Operating agreement for 3 way LLC

[Jeff Piscioniere]

Hello everyone! Myself and 2 partners are getting close to purchasing our first property together and we will first need to form our LLC. It's pretty simple, 3 ways equally. We would like some input on the types of terms and parameters to include in the operating agreement. We are planning on discussing this with an attorney but would love some feedback from the real estate investment community. We are 3 guys in our early to mid 40's with very similar life situations: married, several kids, middle to upper middle class incomes doing real estate investment on the side starting with what might be a single family rental progressing to multi-family and hopefully eventually apartment complexes. Additionally, what types of fees might we expect to incur from an attorney to complete this process? We are in the state of Connecticut.

Thank you in advance!

Jeff

[Andrew A.]

Hi there @Jeff Piscioniere!

Forming an operating agreement is akin to figuring out how a life together will look before you say, "I do!"

Key parameters that I'm always urging clients to consider:

- Management. Who manages day to day operations/decisions? Is your entity member or manager managed?

- Capital accounts. Will capital accounts be tracked? If yes, it's important to very precisely spell out how capital calls will occur, how they'll be handled, and what happens if on member fails to meet a necessary capital call.

- Buyout/Transfer Valuations. As mentioned by @Brian Schmelzlen, determining in advance how a member can (or perhaps must) get out in the event of a death, material disagreement, deadlock etc. Additionally, also as mentioned by Brian, determining how the value of each member's interest is determined is vitally important, especially in the context of real estate. By way of example, assume you work together for several years, acquire significant assets and cashflow, you're not going to want to have to get everything you own appraised to determine a buyout value. Your attorney will be able to direct you to a valuation method appropriate for your situation.

- Buyout/Transfer Restrictions. It is possible (in all states that I'm familiar with, but I don't know if CT allows this specifically) to restrict a person's ability to sell their interests to anyone outside the partnership. Similarly, if one member unexpectedly passes away, while they can will their interests as they see fit, a restriction can be put in place to restrict an inheriting member's ability to participate in voting, which helps prevent an unknown quantity from entering the mix and causing issues.

- Authority of Members. Perhaps one of your members handles financing, one construction and one acquisition. It'll be important to spell out each member's authority to bind the entity, and what checks/balances need to be in place. This is similar to management, but can handle more than your typical day to day issues.

- Minutes. In addition to your operating agreement, when any significant action is taken, it's important to document it to make sure no disagreements arise after fact. Your operating agreement can spell out spending limits etc before a vote and minutes are necessary.

I don't know if I've helped or muddied the water, but best of luck!