Investor · Pittsburgh, PA · Member since 2015 · 35 posts · 3 votes
Myself and my partner currently own a multifamily property. We own the building in an LLC that we are equal partners on. We formed a second LLC in WY as our holding company for future deals.
We are buying a 50% interest in another multifamily. The current owner owns the property 100% in his own LLC, "Main st LLC." My partner and I are doing a value add, then buying out that owner upon refinance so we will own 100% of the property.
My question is, do me and my partner form our own LLC to partner with "Main st LLC", that way our entity can be owned by the holding company? I believe the alternative would be purchasing shares in Main st LLC and all three of us would be in one entity. I would like our portion under our holding company in WY, I just want to make sure that's the correct way.
Thanks.
(I used corporate direct to form the WY company, it’s difficult to get ahold of someone to answer questions quickly).
@Phil B. be very careful. I would make sure you have an attorney representing you through this transaction. You need to make sure you have operational control once you purchase your shares or else the current owner could let you spend your money doing the rehab and then refuse to refi/sell, etc.
To answer your question, I don't believe you get any added protections by buying shares as an LLC. If anything it just complicates the accounting and taxes. On the other hand, if you and your partner both have your roles and responsibilities clearly defined in the operating agreement of your LLC, it may be a good idea to invest as that LLC. If you want operational control, have your LLC be the managing member in the current owners LLC.
Our purchase/sale contract would include our buyout agreement once construction is complete. All of the terms relating to construction, lease up and subsequent refinance will be clearly stated.
"If you and your partner both have your roles and responsibilities clearly defined in the operating agreement of your LLC, it may be a good idea to invest as that LLC."
What do you mean by that? Which LLC, a newly formed one? If I'm understanding you, us forming a new LLC to partner with the current owners existing LLC would be cumbersome.
If we became members of the existing LLC with the current owner, I guess the property would not be able to fall under our holding company during this hold period until we refinanced?
@Phil B. I don't think the clauses in Purchase and Sale Agreement will be enough to cover your bases here. The issue I see is the seller having operational control of the entity (LLC) that owns the property. If you don't amend the Operating Agreement he can sell or not sell/refi or not refi.
If you and your partner buy into the seller's LLC individually (not together in an LLC), how do you all intend to split profits?
@David Lilley we are drafting an operating agreement as well. It would include operational decision power, the seller not being able to sell his share to a third party, etc.
We intend to split profits 50/50 while we wait for approvals to redevelop. The seller is also doing the construction for the redevelopment.