Real Estate Multi Member LLC - Essential Provisions

hey guys clint hughes here and in this video we're going to talk about setting up a real estate multi-member limited liability company and the essential provisions you should have in there okay let's get started wow all right so you're thinking about going into business with someone else that is a huge undertaking and unfortunately for a lot of people who choose to set up an llc with another party they don't want to take the time to go through the issues that need to be addressed at the outset in fact just two weeks ago i was speaking with a real estate investor who was setting up an llc right right here and there were four partners in this limited liability company to purchase this small multi-family property so we're setting up this llc for this deal right here and i'm talking to the the client of mine which happens to also be the majority member in this limited liability company i said i really need to get all of these parties uh together we need to come in on the phone and we need to talk through the various issues that go into creating this type of structure well the response was now i don't have time for that don't want to worry about it i understand what you're trying to tell me but no not concerned you see that is the mindset that results in this entity right here in my experience typically exploding two three years down the line because of violated expectations so when you're creating a multi-member llc you want to make sure you're addressing some of the points i'm going to be covering here i'm not going to cover all of them because they're just too many to go through but there are some important considerations that go into this all right so what are those considerations well the first thing that i want to know when i'm creating a multi-member llc is do you plan to acquire financing in the name of that limited liability company so let's say that i'm going to set up this llc and i'm going to actually take title to the real estate in the llc so that means you're going to be working with a commercial lender to to finance this deal so if there were two partners here and we're going into this deal together in this llc and we're going to be getting financing on this the first question you want to ask yourself is do we want both partners to have to go on the loan all right because if you're both listed as members in that llc then both of you are going to have to qualify for that loan i mean the financial statements and they're going to run your credit and those types of things even if it's a non-recourse loan it doesn't matter you're both going to have to go what i like to say is through the ringer to get this deal done so in that situation if you want to limit you know the the work that has to go into getting that loan you may want to keep one partner off the llc do not list them as a member talk to your partner say hey listen i'll take the hit with the with the lender i'll go through all that you won't go have to go through it but you can't be listed as a member of this limited liability company now when you go and you have that discussion with someone they'll be like let me see here so i'm putting up 50 000 uh for the down on this deal you're putting up 50k but i'm not going to be a member in that i don't feel comfortable how do i know that when all this is done you're going to bring me back in because that's the idea right once you get the loan done you bring that partner back into that limited liability company and we go back in as 50 50. they may not trust you to do that so here's what you can do then when you're setting up these llc's if that was the situation where i'm going to be borrowing set up your llc as follows the person that's going to deal with the lender is going to have 100 interest in this company to begin with and they're going to be listed as the manager now sometimes you can list both partners as the manager it just depends on the lender that you're working with whether or not they want to run the managers as well for the purposes of the financing but that second partner the way you protect the second partner in your deal to get them to want to commit without fear that they're going to get shut out after the deal's done is you make them what's called a springing member a springing member so what does a springing member mean it means that once the deal is done then their ownership the ownership of this llc will change to 50 50. they spring into their membership interest upon the closing of this property so now they have an operating agreement that states hey john here will become a 50 member once the deal closes on the acquisition of 1465 evergreen lane so once that's done boom i automatically become a member so i can see that and i know hey yeah he can't screw me out of the deal because i'm listed in the operating agreement as that springing member what does that do for lenders nothing they're okay with that i've done these deals before they're fine with that when you when you have a springing member so that's one of the things we want to look at when we're putting together a multi-member llc how is it going to be financed now let's assume that we're not financing the deal that way that's no longer a concern or even if you were we need to then look a little deeper here so what are some of the major issues that we come up with when we're structuring these number one it's going to be control all right who is going to control that joint venture multi-member limited liability company that you're setting up here who's going to be involved in running the day-to-day operations i mean a lot of times you'll see it with a flip deal somebody's going to take on more of the responsibility of flipping the property and dealing with the contractors maybe one of you is going to be more the funding you're going to sit in the background you're going to make sure that everything gets paid but you're not going to be on boots on the ground day-to-day operations so whatever that is you need to specify that out in your operating agreement who's going to be a manager of this llc and typically i would say both of you or if there's three of you four of you you should be listed as managers in your limited liability company put everyone in there as a manager unless there's some compelling reason not to but then you can delineate what each party is responsible for so then you want to list out what they're going to do now if this deal here i did this a week ago we did i did something like this where one of those members in this company so it's 50 50 was going to handle the entire project so so they were coming in together my client was putting in a little more money but then the other individual who's a partner here was going to handle the contractors because this was a rehab flip type deal so what we did is we made them both managers like i said here we said what their control is over the company how the decisions were going to be made such as budgets so you want to talk about that who's going to you know what type of budget we're going to come up with uh we talked about uh you know the sale price of the property that they'd have to vote on that and and many of the things that are going to come up with running this type of joint venture but then i came down here because it's a flip we said all right we're going to have a separate development agreement so you can do this in your llc you don't have to specify all this in there what i stated here in this particular case i said hey we're both managers but this party here is going to be what i call the developer so we have a a third party agreement down here between the llc and this manager that spelled out everything that we're requiring him to do on that project and we put in their timelines and the budget and if there's budget overruns all that got buried into there so you could have a developer agreement tied into it so what i'm saying is that when you're setting up a multi-member llc if one party's supposed to do more you don't have to always list it in the llc agreement what you can do is you can have a third party agreement another contract between the company and them to perform that service all right so number three after you get past that you want to talk about member voting all right so member voting so who's going to decide some of the more major issues that go on with a multi-member llc owning the property now depending on your deal flip it you know it's going to be important you want to know when the property is going to be sold how that sales price is going to be determined what happens if it doesn't sell then are we going to come back in and lower that price how much would it be lowered by so all those i would actually list out in my operating agreement i would say that it's to the members to decide those not the managers the members are going to vote on that and what's required for member voting do we want unanimous is it going to be majority well if you're 50 50 you're going to go unanimous right both you're going to have to agree if you have three partners maybe you're going to choose to have it majority and so you have some options here when it comes to member voting you can have you can state that each member has a vote all right so even if you had three members here this member here has 50 this one has uh 35 and this one has 15 if these two agree to do something well then then that's what we're gonna do with that particular deal because we we stated that it's majority rule two out of three members or you could say percentages so if so if we want to go percentages then you're always going to need this member here to agree to whatever course you go on so that's key when you're setting up a multi-member llc where you have more than two partners and you want to use majority on that you want to either go by percentage ownership or by the numbers you can choose either way to set up your voting now the other thing you should look at is what happens if you don't get along well then you want to have a dispute resolution clause in there okay so this dispute resolution governs those situations where we can't agree so if we set up our llc and it's 50 50 requires unanimous approval but we're butting heads and we just can't agree on that well then this dispute resolution will determine how that activity is going to take place or what you're going to do going forward so you could state that if we don't agree then we don't do it but what happens it's a major decision like selling the property one of you says no i don't want to sell i want to make it a rental the other one says no we bought this to sell well that's a problem you're going to have so in that instance you can specify in there that there's going to be a third party arbitrary you could choose who would decide the issue or maybe you uh submit it to dispute resolution to binding arbitration or something like that so you this is really an important clause whenever you're setting up a multi-member llc to determine what's going to happen whenever there's a dispute fifth thing that i would have in there is buy out okay now what i mean by that is let's assume that one of you passes away right or one of you files for bankruptcy or something goes wrong in your life and you no longer can participate in there how are you going to determine a buyout of a member so this clause is really important to deal with those situations where someone can no longer perform their required duty or they pass away as i stated you want to be able to buy them out and so you can specify in there under what terms you could buy them out of out of their interest so let's assume that this deal here was a 700 000 deal do you have 350 000 cash to buy them out probably not so you would structure it so that it would be over time you could put all that into your buyout clause now another thing you can do is in that buyout clauses you can just you can put in one of these uh i don't like you anymore okay uh so what is it i don't like you anymore claus well basically it says this hey you know this marriage was fun while it lasted but uh you know now i've i've got other things uh in mind that i want to go after and it's not you so how do we get out of this deal well one of the clauses that i like to use is what's referred to as a shotgun clause where you state that if if i wanted out i could would come to you and or i don't want to work with you anymore i'd come to you and i would say hey i'll buy you out let's say this property was for 700 000 that's the value of it right i'll buy you out for 250k so when you use this particular clause it puts a lot of of of pressure on the person who wants to buy out the other party because if it's valued at 700k and i came to you and i said hey i want to buy out your interest for 250. this just isn't working out with the shotgun clause where you can set it up is you can say all right you make the offer and i have a choice i can either take the offer or i can force you to sell to me at that price and so that what this does is it protects against people making bs offers to buy you out and and what how would that come about let's say you're in a financial situation dire straits and they know it and so they come to you and they want to pinch you to get you to to sell them their interest well you can turn around and use it against them and you might be saying well clint if you're in dire financial straights how could you come up with the money well believe me if you've got 700 000 in value here and somebody's trying to buy you out for 250 which is a hundred thousand dollars under what your your interest is worth you can find someone that's going to finance that so a shotgun clause i think is important in llcs to prevent someone for trying to come in and buy someone out at less than their their fair value there the other thing number six i like to put in here is distributions you want to make sure that you're covering how distributions are going to be made to the partners the key is here is that you want to make sure that you're distributing enough money every year to cover your tax liability i've seen so many deals go down where one individual actually ends up getting bought out because they can't afford the taxes on the income that's being generated because the company isn't making any distributions and they get backed into a corner don't allow yourself to be backed into a corner like this specify in your operating agreement that the llc will always distribute enough money on an annual basis to cover the tax liability of the members my preference is even to say this that absent a set amount that we're going to withhold back in the company for reserves all the rest will be distributed out on a quarterly basis semi-annual or annual basis so that you keep that cash flow that deal flow coming down to you uh from your limited liability company and then the the other clause here has to do with transfers of of ownership interest okay do you want one of these members to be able to transfer their interest to a third party i would tell you know that when you go into business with someone you know who they are you have certain expectations of them you would say you cannot transfer your interest without my approval so i could block it and if you did want to transfer your interest then i have the right to buy you out of your interest so you can build that into your company agreement so these are seven key aspects of setting up a a multi-member limited liability company boxes that you need to check and and these go much deeper as well i mean we could spend an hour and a half to two hours just on this topic alone but i want to get you thinking if you're considering going into business with someone else and creating an llc for real estate you need to sit down with a qualified individual or a company or firm and start addressing some of these important topics because if you don't address them now i mean you could be in a situation i remember one client went into a joint venture agreement into an llc and it stated that when the property is sold the proceeds would be split 50 50 between them well what ended up happening is they didn't sell the property and the guy who was running the deal started renting the property out and he was taking all the rental income and this other guy said wait a minute i should be entitled that rental income as well well no if you look at what you signed it said you only get paid if the property's sold you you're not entitled to any rental income so so little things like that can have major implications down the road if you haven't thought through it these things can get complicated that's why you typically say joint ventures are very difficult to maintain but if you put the right agreements in place i think you'll be on the right road to finding success with that type of real estate endeavor hey guys i hope you liked the video if you do be sure to hit that like button and again if you haven't subscribed yet you know what to do take care [Music] [Music] bye

Channel: Clint Coons Esq. | Real Estate Asset Protection

Views: 9,981

Keywords: anderson business advisors, llc, llc manager vs member

Id: nOqWVRmEHzY

Length: 16min 43sec (1003 seconds)

Published: Thu Mar 03 2022