Nashville Buy–Sell Plans for LLCs Holding Real Estate
TL;DR: A clear buy–sell plan, embedded in your Tennessee LLC’s operating agreement, can keep your Nashville property stable during ownership changes. Define triggers, valuation, funding, lender consents, and dispute processes up front, and coordinate with Tennessee law and your loan documents. For help tailoring a plan, contact our team.
For Nashville investors using LLCs to hold income-producing or development property, a well-drafted buy–sell plan provides a roadmap for ownership changes without disrupting leasing, financing, or property management. It aligns expectations among members, protects the asset from forced liquidations, and reduces disputes when life events or business changes occur.
Where the Buy–Sell Plan Lives
In Tennessee, buy–sell provisions are typically placed in the LLC’s operating agreement or in a separate agreement cross-referenced by the operating agreement. Tennessee’s LLC statute gives members broad latitude, subject to nonwaivable provisions, to regulate their affairs by agreement, including restricting transfers and specifying admission procedures for new members. See, for example, Tenn. Code Ann. § 48-249-203 (operating agreement), § 48-249-507 and § 48-249-508 (assignment and effect), and § 48-249-510 (admission of assignees).
Common Triggering Events
Your plan should define when a mandatory or optional buyout occurs. Typical triggers include:
- Death or disability of a member
- Retirement or voluntary withdrawal
- Bankruptcy or insolvency
- Divorce or other events affecting ownership interests
- Deadlock or expulsion for cause
- Key covenant breaches (e.g., unauthorized transfers)
- Third-party purchase offers
For real estate LLCs, also consider lender-driven triggers if a loan’s due-on-transfer or change-of-control provisions could be implicated.
Valuation Methods Suited to Real Estate
Clear valuation mechanics help avoid disputes. Common approaches for property-holding LLCs include:
- Appraised FMV of the real estate less debt and transaction costs
- Income approaches such as cap rate on net operating income or discounted cash flow
- Adjusted book value with agreed add-backs and deductions
- Pre-set formulas updated annually
Decide in advance whether minority or marketability discounts apply; who selects appraisers; how to handle multiple appraisals; how pending leases, TI allowances, or capital projects affect value; and whether 1031 exchange timing or transfer taxes require adjustments.
Funding the Buyout
A buy–sell plan should specify how purchases are paid. Options include life and disability insurance on key members; installment notes with interest and security; capital calls; reserve funds; or permitted third-party financing. Align payment terms with lender covenants, debt service coverage tests, lockboxes and cash traps, and reserve requirements so the buyout does not cause a default.
Lender Consents and Transfer Restrictions
Many commercial real estate loans limit transfers of membership interests or changes in control and require lender consent or a formal assumption. This is especially true for agency and securitized loans. See, for example, the Fannie Mae Multifamily Guide (ownership transfers and assumptions) and the Freddie Mac Multifamily Seller/Servicer Guide (transfers of ownership). Your plan should:
- Define what constitutes a prohibited transfer or change of control under your loan
- Require obtaining any needed lender consents before closing a buyout
- Allocate responsibility for consent fees, rating agency review, legal opinions, and third-party reports
- Provide alternatives if consent is delayed or denied (e.g., redemption structure, escrow, or standstill)
Management and Control During the Transition
To protect operations, specify interim authority, property management continuity, rent collections, and vendor payments while a buyout is pending. Deadlock-breaking mechanisms, such as a tie-breaking manager, independent member, mediation, or arbitration, can keep the asset stable during disputes.
Tax and Title Considerations
Real estate LLC buyouts can have federal and Tennessee tax implications. Coordinate with tax advisors on:
- Structuring as a redemption vs. cross-purchase and the impact on capital accounts
- Potential disguised sale concerns under 26 U.S.C. § 707
- Whether to make a basis adjustment via a 26 U.S.C. § 754 election
- Tennessee franchise and excise tax treatment (TN Dept. of Revenue)
If deeds or recorded assignments are involved, budget for recording fees and any applicable transfer taxes, and coordinate with the title insurer to preserve coverage and endorsements after membership changes.
Coordination With Tennessee Law
Tennessee’s LLC statute allows members to set transfer restrictions, admission procedures, and dissociation processes by agreement, within statutory limits. To reduce ambiguity, your plan should:
- Spell out consent thresholds and notice mechanics consistent with your operating agreement
- State remedies, such as specific performance, and fee-shifting if parties do not perform
- Clarify that the buy–sell agreement controls over conflicting defaults in the statute where permitted (see § 48-249-203, § 48-249-507, § 48-249-508, and § 48-249-510)
Dispute Resolution and Remedies
Specify staged processes, including good-faith negotiation, mediation, and either arbitration or court, for valuation and performance disputes. Consider fee shifting, the availability of specific performance, and temporary operating protocols to protect the property during a dispute.
Practical Drafting Tips
- Keep a current schedule of members, percentage interests, and capital contributions
- Attach insurance policies or certificates and require periodic proof of coverage
- Build a timeline with notice, election, valuation, and closing steps synced to loan covenants and lease obligations
- Provide for tax distributions and waterfall priorities during installment buyouts
- Include right of first refusal and first offer mechanics and protocols for third-party offers
- Update the plan upon refinancings, major capital projects, or significant tenancy changes
Buy–Sell Plan Checklist
- Identify triggering events and who may initiate a buyout
- Select valuation method, appraiser selection, and tie-break rules
- Define payment terms, security, and default remedies
- Confirm lender consent requirements and responsible party for fees
- Set interim control and decision-making authority
- Address tax allocations, Section 754 election, and capital accounts
- Preserve title insurance and endorsements post-transfer
- Include dispute resolution steps and timelines
- Maintain updated member schedules and insurance amounts
- Calendar periodic plan reviews tied to refinances and major events
FAQ
Does Tennessee law require a separate buy–sell agreement?
No. Tennessee allows buy–sell provisions to be in the operating agreement or in a separate agreement referenced by it. The key is consistency and clear priority of terms.
Will our loan be called if a member exits?
It depends on your loan. Many agency, CMBS, and bank loans restrict ownership changes and require consent. Review transfer and change-of-control clauses and plan buyouts around those requirements.
How do we avoid valuation fights?
Pre-commit to a valuation method, appraiser qualifications, a multiple-appraisal tie-breaker, and whether discounts apply. Set deadlines and an interim payment mechanism if timing slips.
Is insurance necessary to fund buyouts?
Not required, but key-person life and disability insurance can stabilize cash needs and protect DSCR during a buyout.
When to Review or Update Your Plan
Review your buy–sell plan after acquisitions or dispositions, refinances, significant capital improvements, changes in membership, new loan covenants, or material shifts in market conditions. Regular updates help keep valuation formulas, insurance amounts, and consent requirements accurate.
How We Can Help
We counsel Nashville investors and operating partners on structuring, drafting, and enforcing buy–sell plans tailored to Tennessee real estate LLCs. We coordinate with lenders, tax advisors, and title companies to minimize disruption and protect asset value during ownership transitions. Contact us to discuss your plan.
Important Tennessee-Specific Notice
This post provides general information for Tennessee LLCs and real estate investors and is not legal, tax, or financial advice. Laws, loan terms, and facts vary. You should consult a licensed Tennessee attorney about your specific situation.