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

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documents that I provide pretty
much every single one of my

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clients is an operating
agreement. What is an operating

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agreement for syndication or an
investment fund? What needs to

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be in it? What are those
elements? How do I know if it's

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any good? Let's talk about all
of that in this video.

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So if a private placement
memorandum is the kind of the

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disclaimer document that
explains the investment

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opportunity to investors, then
an operating agreement is really

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the rules that govern how that
syndication, how that investment

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fund is going to work. It is a
absolutely critical document,

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not only because it's required,
but also because it's what you

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turn to at the end of the day to
make sure that you're making

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your decisions in accordance
with what the investors need to

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get. So it's that instruction
manual. Like I said, I like to

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call my operating agreements,
all weather operating

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agreements. The reasoning is
because I want to make sure that

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if the if it's rainy weather or
sunny weather, they can look in

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the operating agreement and find
out exactly what is supposed to

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happen, and all of that's been
provided to the investor, so

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there's no questions later on.
If there's a question on why is

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the distribution, x, y, z, you
can point to the operating

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agreement and said, Remember
when I gave you this document?

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Here's exactly where it says
that. That's the whole point of

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the operating agreement. It's an
agreement on how you're gonna

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operate. Funny name, huh? So one
of the key points that needs to

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be in an operating agreement is
the roles. And that's roles,

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oftentimes, is kind of twofold.
So on one hand, we have the

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different kinds of members that
there will be, so we have

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members that are going to be the
investors, right? So in an LLC,

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by the way, that we have
members, we don't have

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shareholders. So those members
might be investors. Typically,

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we divide them up into classes,
with Class A being the

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investors, and then we'll have
other kinds of members, like the

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manager or the sponsor, and have
those roles. Typically, I'll put

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those as Class B or C or D or
whatever makes the most sense.

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So those are the kinds of roles
from that perspective on who

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those members are. But we also
need to know what they get in

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part of those right? So do they
have voting rights? Who has

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equity, those sort of things. So
we can kind of understand, well,

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who gets to make the decisions,
who actually owns the the assets

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of the the LLC, so that's all
incorporated as well. We

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probably also talk about the
role of the manager and make

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sure that what's clear this is
what the manager's role is. Most

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of the time it will be manager
gets to make every decision, and

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they are encouraged to check
with the other members, is

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probably what the outline is
going to be. Might be different

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in your syndication or
investment fund. Another

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important part of an operating
agreement for syndication or

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investment fund has to do with
what we call the capital stack.

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So the capital stack is all of
the capital, all of the money

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that comes in for it. So not
only is it financing, but it's

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also that investor money. It
might also be that sponsors

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money. How is it all treated?
What do we do with that set of

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money? How does it get applied
to where it gets applied. What

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are the rules governing it? What
if we have money come in later?

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What do we do with it, and how
do we categorize it? That's all

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part of that discussion about
how we deal with the capital

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stack. Now, typically, as part
of that too, we are talking

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about accounting rules, not
necessarily as detailed as the

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you know, this is what gap says,
But accounting rules in terms

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of, how are we going to deal
with these little changes? What

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if there's a reassessment? What
are there's if there's something

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that goes on, what if somebody
contributes a property to the

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investment fund rather than
cash? What do we how do we deal

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with that? How do we appraise
it? Those are an important piece

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to talk about in any operating
agreement, always in an

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investment fund. One concern is
that compliance and

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enforceability provisions.

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The idea of a Limited Liability
Company is a very good one. It's

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very strong. It's very
structured. Every state in the

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United States has a provision
for how LLC should fit together

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and how they should work. There
are little nuances between each

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and between the different
states. Most of the rules are

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very, very similar to each
other,

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so but we're always concerned.

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Concerned with things like,
well, what are those rights that

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we're giving all the different
members, and can we, as putting

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this deal together, take some of
those rights away, or can we

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give them other rights? This may
change the enforceability, and

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so part of my job as an attorney
is to help my sponsors balance

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what is clear, black and white
law to what is a little bit less

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so. Good example would be
removing members. Most of the

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time you can't remove members.
That said, we sometimes will put

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in a rule about how we can
remove members, how we can

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remove members to an LLC now it
those provisions oftentimes will

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be enforceable, but in some
jurisdictions, it might be a

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little bit less so, but that
doesn't necessarily, doesn't

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mean that we don't put it in and
incorporate it as our set of

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rules. So at least it's clear
from the get go, this is how we

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want to work as an operation,
how the actual laws apply might

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differ slightly, but as a
company, we want it to work like

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this, and that is what the job
is, to assemble a good operating

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agreement for that syndication
or investment fund. I talked a

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little bit about it before, but
how we put together voting

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rights and how decision making
goes is of utmost importance.

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It's a big part of any operating
agreement for a syndication or

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investment fund. Now, the vast
majority of funds that are put

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together have the manager
ultimately making all the

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decisions and the investors not
taking making any it looks a lot

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like the gplp roles in a limited
partnership. Now that said it

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doesn't have to be like that. So
it can be different. If your

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syndication needs to work
different. I have sponsors who

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put together voting rights for
everybody. I have sponsors who

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put together boards of managers
in order to make all the

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decisions, and the manager
itself was just there to set up

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the original company. I have, I
have all everything in between,

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from from the people who are out
of true democracy with everybody

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making all the decisions
together, to all the way to the

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manager is the sole decision
maker. So this is the playground

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that we play in, where we can
make those decisions and how we

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structure it, and where we
document that is in the

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operating agreement. It's good
to put that in the PPM. It's

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best to also put it in the
operating agreement, because,

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again, that's the rules for the
road. Probably what you're

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thinking a very important part
of an operating agreement for

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the syndication or fund is
waterfalls, distributions,

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capital stack. We talked a
little bit about capital stack

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already, but distributions, I
mean, yes, distributions is

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absolutely critical, because
most of the time that's where

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the questions are going to come.
They'll either come from

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distributions or they'll come
from expenses, because it has an

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impact on distributions. So how
we do distributions needs to be

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very well spelled out so there's
no ambiguity. So we may have the

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situation where the manager gets
to make the decision on how much

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to distribute at any given time,
but it also makes it very clear

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that when those decisions are
made, here's how all the cash

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will flow. That way, they're not
able to give all the money to

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their best friend who's an
investor alongside of somebody

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that they're not that fond of.
Everybody needs to be treated

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the same if they're on the same
investment class. So we spell it

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out in the operating agreement.
The reasoning is clear. I mean,

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we everybody goes into the
investment with the set of rules

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so they understand what they're
getting into. They read the PPM,

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they read the terms, they
understand it, the rules of the

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road. Just need to support that
also how we deal with taxes

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needs to be a part of the
operating agreement many times,

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probably the vast majority of
times, we just make allocations

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of taxes for tax purposes,
evenly, a pro rata. You know,

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your investors have their
person, their pro rata amount to

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their basis. That's set out for
them, depreciation happens and

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it flows through the through the
normal way. It's not always the

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way we do it, though, and no
matter how it's done again, it

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needs to be spelled out so that
way again, there's no questions

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about how the decisions were
made, about taxes or about

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really anything in the operation
of that syndication or fund. My

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name is Tilden moschetti. I am a
syndication attorney with the

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moschetti syndication Law Group.
We help syndicators from real

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estate private equity companies,
anyone who wants to raise money

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from investors using Regulation
D, it's the best exempt.

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In the world, that's my opinion,
and we can certainly help set it

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up. Set up an investment fund or
a syndication for you. If you've

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got a project you're working on,
give us a call. Get on our

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calendar. Let's meet and talk
about it, to see if there's a

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good fit between us.

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You