IncNow Presents – How to draft Delaware LLC Operating Agreements for use in real estate transactions

By IncNow | Published May 15, 2015

RPTE Spring Symposia 2015 CLE Meeting

On May 1st, IncNow President John Williams led a panel of distinguished attorneys on the topic of LLCs in real estate transactions. Also presenting were Andrea Whiteway of McDermott Will & Emery LLP, Barry Nekritz of Faegre Baker Daniels LLP, Edward Wender of Venable LLP and Doug Walker of Miles & Stockbridge P.C. The venue was the American Bar Association’s Real Property, Trust and Estate Law Section Spring Symposia in Washington, D.C. During the two-day Symposia, each class focused on a particular topic, such as opinion letters, business planning, and office leases. The presenters on each panel were selected for their expertise in each area of practice.

John and the other speakers on his panel presented to a conference room filled to standing room only capacity with lawyers from many different parts of the country. John and the other experts in the field discussed how to draft LLC operating agreements for clients to hold and to develop real estate. John and the other speakers were selected for their expertise in multi-million dollar real estate transactions that involve LLCs utilized as land-holding entities.

LLCs are useful vehicles in several different areas of law, including commercial real estate finance, yet the best practices for drafting LLC operating agreements are unfamiliar to attorneys who are not involved in what is “under the hood” of the LLC. What provisions are included in, or left out of an operating agreement lay out the instructions for what happens if there is a dispute between the owners and managers. The panel shared with the attendees a few axioms about drafting LLC agreements, such as:

  1. “The Operating Agreement is for when members cannot agree.”
  2. “The company will always need more money.”
  3. “Draft to keep the lights on.”
  4. “Rule No. 1, get the money right.”
  5. “Don’t forget to draft for tax distributions. Taxable income without cash flow=BAD”
  6. “Balance sheets have to balance”
  7. “If a deadlock can happen, it will.”
  8. “There is no such thing as a fair contract with an affiliate once a dispute occurs.”
  9. “Always draft transfer provisions with your capital and profit allocation provisions in mind.”
  10. “Pay attention to your transfer provisions. The last people you want as co-members are disgruntled former spouses and in-laws.”

John shared with attendees which provisions he recommends to include in the operating agreement of the LLC that reduce ambiguity. John provided an overview on the topic, and addressed management, termination, and transfers.

John educated the audience on the Series LLC and its commercial real estate applications. Forming separate LLCs is a common way to structure real estate developments, but the administrative costs and time required to maintain the separate entities can convince some developers to only form one LLC. Rather than just form one LLC, an alternative is to form a Series LLC with each parcel of land owned by separate series.

The audience was particularly interested in LLC Operating Agreements used in single-purpose entity transactions for real estate. These are often financed by Commercial Mortgage-Backed Securities and require Delaware attorney opinion letters.

John and the panel ended their session by fielding questions from the attendees after the conclusion of their warmly-received presentation.

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go