If you’re forming a private mortgage fund or raising capital through a pooled investment vehicle, selecting the right legal structure and drafting a well-constructed Operating Agreement (for LLCs) or Limited Partnership (LP) Agreement is critical.
At Geraci LLP, we help private lenders, capital managers, and real estate sponsors navigate fund formation and governance with custom agreements that balance control, risk, and investor confidence.
Why Entity Structure Matters in Fund Formation
Most private lending funds in the U.S. are formed as either:
- A Limited Liability Company (LLC) governed by an Operating Agreement, or
- A Limited Partnership (LP) governed by a Partnership Agreement
Both structures offer limited liability, pass-through taxation, and flexible control mechanisms — but they differ in how control and liability are allocated.
Key Differences: Operating Agreements vs. LP Agreements
| Operating Agreement (LLC) | LP Agreement (Limited Partnership) | |
|---|---|---|
| Management | Typically member-managed or manager-managed | General Partner (GP) has full control |
| Investor Title | Members | Limited Partners |
| Liability Protection | Members and managers generally protected | LPs have liability protection; GP is fully liable |
| Control Structure | Flexible – can mimic LP setup | Traditional – GP has operational authority |
| Common Use | Mortgage funds, small to mid-size lending vehicles | Institutional or larger funds, especially those with passive investors |
| Tax Treatment | Pass-through | Pass-through (or fund-level elections) |
What Should Be Included in These Agreements?
Whether it’s an Operating Agreement or LP Agreement, the following provisions are essential:
- Purpose of the Entity
Defines whether the fund will engage in mortgage lending, loan purchases, real estate acquisition, or other activities.
- Capital Contributions
Outlines minimum investment amounts, funding obligations, and timing.
- Preferred Returns & Waterfall Distributions
Details how profits are distributed — typically:
- Return of capital
- Preferred return (e.g., 8%)
- Profit splits (e.g., 80/20 or 70/30 between investors and manager/GP)
- Voting Rights & Control
Defines who makes key decisions, voting thresholds for major actions (e.g., amendments, dissolutions), and the manager or GP’s authority.
- Management & Fees
Describes roles of the manager or general partner and fees paid (e.g., asset management, origination, servicing, profit share).
- Withdrawal / Redemption Rights
Specifies whether investors can redeem their interest, when, and under what conditions.
- Transfers & Substitutions
Rules for assigning interests, death/disability of a member/partner, and bringing in new investors.
- Conflicts of Interest
Disclosure of any outside interests or affiliated parties that may interact with the fund.
- Books, Records & Reporting
Requirements for financial statements, investor reports, and tax documentation.
- Dissolution & Exit Strategy
Triggers and procedures for winding down the entity, distributing assets, and managing liabilities.
Geraci LLP’s Role in Drafting Operating and LP Agreements
Every fund structure is unique — and your agreement should reflect:
- Investor sophistication and expectations
- Fund strategy (e.g., debt vs. equity, bridge vs. long-term)
- State-specific entity laws and licensing needs
- Targeted Regulation D exemption (506(b) vs. 506(c))
- Governance structure aligned with your risk tolerance
Geraci LLP delivers custom agreements that are fully integrated with your PPM, subscription documents, and capital raise strategy.
Common Mistakes to Avoid
- Using a generic agreement from a prior deal
- Failing to define redemption rights or lock-up periods
- Overpromising returns or omitting disclosures
- Not separating fund operations from personal/business assets
- Misclassifying manager vs. investor rights
Who Needs These Agreements?
- Private lenders forming mortgage or debt funds
- Real estate sponsors pooling investor capital
- Family offices entering joint ventures
- Capital advisors structuring co-GP or LP platforms
- Developers managing investor equity in projects
Need Help Drafting an Operating or LP Agreement?
Whether you’re launching your first mortgage fund or refining an institutional partnership, Geraci LLP offers industry-specific experience and proven legal strategies to ensure your documents are airtight, investor-ready, and regulator-compliant.
Contact us today to schedule a consultation and take the first step toward structuring your fund the right way.
