Operating agreement for partnership
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
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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.
Contact a real estate / business lawyer. Operating agreements are complex and are usually very specifically drafted for your specific type of business arrangement.
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!
