Asset Ownership within a LLC
Hi all,
My business partner and I are looking to purchase our first property but just have a few questions concerns about how to structure the purchase within the partnership. I have heard that it is difficult to get a loan under a LLC and just wanted to get some advice on how others have structured their partnerships in order to purchase properties. Should we try to find a lender that will loan to the partnership or should one person hold it on their person books, or is there another method that I am overlooking? If you have any other general advice for structuring the partnership that would be greatly appreciated as well.
Thank you very much!
Multi member LLCs are essentially partnerships. We have many of these and its common for the members within the Entity needing to personally qualify and backup the financing even though the LLC will retain ownership. Local banks make this pretty easy. But i would assume that you'll need to have your personal finances assess (every member) for each deal. Unless you have a C-corp or other entity style that generates credit for itself over time.
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Sounds like a shell LLC to me which means the lender will probably want a personal guarantee from a member(s) with enough personal assets to serve as collateral. I'd just get in front of a bunch of different lenders, hear their feedback and adjust accordingly until you find financing that works for you.
Hi @Julian Drew, I would begin with talking to the lender you and your partner prequal with. Explain what you are looking to set up (in terms of split ownership) and ask what their parameters are. While you didn't mention it, I presume this will be a new LLC which will hold the yet-to-be-determined asset...if that's the case the new LLC will have no history, so presumably the lender won't really take the LLC into account and the lending will be based on you and your partner's personal financials. You can ask your lender if you can then close in the LLC, but if not, you and your partner will likely have to close in your personal names and after the dust settles, have a Grant Deed executed to transfer ownership of the asset from your personal names to the LLC's name.
Due on Sale Clause
You will find many, many posts on here and in the internet in general that warn you not to do this because of the Due on Sale Clause found in mortgages which provide that a Lender can call the entire mortgage if a transfer is made out of the original borrowers' names. This is partly true, but the true intent of that language is to prevent undisclosed sales/transfers that would leave the Lender without an easy recourse in case the note is then not being paid. There are statutory exemptions for transfers that will NOT trigger the due on sale clause (E.G. death, marriage/divorce, estate planning/asset protection, and a few others). Bottom line: the purposes for which many real estate investors on BP would transfer ownership of an asset to a LLC, would likely fall under the exempted transfers, and as such, NOT trigger the Due on Sale Clause. Which makes the Due on Sale Clause (in most instances) an irrelevant issue to worry about. Feel free to chime if you'd like more clarification.
Do it right and work with a "commercial" lender. Legal entities are not eligible for conforming loans, e.g. FHA, conventional, etc. You want everything titled under the LLC for the limited liability protection especially since it sounds like you are investing with a non-spousal partner. You dont' want the loan in your names otherwise it affects both your credit serviceability 100% (its not split). With everything under the umbrella of the LLC, all the accounting and tax liability will be handled cleanly, and correctly.
Both of you will need to personally guarantee the loan since the LLC has no assets or history. That's normal. But, the loan / lien / DoT will be in the LLC's name.
Happy to chat. Good luck.
@David M.@Luis Alvarez @Matthew Morrow@Mario Mila
Thank you all so much this information is incredibly helpful! There are so many nuances in structuring the business which seems to be largely based on the type of investment we are going for and what we are wanting to achieve from the business and I have a great idea of how to move forward now. I am very very thankful.