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. You