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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