A Distributions Clause is the heart of your Operating Agreement. It legally binds the Manager to pay out the money in the exact “8% then 70/30” order you promised in the PPM.
In Michigan, under MCL 450.4303, distributions are made according to the Operating Agreement. If the agreement is silent, the law assumes equal shares—which would ruin your “Promote” structure. Therefore, this clause must be precise.
1. The “Distributions” Clause Draft
Section X. Distributions of Available Cash.
(a) Definition of Available Cash. “Available Cash” shall mean all cash funds of the Company on hand from time to time after (i) payment of all operating expenses, (ii) payment of all debt service (including any Member Loans), and (iii) the creation of reasonable reserves for repairs, replacements, or anticipated liabilities as determined by the Manager.
(b) Priority of Distributions. Subject to the Michigan Limited Liability Company Act, the Manager shall distribute Available Cash to the Members at least [e.g., Quarterly], in the following order of priority:
- First (The Preferred Return): 100% to the Limited Partners, pro-rata, until each has received a cumulative, non-compounded annual return of 8% on their Unreturned Capital Contribution.
- Second (Return of Capital): 100% to the Limited Partners, pro-rata, until each has received a return of 100% of their initial Capital Contribution.
- Third (The Split): Thereafter, 70% to the Limited Partners (pro-rata) and 30% to the Manager (as a “Promote” or “Carried Interest”).
2. The “Tax Distribution” Shield (Crucial for 2026)
Since an LLC is a “pass-through” entity, investors owe taxes on the property’s profits even if you don’t send them a check (phantom income). In high-growth years, this can leave an investor with a tax bill they can’t pay.
Add this protective sub-clause:
(c) Tax Distributions. Notwithstanding the priority above, the Manager shall make its best effort to distribute sufficient cash to each Member to cover the estimated federal and state income tax liabilities arising from their share of Company profits (calculated at the highest individual marginal tax rate).
3. The “Clawback” Provision
Professional real estate sponsors often include a Clawback. If you (the Sponsor) take a 30% profit split in Year 3, but the property loses money in Year 5, the investors may want you to “give back” some of that 30% so they are made whole on their 8% Pref.
- Note: This is common in institutional deals but often skipped in smaller “Friends & Family” syndications.
4. Michigan-Specific Legal Guardrail
Under Michigan law (MCL 450.4307), you cannot legally make a distribution if it would make the company insolvent (unable to pay its bills).
- The Check: Before you hit “send” on those 8% Pref checks, you must verify that the company has enough assets to cover its liabilities. If you distribute money while insolvent, you can be held personally liable to the company’s creditors for that amount.
Your Final Documentation Roadmap:
- Form D: File with the SEC via EDGAR (Item 16 must match this waterfall).
- Michigan Notice: File with LARA via EFD (with the $100 fee).
- PPM: Describe the “8 & 70/30” structure in plain English.
- Operating Agreement: Use the legal “Section X” draft above to make it binding.