Real Estate LLC Operating Agreement Template: Everything You Need to Know
A real estate LLC operating agreement template is a basic format to be followed for creating an operating agreement for an LLC involved in the real estate business. 3 min read
Operating Agreements for LLCs in Real Estate
A real estate LLC operating agreement template is a basic format to be followed for creating an operating agreement for an LLC involved in the real estate business. An operating agreement is a legally binding document used to set out the internal organization of an LLC and the members’ roles within that LLC. It is usually not required, but it is considered a very good idea to have one. The three biggest benefits to having an operating agreement are:
- Maintaining control over the internal workings of your LLC. If you decline to create an operating agreement, you will be bound to the state’s rules governing LLCs.
- Strengthening limited liability. An operating agreement will more clearly define the separation between members and their LLC.
- Forestalling disputes. By setting out the rules of LLC operation, there will be less confusion about the proper action in various business scenarios.
Because government entities rarely require operating agreements of LLCs, these agreements may be as simple or as complex as you deem necessary. However, an effective operating agreement should cover the following details:
- Basic LLC information.This includes the LLC’s name, address, business activities, and length of duration.
- Member information.This includes the name, address, capital contribution, membership class, ownership percentage, and profit/loss percentage of each member.
- Management structure.This specifies how the LLC will be managed, including if it will be member managed or manager managed. Meeting and voting information may also be covered here.
- Financial administration.This includes the accounting methods, banking methods, annual report details, and the fiscal year of the LLC.
- Miscellaneous. Any details that the members feel are pertinent to their business situation should be included in the operating agreement. This may include who can sign contracts, how member disputes are to be resolved, and how members may leave the LLC, or if they can.
For LLCs operating in the real estate business, however, there are some additional details that it may be advisable to cover, such as:
- Capital calls. There may be a time when a real estate LLC will need more funding. Making a capital call will be easier if the terms of this are set out from the beginning.
- Member admittance. In a similar vein to capital calls, new members may need to be brought in to raise additional funds. Generally, if new members are allowed, they will come in with the same terms as the initial investors.
- Distributions. In general, real estate LLCs are structured so investors will get a “preferred return” on their investment (generally 5 to 10 percent) in addition to a share of the remaining profits and cash flow, with the LLC receiving the balance. This distribution model, or any distribution model, should be established in the operating agreement.
- Manager removal. If a manager is taking actions that are detrimental to the LLC, it may be necessary to remove them. This is easier if provisions are set out concerning how this is to be handled. Often a “super-majority” (70 to 80 percent) vote by LLC members in favor of removal is what is proscribed by an operating agreement.
- Interest transfer.Generally, real estate LLCs have “private placement” of securities (the LLC’s interests) and the “right of first refusal,” or the right of the LLC or its members to have the first chance at buying any interests that a member desires to sell. If the LLC members desire this, it should be stated in the operating agreement.
- Manager indemnification. Managers of real estate LLCs are usually not held to be liable to the LLC members for management mistakes deemed to be made in good faith. Willful misconduct, negligence, and uncured breaches in the operating agreement’s terms are not overlooked, however.
- Tax and reporting timing. When tax returns and business updates will be issued should be set out in the operating agreement. Usually, a real estate LLC will give quarterly updates on the state of the business, and perhaps more often if there are major material developments, such as new property leases.
Other issues aside from these may also be necessary to address in your operating agreement, depending on the perceived needs of the LLC, but since you have the freedom to address any issue you chose, adding the appropriate language is all that must be done to address it.
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