La Canada Flintridge, CA · Member since 2015 · 2 posts · 0 votes
I was assisting a family member who was looking to purchase a multi tenant office building as an income property. I noticed monthly rent for one tenant was about 10% higher than the others. Turns out that the owner of the building and the tenant paying the higher rent were two separate LLC's that were registered to the same person. The cap rate in the listing and marketing material was based on rental income that was artificially inflated. The broker also never informed me of this owner tenant relationship either either, I discovered it on my own.
I understand that an LLC is a separate legal entity but in this case the money is going to the same place. Is this sort of thing common? If name alone is not enough to show the relationship between owner and tenant shouldn't that be disclosed right away? To me it seems like a deceptive accounting trick. Is it even legal to not disclose to a buyer that this owner tenant relationship exists?
Sounds like tax evasion. If the building owner LLC (lower tax bracket) is receiving "income" from a tenant LLC (higher tax bracket) who claims it as an "expense", then he is using this false relationship to artificially transfer the rent amount from a higher bracket taxable income to a lower bracket taxable income.
I'm no accountant, but I also thought LLC's had pass-through taxation so I could be completely wrong.
I don't know if he is presenting significantly misleading information though. The fact the owner is a tenant doesn't affect the published cap rate at all (except his 10% inflation on one single unit). In either case, that unit's rent is 10% above "market rent" and you should lower it for your own due diligence NOI calculations anyway.
Snake in the grass tactic to artificially inflate GRM and Cap rate. The IRS will probably sniff this out as well. Never do business with snakes or crooks! Good find @Andrew Cornell!