Operating agreement for partnership

5 Replies

Hi BP, Can I get copy of an operating agreement as an example? I’m looking to invest with a friend of mine an we want to set things straight from the get go. If there are examples on here already. Just direct me to them. Thank you!

Hi Jonathan!

I've used the below agreement for a partnership on an investment in an Airbnb property. Essentially, you just want to make sure that every scenario that could happen is laid out explicitly, so if there is a conflict down the road, the resolution is in writing. 

I would confirm with some other BP'ers as well to see if I've missed anything. 

Hope this helps.

Thanks,

Nick

Business Formation

 There will be two members of the LLC. ______, will be from here on

referred to as the Managing Partner. _______ will be from here on referred to as

the 2nd Partner.

 All rental income will flow through an LLC and all profits distributed evenly from the

LLC's checking account

 Both members will have equal (50%) ownership of the LLC

 All major decisions, with costs or financial implications over $1,000, must be

unanimous

Term

 The term for the purchase and holding of the property will be __ years. After the __-

year term, the property will be sold

 If the time is not opportune to sell after the __-year period (ie. the housing market is

down) and both the partners agree, the sale of the property can be postponed to a time

deemed appropriate by both partners

 If one partner wishes to exit before the __-year term, see terms in the Buy-Out/Exit

Options section

Mortgage and Title

 Both partners will apply for the mortgage and will be co-borrowers on the mortgage

note

 Title to the property will be in both partners’ names with a ‘Tenants in Common’

designation. With this designation, upon death of a partner, their interest in the

property is transferred to their estate.

Operation, Insurance, Taxes

 The property will be used as a rental property for purposes of producing income for

both partners

 No partner will use the property for personal purposes without expressed approval of

the other partner. The goal is to keep the property occupied as much as possible in

order to maximize earnings for both the partners

 The primary use will be short-term rentals. ‘________ Insurance co.’ will provide

the home insurance policy and short-term rental insurance policy

 Tax deductions will be split evenly between partners

Financial Contributions

 Both partners will contribute 50% of the entire initial cash investment. This includes

the Down Payment on the loan, all closing costs, business costs (LLC formation,

attorney fees) and outfitting costs to prepare property for short-term rentals

(furnishings, home upgrades if necessary, etc.)

 Both partners will contribute funds evenly to cover expenses in the event of a period

of loss, in what will be referred to as a ‘Call’. If one partner is unable to contribute his

half of the funds, then the other member will contribute the funds to cover the whole

loss and will receive half of the payment in equity from the non-paying member’s

equity share. The equity share percentage to be forfeited by the non-paying member

and given to the paying member will be calculated by taking the dollar amount the

non-paying member was unable to pay and dividing that number by the _______ (figure out an exact method of estimating value - ie. Redfin estimate or other metric, as this can create issues down the road) or appraisal value

o Example Scenario: In January of 2018, the rental incurs a loss of $2,000.

Partner A is unable to pay his 50% contribution, or $1,000. Partner B

contributes the funds, $2,000, to cover the entire loss.

o $1,000 contribution / $350,000 Redfin estimate = .0028% equity

o Partner A’s old equity share – 50% // Partner A’s new equity share –

49.9972%

o Partner B’s old equity share – 50% // Partner B’s new equity share –

50.0028%

 In the event of a large maintenance expense, the necessary funds will be taken from

the maintenance fund. If the cost exceeds the balance of the maintenance fund, both

partners will equally contribute for the additional funds necessary to make the

purchase. If one partner is unable to contribute his half of the funds, then the other

member will contribute the funds to cover the whole expense and will receive half of

the payment in equity from the non-paying member’s equity share. See above

scenario

 Upon sale of property, both members will pay evenly for all costs incurred from

selling property (staging, closing, commission and other fees)

Earnings Distributions

 Both partners will own 50% of all property equity

 Both partners will earn 50% of all rental income, to be paid in monthly (or quarterly)

payouts

 Upon sale of property, both members will receive 50% of the earnings from the sale,

less any equity share forfeited due to lack of payment to cover funds

Roles/Responsibilities

 The Managing Partner will bear all of the operational responsibilities, while the 2nd

Partner will only have a financial role. The Managing Partner’s responsibilities will

be ____________________ (explicitly state all duties to be handled by MP)

Buy Out/ Exit Options

 Both partners can agree to sell before the __-year period or both partners can decide to

delay the sale of property to a new time horizon, agreed upon by both partners

 If one partner wishes to exit before the initially agreed upon term of __-years, he must

offer right of refusal to the remaining partner. If the remaining partner agrees to buy

the selling partner’s equity share, he will do so by conducting a mortgage buyout. At

closing the selling partner will deed his interest in property to remaining partner,

leaving the remaining partner as sole owner of the property and sole borrower on the

mortgage. The value of the equity will be calculated by subtracting the property’s

market value, using the _____ (figure out an exact method of estimating value - ie. Redfin estimate or other metric, as this can create issues down the road) or acquiring appraisals, from the balance on the mortgage principal.

 Scenario: Partner A wants to exit at Year 3. Partner A’s equity share is 50%.

Estimated value is $400,000 and the principal balance on the mortgage is

$250,000. ($400,000 - $250,000 = $150,000). The total equity value is

$150,000. Partner B will pay 50% of the equity, or $75,000 to Partner A.

 In the case that a partner wishes to exit before the initially agreed upon term on ___-

years, the selling partner will be responsible for all selling costs (closing, agent,

attorney fees, etc.)

 If the remaining partner cannot afford to buy the other partner out or is not able to

qualify for the new loan, the property may be sold to the public. In this case, the

partner wishing to sell will forfeit 10% of his equity share, as penalty for the

dissolution of the partnership before the initially agreed upon time horizon of __ years,

in addition to covering all the selling costs

 In the event of a major life event, such as a death of a partner, a major injury or

divorce, the property may be sold without any penalty to the selling partner and with

an equal split of closing costs from each partner

In the above, how will disputes be resolved? What recourse if the Managing Partner provides an accounting that the other partner wants the challenge?

As a business, I would never do all the operational work for only 50% profit with 50% of capital.

Thanks Ronald. Agreed on the need for a dispute resolution piece.

In regards to the 50/50 split: That specific deal required the co-investor’s high annual income to qualify for loan. Additionally, my property management co received 15% of gross revenue. 

@Jonathan Castillo It's not what's in the agreement. Anyone can review a contract. It's what's NOT in the agreement that people don't realize they might need down the road.  In real estate NOT KNOWING what you DON'T KNOW can kill you quickly!

If you can't afford an experienced attorney's help in this matter keep stacking chips till you can!

All the best!