Multi-Member LLC Operating Agreement for Buy & hold, Key Points?

Question

Hi everyone,

I and a possible JV partner are planning on purchasing a property with all cash, rehabbing it, and renting it out. In the future we may seek financing after seasoning to pull cash back out. We are open to the idea of repeating the process if it works out great. Our plan is to use a Multi-member LLC which seems like the best way to do this. This would be my first LLC and first partnership and I am hoping to get some advice on things to make sure we have in the Operating Agreement for things to go smoothly.

I don't know the legal verbiage yet, but some things we've agreed upon already are:

Splitting all initial acquisition/rehab costs.
All profits & losses to be split evenly, 50%
Opening a separate bank account for the LLC to receive rents in
All Cash flow will be put into a reserve account until the reserve amount is met, then distributions will occur (haven't decided on frequency).
Any time money from the reserve account is used it will need to be replenished before distributions kick in again

In doing some searching on the forums I came across a few ideas I think are good:
Setting a purchase cut off amount for a member to transact business up to a certain dollar amount (say $500.00) without consent of all members.
How things will be handled if either of us passes away, gets married/divorced, or wants out of the partnership etc.

I'm sure there are things that I'm missing that are super important and thoughtful to have in the OA. Any other ideas would be greatly appreciated. Also, If anyone has an OA they've used before and can share I'd be so thankful :) Please PM me

Thanks in advance all

Bill Gulley · Answer

Agree on a price as you would for anone else and pay him. :)

Ned Carey · Answer

Some idea to consider. Ownership %, voting%, distribution% can all be different numbers. It sounds like everything will be split 50/50 top start but you should have provision in there if that changes in the future. For example you want to buy another property but only on of you has money to contribute. Buy/sell agreement; can one of you sell or transfer your interest. Is it manager managed or member managed? The manager does not have to be an owner. I really like the legal self help book from Nolo Press. They have some books on LLCs including one that has software to create an operating agreement. I am not necessarily recommending everyone create their own LLCs or operating agreements but at least it will allow you to be better prepared when speaking with an attorney. Good luck - Ned

Chris Calabrese · Answer

I think the most important aspect is the exit strategy. Even though this is a buy and hold, a lot can change in a couple of years, and you will most likely have different long-term financial goals. What happens when one member relocates, gets married, or loses his day job and wants to sell? Also, don't forget that it will be harder to obtain financing once the property is in an LLC.

Bill Gulley · Answer

Brandon, probably the liability protection, tax alternatives, less cost, popularity and acceptance by others in the industry, ease of administration and maintenance. But, let's see what Mehran Kamari has to say... :) Oh, and another issue, you might consider a hold harmless by and between members or cutoff to liability, or not. :)

Leonid Sapronov · Answer

@Jameson Triplett I'm in a similar situation, working with my dad on a buy and hold LLC. Would love to see some examples of ones people actually use.

Jameson Wildwood · Answer

Does anyone have examples of these kind of operating agreements they can share? I'm working on one with my father to acquire a couple investment rentals and would love to have a few suggestions of stuff to include like hold harmless language, buy-sell agreements, etc. I'm pretty legally savvy and would love to see some examples.

Mehran K. · Answer

Thanks for the awesome replies Ned Carey and Bill Gulley, I've ran the ideas by my partner via email and we'll discuss them soon. Brandon Eleazer, Bill beat me too it and probably answered it better than I even understand right now. Thanks again Bill. Another question: If my partner is pretty handy and wants to do some of the rehab work personally to keep costs down, how would I go about compensating them for their work. Considering the type of 50/50 arrangement we have? Maybe I just pay a little more for the rehab portion of the contribution amount? Or is there another way?

Brandon Eleazer · Answer

Mehran, Thanks for posting this. I'm experiencing this same situation. What made you decide to form the LLC Vs. sticking with a JV agreement and joint bank account?

Bill Gulley · Answer

I was expecting to have a long list, Ned caught the most omitted aspect, a buy-sell agreement. You might consider causes for the removal of members, incapacitation is usually covered by law, but not performing isn't. Under certain circumstances you need to be able to force sale in the buyout. What's the agreement to admit new members? Good points! :)