Tilden Moschetti: As a syndication attorney, one of the core
documents that I provide pretty much every single one of my
clients is an operating agreement. What is an operating
agreement for syndication or an investment fund? What needs to
be in it? What are those elements? How do I know if it's
any good? Let's talk about all of that in this video.
So if a private placement memorandum is the kind of the
disclaimer document that explains the investment
opportunity to investors, then an operating agreement is really
the rules that govern how that syndication, how that investment
fund is going to work. It is a absolutely critical document,
not only because it's required, but also because it's what you
turn to at the end of the day to make sure that you're making
your decisions in accordance with what the investors need to
get. So it's that instruction manual. Like I said, I like to
call my operating agreements, all weather operating
agreements. The reasoning is because I want to make sure that
if the if it's rainy weather or sunny weather, they can look in
the operating agreement and find out exactly what is supposed to
happen, and all of that's been provided to the investor, so
there's no questions later on. If there's a question on why is
the distribution, x, y, z, you can point to the operating
agreement and said, Remember when I gave you this document?
Here's exactly where it says that. That's the whole point of
the operating agreement. It's an agreement on how you're gonna
operate. Funny name, huh? So one of the key points that needs to
be in an operating agreement is the roles. And that's roles,
oftentimes, is kind of twofold. So on one hand, we have the
different kinds of members that there will be, so we have
members that are going to be the investors, right? So in an LLC,
by the way, that we have members, we don't have
shareholders. So those members might be investors. Typically,
we divide them up into classes, with Class A being the
investors, and then we'll have other kinds of members, like the
manager or the sponsor, and have those roles. Typically, I'll put
those as Class B or C or D or whatever makes the most sense.
So those are the kinds of roles from that perspective on who
those members are. But we also need to know what they get in
part of those right? So do they have voting rights? Who has
equity, those sort of things. So we can kind of understand, well,
who gets to make the decisions, who actually owns the the assets
of the the LLC, so that's all incorporated as well. We
probably also talk about the role of the manager and make
sure that what's clear this is what the manager's role is. Most
of the time it will be manager gets to make every decision, and
they are encouraged to check with the other members, is
probably what the outline is going to be. Might be different
in your syndication or investment fund. Another
important part of an operating agreement for syndication or
investment fund has to do with what we call the capital stack.
So the capital stack is all of the capital, all of the money
that comes in for it. So not only is it financing, but it's
also that investor money. It might also be that sponsors
money. How is it all treated? What do we do with that set of
money? How does it get applied to where it gets applied. What
are the rules governing it? What if we have money come in later?
What do we do with it, and how do we categorize it? That's all
part of that discussion about how we deal with the capital
stack. Now, typically, as part of that too, we are talking
about accounting rules, not necessarily as detailed as the
you know, this is what gap says, But accounting rules in terms
of, how are we going to deal with these little changes? What
if there's a reassessment? What are there's if there's something
that goes on, what if somebody contributes a property to the
investment fund rather than cash? What do we how do we deal
with that? How do we appraise it? Those are an important piece
to talk about in any operating agreement, always in an
investment fund. One concern is that compliance and
enforceability provisions.
The idea of a Limited Liability Company is a very good one. It's
very strong. It's very structured. Every state in the
United States has a provision for how LLC should fit together
and how they should work. There are little nuances between each
and between the different states. Most of the rules are
very, very similar to each other,
so but we're always concerned.
Concerned with things like, well, what are those rights that
we're giving all the different members, and can we, as putting
this deal together, take some of those rights away, or can we
give them other rights? This may change the enforceability, and
so part of my job as an attorney is to help my sponsors balance
what is clear, black and white law to what is a little bit less
so. Good example would be removing members. Most of the
time you can't remove members. That said, we sometimes will put
in a rule about how we can remove members, how we can
remove members to an LLC now it those provisions oftentimes will
be enforceable, but in some jurisdictions, it might be a
little bit less so, but that doesn't necessarily, doesn't
mean that we don't put it in and incorporate it as our set of
rules. So at least it's clear from the get go, this is how we
want to work as an operation, how the actual laws apply might
differ slightly, but as a company, we want it to work like
this, and that is what the job is, to assemble a good operating
agreement for that syndication or investment fund. I talked a
little bit about it before, but how we put together voting
rights and how decision making goes is of utmost importance.
It's a big part of any operating agreement for a syndication or
investment fund. Now, the vast majority of funds that are put
together have the manager ultimately making all the
decisions and the investors not taking making any it looks a lot
like the gplp roles in a limited partnership. Now that said it
doesn't have to be like that. So it can be different. If your
syndication needs to work different. I have sponsors who
put together voting rights for everybody. I have sponsors who
put together boards of managers in order to make all the
decisions, and the manager itself was just there to set up
the original company. I have, I have all everything in between,
from from the people who are out of true democracy with everybody
making all the decisions together, to all the way to the
manager is the sole decision maker. So this is the playground
that we play in, where we can make those decisions and how we
structure it, and where we document that is in the
operating agreement. It's good to put that in the PPM. It's
best to also put it in the operating agreement, because,
again, that's the rules for the road. Probably what you're
thinking a very important part of an operating agreement for
the syndication or fund is waterfalls, distributions,
capital stack. We talked a little bit about capital stack
already, but distributions, I mean, yes, distributions is
absolutely critical, because most of the time that's where
the questions are going to come. They'll either come from
distributions or they'll come from expenses, because it has an
impact on distributions. So how we do distributions needs to be
very well spelled out so there's no ambiguity. So we may have the
situation where the manager gets to make the decision on how much
to distribute at any given time, but it also makes it very clear
that when those decisions are made, here's how all the cash
will flow. That way, they're not able to give all the money to
their best friend who's an investor alongside of somebody
that they're not that fond of. Everybody needs to be treated
the same if they're on the same investment class. So we spell it
out in the operating agreement. The reasoning is clear. I mean,
we everybody goes into the investment with the set of rules
so they understand what they're getting into. They read the PPM,
they read the terms, they understand it, the rules of the
road. Just need to support that also how we deal with taxes
needs to be a part of the operating agreement many times,
probably the vast majority of times, we just make allocations
of taxes for tax purposes, evenly, a pro rata. You know,
your investors have their person, their pro rata amount to
their basis. That's set out for them, depreciation happens and
it flows through the through the normal way. It's not always the
way we do it, though, and no matter how it's done again, it
needs to be spelled out so that way again, there's no questions
about how the decisions were made, about taxes or about
really anything in the operation of that syndication or fund. My
name is Tilden moschetti. I am a syndication attorney with the
moschetti syndication Law Group. We help syndicators from real
estate private equity companies, anyone who wants to raise money
from investors using Regulation D, 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 or a syndication for you. If you've
got a project you're working on, give us a call. Get on our
calendar. Let's meet and talk about it, to see if there's a
good fit between us.
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