CRE Finance Investment Bulletin
Online, January 10, 2014 (Newswire.com) - In the world of commercial lending, it is not unusual for a group of partners to form a limited liability company to acquire or refinance commercial real estate or a new business. The legal details of operating a business may not be as exciting as getting your first paying tenant, client, or customer; however, they are extremely important for protecting yourself and your new business for the future. CRE-Finance examines your operating agreement closely to make sure the entity they lend to be up to date with the state in which they are registered to ensure good standing and to ensure that the members of the LLC are in compliance with the rules set forth in the agreement.
An operating agreement is one of the most important documents used by LLCs because it structures the business' financial and functional decisions. The purpose of the document is to govern the internal operations of the business in a way that suits the specific needs of the owners. Once the document is signed by the members, it acts as an official contract binding them to the it's terms. This is especially important when applying for a commercial loan given the underlying risks and responsibilities that come with obtaining borrowed funds.
Here are five reasons why CRE-Finance needs to approve your operating agreement:
Establishing the percentage of ownership: Understanding how much you own and how much your partner(s) own is critical in determining your investment and role within the LLC. Any member of a certain percentage will have a say in the ongoing business decisions. For example, most CRE-Finance requires any member with 20% or more ownership interest to guarantee to new commercial loan for their project. Someone with less than 20% ownership, in most cases, is not always required to guarantee the debt borrowed by the entity.
Establish upfront the rules of management: Setting the standard for management upfront is key to ensuring efficient management expectations for the ongoing operations of any business or rental property. This also helps clarify any verbal agreements. Even if members have orally agreed to certain terms, misunderstandings will happen. It is highly recommended that any operational concerns be in writing so they can be referenced to in the event of any conflict.
Rights & Responsibilities in the business: It is important to establish the rights and responsibilities of each member. Some members are purely investors, which others have specific responsibilities and have a fiduciary obligation to fulfill. Anytime this is established, you run into what's called the "free rider" problem, among other issues that can emerge without effectively communicating the roles. CRE-Finance wants to make sure that the membership group has figured out up front who the players are and what their responsibilities are in order to ensure that there won't be any bones of contention down the line.
Identifying rules of selling, closing or having one or more partners exit the business: The most common issue that will arise is when a member wants to sell, close or exit the businesses. Understanding how this will work upfront is key in establishing a seamless exit strategy.
Profit & Loss Sharing: Profits and losses are allocated by default in the same ratio as each member's ownership interest. A member's interest is initially equal to his capital contribution, or it is otherwise defined based on the consideration.
On a recent closing, CRE-Finance provided a mezzanine loan to complete the capital stack of the last dollar CLTV of 89%. This was made possible due to the owner operator having their operating agreement clearly defined. For more information, please feel free to contact CRE-Finance at 855-515-5585 or visit our website at www.cre-finance.com
