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We syndicators operate underneath the regulatory framework from the SEC and state laws. But we also operate under another framework too. Fortunately, this one is our own design: the operating agreement. 

Just like with a PPM, a lot of syndicators make the mistake of just pulling an operating agreement off the internet and trying to do it themselves. This is a really big mistake that can definitely cost you. If you do this, you might have contradictory and confusing items between the operating agreement and the PPM. The SEC could get upset about it in the PPM, but in as operating agreement – because it’s the rules of the company – you actually can sabotage the entire thing, bringing your whole syndication crashing down into a pile of rubble. Or you can eliminate any liability protection that you thought you had in an LLC. So let’s go through the operating agreement, and its partner, the subscription agreement.

The Operating Agreement

Just like we’re governed by a series of laws, an LLC is governed by its own specific laws. And the place where those laws are defined is in the operating agreement. At the beginning, the only signers in the operating agreement are you and your partners, the originators of the operating agreement. 

An operating agreement is the rules for the company. It defines the way everything has to take place. A good operating agreement has every single thing in it, so that when anything happens, you always have a reference document with very specific rules for how to do it. So let’s go through the different parts of an operating agreement. 

First off, we like to talk about the formation details. Here, we’re talking about the name of the LLC, the address, the purpose of the LLC (which relates to the articles that were filed previously), who to notify, where books and records are kept – all those general ideas about what the LLC is and the foundation that sets it up. 

The next section to put way up front is whether this is going to be a manager-managed entity or a member-managed entity. This talks about the structure in detail, setting the tone for everything else. 

The next section to go through is members and different classes of members. Identify what a member is. And then identify what different classes there are, if there are different classes. So sometimes you’ll have your A shares or B shares. They’re not actually shares – remember they’re membership units. But that’s how people often think about them. So these are just different classes of people that we’ve identified. And these different classes may have different rights, responsibilities, distribution amounts, and voting rights. 

Which leads us to our next section which is voting rights and how the voting process takes place. Now in a manager-managed entity, there still is voting. Most of the time when putting together a manager-managed LLC, you’ll want to give some voting power to your members so they feel empowered. The main thing that you want them to have the say on is, should there be a capital event, you want their buy-in to say when it’s time to sell or not. 

The next section that we have is that of manager compensation. This is where you put in all those fees that we talked about, identify what those fees are, and where and how to get them paid. This includes your asset management fees, construction fees, property management, all those kinds of things. This is the place where you give the manager the right to get compensation. 

The next section is capital contributions. How is it that you receive money from your investors? Do you have limits that you’re taking on? Does it go into a specific account? How are you doing those initial capital contributions? Secondarily, how do you do any additional capital contributions that are needed? What happens when there is that need? Who can identify it? This is also called a capital call. So this isn’t a good thing by any means, necessarily, unless it’s already foreseen. Most of the time, this is a very negative thing, but you’ve got to identify it and spell it out in the operating agreement. 

The next section, probably everyone’s favorite section, is distribution. How do distributions get paid? In what order? What if there’s a capital event? Does return of capital get paid out, or not? What is the order of payments based on the different classes? How does it all take place? 

The next section is what happens in a dissolution of the agreement. At some point, this entity is going to be done, and you will have distributed all the money. And the last section that’s important in an operating agreement, besides a lot of others that we haven’t talked about here is whether you’re going to have a right of first refusal on sale of shares. Now we’ve mentioned before that you can’t really sell the shares in this LLC. But when a member does want to do that, it is permissible – if it’s allowed in the operating agreement. And a lot of times we’ll put in a right of first refusal. Most of the time, the right of first refusal will look like offering first to the manager or the company, so that the manager can make a decision to buy it for themselves. Or the company can get it, in order to buy back those shares. Perhaps you’ll even do it as part of a capital call that takes place. If that happens, there’s some sort of election that needs to take place in order to do this. 

The next tier on the right of first refusal is normally the members themselves. So we set a price, and if the price is that a third party makes a bonafide offer, then anybody in the syndication can also buy it out at that same price on a certain timeline. 

Those are the elements that are very common in an operating agreement. Now let’s talk about subscription agreement. 

The Subscription Agreement

A subscription agreement is what we call an ancillary document to the operating agreement itself. Say you and your partner have both signed the operating agreement. Now, it’s time to add investors into this operating agreement. Well, we’ve got these investors here who want to do that. But the operating agreement is already done. It’s essentially “closed,” having already identified what your units are. So the new investors don’t have a mechanism in order to go into that operating agreement. The way to solve this is through the subscription agreement.

A subscription agreement is signed by each of the investors. And it binds the investor with that agreement to the operating agreement. It makes all of them subject to all the rights and responsibilities of that operating agreement. Capital calls are a perfect example. Nobody wants to make them. But investors have signed a subscription agreement that says they’re a part of this, their money is a part of this, they get the benefit from it, and the risk that’s associated with it as well are those capital calls. 

So a subscription agreement contains a few sections. It has reps and warranties. These are the biggies. Reps and warranties to include are that they got the PPM, read it, understood it, and had an opportunity to discuss with their attorney. Include whether it’s a 506C, and whether they’re an accredited investor. And then also include an acknowledgement about transfer because it’s a big deal.
Lastly, give a questionnaire in order to gather all of the information in one place so you don’t have to look for it anywhere else. Collect names, addresses, phone numbers, social security numbers for taxes, necessary contact people, etc. That way, you’ve got everything in one place.


Are you ready to get started with your own syndication and need a private placement memorandum? Moschetti Law Group is a real estate syndication law firm and we’d be happy to meet with you to put together your Reg D PPM from a syndication attorney and guide you through the process of launching your own offering.

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