):
that comes in for it. So notonly is it financing, but it's
also that investor money. Itmight also be that sponsors
money. How is it all treated?What do we do with that set of
money? How does it get appliedto where it gets applied. What
are the rules governing it? Whatif we have money come in later?
What do we do with it, and howdo we categorize it? That's all

(03:49):
part of that discussion abouthow we deal with the capital
stack. Now, typically, as partof that too, we are talking
about accounting rules, notnecessarily as detailed as the
you know, this is what gap says,But accounting rules in terms
of, how are we going to dealwith these little changes? What

(04:10):
if there's a reassessment? Whatare there's if there's something
that goes on, what if somebodycontributes a property to the
investment fund rather thancash? What do we how do we deal
with that? How do we appraiseit? Those are an important piece
to talk about in any operatingagreement, always in an
investment fund. One concern isthat compliance and

(04:32):
enforceability provisions.
The idea of a Limited LiabilityCompany is a very good one. It's
very strong. It's verystructured. Every state in the
United States has a provisionfor how LLC should fit together
and how they should work. Thereare little nuances between each
and between the differentstates. Most of the rules are

(04:54):
very, very similar to eachother,
so but we're always concerned.
Concerned with things like,well, what are those rights that
we're giving all the differentmembers, and can we, as putting
this deal together, take some ofthose rights away, or can we
give them other rights? This maychange the enforceability, and

(05:15):
so part of my job as an attorneyis to help my sponsors balance
what is clear, black and whitelaw to what is a little bit less
so. Good example would beremoving members. Most of the
time you can't remove members.That said, we sometimes will put
in a rule about how we canremove members, how we can

(05:38):
remove members to an LLC now itthose provisions oftentimes will
be enforceable, but in somejurisdictions, it might be a
little bit less so, but thatdoesn't necessarily, doesn't
mean that we don't put it in andincorporate it as our set of
rules. So at least it's clearfrom the get go, this is how we
want to work as an operation,how the actual laws apply might

(06:03):
differ slightly, but as acompany, we want it to work like
this, and that is what the jobis, to assemble a good operating
agreement for that syndicationor investment fund. I talked a
little bit about it before, buthow we put together voting
rights and how decision makinggoes is of utmost importance.

(06:24):
It's a big part of any operatingagreement for a syndication or
investment fund. Now, the vastmajority of funds that are put
together have the managerultimately making all the
decisions and the investors nottaking making any it looks a lot
like the gplp roles in a limitedpartnership. Now that said it

(06:47):
doesn't have to be like that. Soit can be different. If your
syndication needs to workdifferent. I have sponsors who
put together voting rights foreverybody. I have sponsors who
put together boards of managersin order to make all the
decisions, and the manageritself was just there to set up
the original company. I have, Ihave all everything in between,

(07:12):
from from the people who are outof true democracy with everybody
making all the decisionstogether, to all the way to the
manager is the sole decisionmaker. So this is the playground
that we play in, where we canmake those decisions and how we
structure it, and where wedocument that is in the
operating agreement. It's goodto put that in the PPM. It's

(07:35):
best to also put it in theoperating agreement, because,
again, that's the rules for theroad. Probably what you're
thinking a very important partof an operating agreement for
the syndication or fund iswaterfalls, distributions,
capital stack. We talked alittle bit about capital stack
already, but distributions, Imean, yes, distributions is

(07:57):
absolutely critical, becausemost of the time that's where
the questions are going to come.They'll either come from
distributions or they'll comefrom expenses, because it has an
impact on distributions. So howwe do distributions needs to be
very well spelled out so there'sno ambiguity. So we may have the

(08:17):
situation where the manager getsto make the decision on how much
to distribute at any given time,but it also makes it very clear
that when those decisions aremade, here's how all the cash
will flow. That way, they're notable to give all the money to
their best friend who's aninvestor alongside of somebody
that they're not that fond of.Everybody needs to be treated

(08:40):
the same if they're on the sameinvestment class. So we spell it
out in the operating agreement.The reasoning is clear. I mean,
we everybody goes into theinvestment with the set of rules
so they understand what they'regetting into. They read the PPM,
they read the terms, theyunderstand it, the rules of the
road. Just need to support thatalso how we deal with taxes

(09:02):
needs to be a part of theoperating agreement many times,
probably the vast majority oftimes, we just make allocations
of taxes for tax purposes,evenly, a pro rata. You know,
your investors have theirperson, their pro rata amount to
their basis. That's set out forthem, depreciation happens and
it flows through the through thenormal way. It's not always the

(09:25):
way we do it, though, and nomatter how it's done again, it
needs to be spelled out so thatway again, there's no questions
about how the decisions weremade, about taxes or about
really anything in the operationof that syndication or fund. My
name is Tilden moschetti. I am asyndication attorney with the

(09:46):
moschetti syndication Law Group.We help syndicators from real
estate private equity companies,anyone who wants to raise money
from investors using RegulationD, it's the best exempt.
In the world, that's my opinion,and we can certainly help set it
up. Set up an investment fund ora syndication for you. If you've

(10:09):
got a project you're working on,give us a call. Get on our
calendar. Let's meet and talkabout it, to see if there's a
good fit between us.
You