Co-ownership can be a tricky space to navigate, but we’ve made this process as hassle-free as possible. Fractional’s team of real estate and SEC lawyers have created customizable co-owner legal agreements to help protect and align all co-owners of the property. Working with Fractional will save you thousands of dollars and time from dealing with real estate attorneys and creating your own contracts. Below is an abstract of the standard operating agreement we have enforced based on the numerous transactions that happen on our platform. Co-owners can customize based on their collective decision together.
The Standard Operating Agreement
🧑🏽💼 Naming Fractional as Manager
By default, Fractional is the Manager with 0% ownership interest of the LLC. This is required for Fractional to handle administrative tasks while the property is hosted on the Fractional platform and to take advantage of Fractional’s / Loanbase’s financing options. If you only need to use Fractional for LLC setup, Fractional is not required to be a Manager of your LLC.
Details around Manager’s responsibilities and rights such as:
Preparing and performing contracts and agreements
Executing documents
Expenditures
Incur indebtedness less than 6-months of rental income
Obtain insurance
Employ professional advisors to carry out business operations
Make tax elections
Pay Company expenses
Establish the reserve
Resign as Manager
Charge a pre-agreed upon Service Fee
Not personally liable under any judgment of a court, debt, obligation, or liability of the Company
📞 Calling for a decision or vote
The manager or Fractional can call for a vote at any time by giving 14 days written notice of the decision to be made
A member may call for a vote with “sponsorship” from another member of the group who desires to call for a vote
📜 Requirements for voting/quorum
For votes to be valid, at least 50.01% of outstanding ownership must place a vote. For decisions of higher importance, the approval of larger amounts of ownership will be required
📚 Standard Operating Agreement Member Voting
Members have full responsibility over their decisions
The Manager (Fractional) has the right to take care of urgent matters without seeking the consent of the Members
Important decisions - require at least 60 % approval
Determining a property manager or replacing a manager that has resigned
Contracts exceeding $15k or more than 1 year in time commitment
Approval of the final terms of a sale of property
If there is a incurrence of indebtedness greater than 6-months of rental income
Increasing the reserve amount kept to cover expenses
Approval of final terms when selling the Property
Major decisions - require at least 70% approval
Termination or replacement of property manager
Incurrence of indebtedness where Property is pledged as collateral
Any confession of a judgment against the Company, or execution or delivery of any general assignment of assets for the benefit of creditors of the Company
Any decision to undertake or to settle any legal actions affecting the Company and involving potential legal liability to the Company
Critical decisions - require at least 90 % approval
Dissolution or full liquidation of the company
Operating agreement changes
Engagement of contracts that have not been vetted or approved by the manager
Removal of Manager
Determination to list the Property for sale and select a listing price
The merger, consolidation, winding up and/or dissolution of the Company
The filing by the Company of a voluntary petition for reorganization or liquidation under any federal or state law for the relief of debtors, including bankruptcy laws, or the consent or acquiescence to the filing of any involuntary petition for liquidation or reorganization under any federal or state law for the relief of debtors, including bankruptcy laws
📚 Your co-ownership legal agreement is customized based on how your group wants to run the partnership and created before an offer is made for a property.
For any successful partnership, it is crucial to have a pre-agreed upon governance model that allows for both flexibility and protection of all members.
Topics outlined in the agreement include:
A. Procedures for handling important scenarios such as:
Ownership transfers
Capital calls & events of default
Dispute resolutions
B. Process for voting and collaborating on decisions
C. Responsibilities of each member
See below for a breakdown of major agreement topics covered.
🏡 Ownership Transfer
Sometimes transfers may need to occur (a divorce, inheritance, buy-out, etc). Having a process in place for this transition makes the hand-off efficient. Fractional will help you seamlessly handle all transfers and updates.
A. Procedures for admitting new members.
For example, deciding if new members need certain financial qualifications to be admitted to the group and if they will have the same voting rights as pre-existing members
B. Right of first offer to existing members
Priority for existing members to buy ownership transfers
For example, if Vicky, Sally, and Alan are in a partnership and Alan needs to exit, Vicky and Sally get first priority to buy Alan’s shares before Alan’s shares can be offered to someone else
C. Setting up filings and paperwork updates for the new owners
💰 Capital Calls and Default Events
Life happens, and it’s good to be prepared for any situation! These procedures help ensure that all members are protected in case a capital call or default event (large expenses, renovations, mortgage payments, etc.) occurs.
These situations may be intimidating, but Fractional has built-in structures to minimize risk for all group members. If a defaulting co-owner has been vetted through Fractional’s underwriting model, we will assume responsibility and find another co-owner to substitute their place. Other co-owners and their investments won’t be impacted and they won’t be held responsible.
A. Procedures and timelines for handling capital calls and events
This may include thinking through how many days members have to make their capital contribution and how many days late would be considered a default
B. Procedures and compensation for other members making advances for defaulting members
C. Procedures to buy out defaulting members
🥷🏻 Dispute Resolution
Like any good partnership, there may be disputes. Depending on group preference, members should decide on the best way to best resolve differences. Below is a dispute resolution escalation process that Fractional can assist with:
A. Negotiation: members settle conflict internally and reach an agreement through discussion
B. Meditation: select an independent third party mediator to assist the members in resolving conflict
C. Arbitration: formal court process and confidential arbitration by Judicial Arbitration and Mediation Service
🗳 Voting Process
Having a voting process in place makes collaborating on decisions easy and inclusive of all member preferences.
A. Setting a quorum to quickly make decisions with just the right amount of critical votes
B. Setting a deadline to vote
C. Creating tiered thresholds to pass decisions based on “importance”
🌳 Decisions for Collaboration
Below are some common scenarios in which group decisions must be made. Grouping decisions by type or importance can help members determine the number of votes and member participation required. For any voting decision to be deemed valid, at least 50% based on percentage interest must vote, or pass their vote to another Member.
These decisions types can be re-structured and re-tiered within the Fractional agreement based on group preference.
A. Important decisions require the approval of 60% of the Votes of the Units voted. Important decisions include:
The replacement of the Manager following the resignation or termination of previous Manager
The selection of a property manager following the resignation or termination of the previous property manager
Contracts over $15,000 or a fixed term of greater than 1 year
Incurrence of indebtedness greater than 6-months of rental income
Increasing the reserve
Approval of final terms to sell the Property
B. Major decisions require the approval of 70% of the Votes of the Units voted. Major decisions include:
Incurrence of indebtedness where Property is pledged as collateral
Termination of property manager
Any confession of a judgment against the Company, or execution or delivery of any general assignment of assets for the benefit of creditors of the Company
Any decision to undertake or to settle any legal actions affecting the Company and involving potential legal liability to the Company
C. Critical decisions require the approval of 90% of the Votes of the Units voted. Critical decisions include:
Removal of Manager
Determination to list the Property for sale and select a listing price
The merger, consolidation, winding up and/or dissolution of the Company
The filing by the Company of a voluntary petition for reorganization or liquidation under any federal or state law for the relief of debtors, including bankruptcy laws, or the consent or acquiescence to the filing of any involuntary petition for liquidation or reorganization under any federal or state law for the relief of debtors, including bankruptcy laws
The entry into, preparation, and performance of any contracts, agreements, and other undertakings that have not been vetted or given preliminary approval by the Manager
🤷🏽♀️ Responsibility of Members
Owners can choose to interact as little or as much as they would like with others. Some investors have a hands-on management style, while others take a more relaxed approach. As long as expectations are clear, the co-ownership journey will be smooth and align with everyone’s management style.