MacFarlane Real Estate, Inc.

If an individual chooses to form an LLC for property ownership purposes after the purchase of the property in their own name, it is possible for that individual to transfer ownership.  A transfer deed can be executed, delivered and recorded whereby ownership is transferred from the individual to the LLC.

However, there are some key considerations at issue.  One of many considerations will be discussed below.

An individual should review their loan documents to investigate how such a transfer will affect the loan terms.  Many loans include what is typically described as a “due upon sale” clause.  This clause is triggered when the subject property is sold, transferred, conveyed (some other triggering terms may be included, one must examine the documents closely, preferably with an attorney).  In short, this clause allows the bank to “call” the loan upon the sale of the property to a person or entity other than the person or entity upon which that bank issued the loan.  That is, the bank can demand the full loan amount immediately.  This process makes sense generally.  The bank made an informed decision to loan person/entity X a certain amount of money based on X’s credit report, income, etc.  If X transfers the property to Y, the bank has reserved the right to halt the deal and demand their loaned amount–”calling” the loan.

That being said, one may consider approaching their loan representative and presenting the situation.  A bank may allow such a transfer under the circumstances, in essence waiving and disregarding the “due upon sale” clause.  Many times, especially on multi-family or commercial properties, banks prefer that the property be held under a business entity such as an LLC because it limits liability (as discussed in earlier posts), therefore helping ensure that the loan payments will be made to the bank, on time and in full, well into the future.

There are additional considerations related to the transfer described above. One big consideration is tax-related (POTENTIAL CAPITAL GAINS TAX).  I will address this issue in a post within the next week.

To conclude, if one is considering a transfer as described above, it is advisable to consult with an attorney to review the loan contract.

LLC’s seem to be the fad right now across the U.S.  For many situations, the popularity is warranted.  However, it is important for an individual to assess the true nature of their “business” before rushing into the formation of a particular business entity.  Consumerism as it is, there are far too many people out there ready and willing to take your money and set you up with a generic LLC.  Therein exists two problems: 1) that person has no interest in whether or not an LLC is the best structure for the particular business you are conducting, and 2) that person is most likely not qualified in the first place to issue the relevant guidance.

As was mentioned in a previous post, there are several factors to consider when choosing a particular business structure.  Will you have employees (i.e. will state law require you to employ an on-site resident manager at your particular apartment building)?  Will you have partners or co-owners or will you be the sole owner/manager (i.e. are there multiple investors, are you considering a general partnership, limited partnership)? In what states/countries will you be conducting business (i.e. will you own properties across several states within one LLC portfolio)?…etc., etc.

Generally, LLC’s provide a more flexible structure than a traditional corporation.  The LLC is dictated by its operating agreement, which through its drafting can specifically manage the assets of the LLC.   Typically, by state, there are less formalities involved with setting up an LLC compared to a corporation.  However, ease of formation and management should not be the sole deciding point.  To many business people, it is the “pass through” taxation treatment at the federal level that sells them on selecting the LLC.  Each member of the LLC reports their share of the profits or losses on their individual tax return and no separate federal tax is assessed on the LLC itself (DISCLAIMER: particular states may have additional taxes –many times called franchise taxes–assessed specifically on the LLC).

The purpose of this posting is to recommend you SLOW DOWN before rushing to create one business entity over another.  It is highly recommended you consult with an attorney who is experienced in not only creating business entities, but also has some experience in assessing particular types of businesses and how those particular businesses fit nicely into certain business entity structures.  As always when considering assets, profits, losses and long-term planning, advice from a tax advisor and/or accountant is key.

Every business is different, as is every apartment building–don’t make a hasty decision.

Many real estate investors’ properties are owned under a separately formed entity–many times, but not always, by LLC’s. Such alternative ownership structure protects one’s personal assets. For example, if a claim or lawsuit arises relating to real estate owned by a properly formed and managed LLC, only the assets owned by the LLC are generally at risk if a judgment is entered. The investor’s personal assets will typically not be subject to such claim or lawsuit.

Many investors choose to set up a separate business entity for each investment property they own. Others choose to set up one business entity for their entire investment property portfolio. Either choice goes a long way toward protecting one’s personal assets.

As for choosing between an LLC, partnership, corporation, or other business entity, many factors are at play. Number of owners/managers/members…state in which the property is located…tax treatment considerations…etc. More posts will be submitted in the near future regarding these factors, as well as how to transfer ownership of one’s property from ownership as an individual to ownership as a business entity. Check back in the coming weeks.

Of course, when making these decisions, it is always best to consult one’s attorney and possibly one’s tax advisor.