Legal Insights
Miami real estate developer Rishi Kapoor[1] was recently indicted for coordinating an $85 million fraud scheme where real estate investor funds were diverted to luxury purchases, which included a 68-foot yacht, a Rolex Daytona, and a 2.5 carat platinum ring. Kapoor raised investor funds for real estate development projects in Coral Gables, Coconut Grove, Miami Beach, and Fort Lauderdale. It should come as no surprise that none of the aforementioned projects ever came to fruition.
Kapoor’s case illustrates the risks that can arise when a joint venture lacks sufficient checks and balances. Although it is true that Kapoor’s actions were extreme to the extent that they violated criminal laws, financial harm to investors can also occur when operating agreements do not clearly define the limits of a manager’s authority. To minimize risk and protect their interests in a real estate joint venture, limited partners should include limitations, constraints and enforcement mechanisms while negotiating the company’s operating agreement to ensure that appropriate safeguards are in place from the start.
Typically, either the developer, majority partner, or direct affiliate of the developer is appointed as manager of a real estate joint venture. This managing member retains control over finances, bank accounts, financial reporting, and cash distributions of the company. Consequently, the investments of limited partners are put at risk when managers make decisions without keeping the best interests of limited partners in mind.
This DE Insight examines four operating agreement provisions that limited partners must negotiate carefully to avoid significant financial losses: Management and Fundamental Decisions, Capital Calls, Fees, and Financial Reporting.
Management and Fundamental Decisions
Limited partners should ensure that any managerial decision having a major impact on company financials is included as a fundamental decision.
Standard operating agreements entrust day-to-day decision making in an individual manager, while “fundamental decisions” are voted on and consented to by either the majority or unanimous approval of the limited partners. The longer the list of fundamental decisions, the more control limited partners will have over company decision making. When negotiating the operating agreement, limited partners should insist that fundamental decisions include all actions that materially impact the company’s financial position, such as taking out loans and assuming debt, refinancing the project, granting security interests, entering into affiliated contracts, and selling all or significantly all assets of the company. A highly detailed fundamental decisions provision is essential for protecting the interests of limited partners.
The operating agreement should also contain an immediately enforceable mechanism for limited partners to remove a manager for bad acts. Limited partners should have the ability to call a meeting and vote on the removal and replacement of a manager that starts acting against company and investor interests, even in cases where such actions do not rise to illegal or criminal conduct. In situations like Kapoor’s, a removal right of this kind could give investors an opportunity to act before significant losses occur.
Capital Calls
Limited partners should also try to minimize the penalties associated with any failure to meet capital calls in operating agreements.
Failing to meet a capital call is costly. When membership interest dilution is on the table, the stakes become even higher for limited partners. Capital call provisions allow a manager to notice members and request that they contribute additional capital to the company to make up for budgeting shortfalls. In a time of rapidly increasing building material and labor costs, the need for multiple capital calls during the construction phase of a project has become the norm among real estate joint ventures. Given this reality, limited partners should account for times when they may not have the financial resources to meet capital calls. Accordingly, limited partners should resist provisions that authorize managers to dilute membership interests if a capital call is not met. Limited partners should also look out for operating agreement provisions that force them to pledge their membership interests to other members in the event they cannot meet a capital call. This can eventually result in a forfeiture of a limited partners’ membership interests.
Fees
Fee arrangements present another area where limited partners should pay close attention during negotiations.
In most commercial real estate projects, developers, general contractors, and property managers are paid a fee from the company. Since developers typically manage the company, they often have significant control over the amount, timing, and priority of fee distributions. Developer affiliates may also serve as general contractors or property managers, creating additional fee arrangements that warrant scrutiny. During joint venture negotiations, limited partners should seek clear limitations on fee disbursements. This can be accomplished by incorporating specific parameters into the operating agreement, such as maximum contract amounts, limiting fee distributions to periods of positive cash flow, and restricting the accrual of any preferred return on unpaid fees. Any change to these parameters should also be treated as a fundamental decision requiring limited partner approval.
Financial Reporting
Finally, limited partners should negotiate detailed financial reporting requirements to maintain visibility into company operations and identify potential problems early.
The Kapoor case underscores why these requirements matter. Accurate accounting, frequent financial reporting to investors, and overall transparency with respect to cash flow and company spending are crucial to holding managers to a standard of accountability. Without clear reporting obligations, financial issues can go unnoticed until they become serious. If limited partners’ first indication of trouble is a default letter from a lender, it may already be too late to take corrective action. Limited partners should negotiate carefully structured financial reporting provisions that obligate investors to provide monthly accounting statements, complete tax returns and filings for the company in a timely manner upon conclusion of the fiscal year and provide K-1 tax forms within a time frame that allows investors to submit their own individual tax filings before any deadlines. Managers should also be required to put limited partners on immediate notice in the event any notice of default is received from creditors or any other parties contracting with the project.
As this DE Insight illustrates, there are many ways limited partners can approach operating agreement negotiations to protect their investments. Limited partners should also keep in mind that, regardless of how protections are built into the agreement, it is still important to diligently stay informed on company affairs so that any signs of mismanagement can be detected in the early stages.
[1]United States v. Kapoor, No. 26-cr-20073 (S.D. Fla. 2026).
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