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Operating Agreement: Roles, Profits, and Decision-Making

operating agreement

An operating agreement is a legal document that outlines the rules and regulations of a real estate syndication. This agreement is crucial in ensuring that all team members are aware of their roles and responsibilities, and it sets the framework for how decisions will be made, profits and losses will be distributed, and other key topics. The following are some of the key topics typically covered in a real estate syndication operating agreement:

Roles and Responsibilities:

This section outlines the roles and responsibilities of each team member in the syndication. This includes the responsibilities of the sponsor, the investors, and any other team members involved in the syndication. It also outlines any expectations for the team members, such as the amount of time and effort required to participate in the syndication.

Capital Contributions: This section details the amount of capital required from each investor, the timing of contributions, and any penalties for late or missed payments. It also outlines any requirements for additional capital contributions in case of unforeseen expenses or other financial needs.

Profits and Losses:

This section outlines how profits and losses will be distributed among the investors and sponsor. It typically includes the preferred return or distribution waterfall, which outlines the order in which profits are distributed to investors and the sponsor. It may also include any provisions for the sharing of profits above and beyond the preferred return.

Decision-Making: This section outlines how decisions will be made within the syndication. It typically includes provisions for voting rights, such as the number of votes required for a decision to be made, and any limitations on the types of decisions that can be made without unanimous agreement.

Management:

This section outlines the management structure of the syndication. It typically includes provisions for the appointment and removal of the sponsor or other team members, and any limitations on the authority of the sponsor.
Term and Termination: This section outlines the term of the syndication and any provisions for early termination. It may also include provisions for the sale or disposition of the property.

Dispute Resolution:

This section outlines the process for resolving disputes within the syndication. It may include provisions for mediation or arbitration, as well as any limitations on the types of disputes that can be resolved through these processes.

A well-written operating agreement is crucial in ensuring the success of a real estate syndication. It should cover all of the key topics outlined above, and it should be written in clear and concise language that is easily understood by all team members.

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AARE and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.