Understanding Legal Documents: Subscription Agreements & Operating Agreements
Investing in real estate can be an exciting opportunity, but it's essential to understand the legal documents associated with your investment. Two critical documents you'll encounter as an investor are the subscription agreement and the operating agreement. While they serve different purposes, both are designed to protect your interests and outline the terms of your investment.
Subscription Agreement
A subscription agreement is a contract between the company and the investor. It formalizes the investor's commitment to invest a certain amount of money in the company and outlines the terms of the investment.
In a subscription agreement, you'll find details such as the amount of money you're investing, the number of shares or units you'll receive in return, and the purchase price per share or unit. This agreement may also include conditions that need to be met before the investment is finalized, such as regulatory approvals or due diligence.
Additionally, both the company and the investor will make representations and warranties in the subscription agreement. The company will represent that it is authorized to issue the shares or units and that there are no legal issues preventing it from doing so. The investor will represent that they have the authority to enter into the agreement and that they are not violating any laws by doing so.
Finally, the subscription agreement will typically include a section outlining the risks associated with the investment. This section may include information about the company's business, industry, and potential challenges or obstacles.
Operating Agreement
An operating agreement is a document that outlines the internal workings and structure of a real estate venture, such as a limited liability company (LLC) or a real estate investment trust (REIT).
In an operating agreement, you'll find details such as the management structure of the real estate venture, including the roles and responsibilities of the members (owners) and managers. This agreement will also specify how profits and losses are allocated among the members of the venture, based on their ownership percentage.
Additionally, the operating agreement will outline how major decisions are made within the real estate venture, such as acquiring or selling properties, taking on debt, or distributing profits. It will also include provisions regarding the transfer of ownership interests in the venture and what happens if the venture is dissolved or liquidated.
One crucial aspect of the operating agreement is its provisions regarding liquidity events. A liquidity event is any transaction that allows investors to cash out their investments. In the context of real estate investments, liquidity events may include the sale of the property, refinancing, or the dissolution of the real estate venture.
The operating agreement will specify how liquidity events are handled, including how the proceeds from the event are distributed among the investors. For example, it may outline whether investors will receive a preferred return on their investment before the remaining proceeds are distributed, and if so, at what rate.
Additionally, the operating agreement may include provisions regarding the timing and process for initiating liquidity events. For example, it may require a certain percentage of the investors to agree to a liquidity event before it can proceed, or it may specify a timeline for when liquidity events can occur.
How These Documents Protect You
Subscription agreements and operating agreements are essential documents that protect the interests of investors in a business venture.
By formalizing the terms of your investment, the subscription agreement provides clarity and transparency, helping to prevent misunderstandings and disputes. It also provides legal protection, as it is a legally binding contract that outlines the rights and responsibilities of all parties involved.
Similarly, the operating agreement provides clarity and transparency regarding the internal workings of the company. It outlines the management structure, decision-making processes, and procedures for transferring ownership interests. By doing so, it helps to protect your interests as an investor and reduce the risk associated with your investment.
In conclusion, understanding subscription agreements and operating agreements is essential for investors looking to participate in a business venture. By familiarizing yourself with these documents and their provisions, you can make more informed investment decisions and reduce the risk associated with your investment. If you're considering investing in a company, be sure to review these documents carefully and consult with legal and financial professionals if necessary.
