Wanting to purchase LLC entity that holds the real estate....how?

33 Replies

Hi everyone, I am in contract currently purchasing an apt building. The sale is suppose to be an "entity sale" however I am a bit confused. My intentions are to purchase the LLC entity that holds the real estate in efforts to prevent any public info of the property actually transferring, hence no purchase price shown. Currently, a title company is handling the transaction. They are charging a conveyance fee (wouldn't that provide info to the public?). From what I read, shouldn't there not be one as technically no real estate is being sold, just an entity? This is all new to me, obviously meeting with an attorney asap however just trying to see if anyone else has some experience with how this is suppose to be done properly and effectively.

@Nik S.

I am not familiar with your state, but in Florida, if more than 50% of the controlling ownership of the entity owning real estate change, you have to fill out a form to notify the county that will then reset the assessed value.

Also, I am not sure how your depreciation will work as for the IRS, I would believe that the LLC will continue the one already in progress on the original cost when the LLC initially acquired the property.

Last, you will also inherit the past liability of the LLC.

If all those are ok for you, then buy the LLC. Or you can either create a new LLC and buy the property into it. You can also use a land trust to gain better anonymity.

Many states and local municipalities have changed the rule on conveyance of LLC that holds property so they can capture transfers fees and stamps. You definitely need to check with your attorney on the best path for your goals.

@Nik S. Not sure why you are so concerned about the the sale showing up in the public records, but the risks and hoops of buying the llc instead of the property I think severely outweigh the “keeping the sale private”.

As mentioned, not only do you keep the existing depreciation schedule, based on whatever the seller paid for it, you also have their reduced basis in it when you sell.

Do tell us exactly Why you think it’s important to make the sale public.

Originally posted by @Wayne Brooks :

@Nik S. Not sure why you are so concerned about the the sale showing up in the public records, but the risks and hoops of buying the llc instead of the property I think severely outweigh the “keeping the sale private”.

As mentioned, not only do you keep the existing depreciation schedule, based on whatever the seller paid for it, you also have their reduced basis in it when you sell.

Do tell us exactly Why you think it’s important to make the sale public.

not to mention fresh title insurance.. I would not do a larger transaction without fresh title insurance.. I have 2 title insurance claims going now.. this is a key component to me.

 

@Wayne Brooks

My understanding is if I purchase the llc that owns the real estate, there’s no recorded transfer with the purchase price showing. Therefore mitigate risk of tax reassessment. Without a purchase price or conveyance fee, the property will go under the radar. It’s a legal way for now, so why not take advantage of it.

@Nik S. Well, as you are finding out, Moses places require transfer tax on the sale of the entity as well.  I don’t know how much property tax you think you might save, if any, but the financial penalty for depreciation and cap gains later alone I think make that a moot point.

Originally posted by @Nik S. :

They are charging a conveyance fee (wouldn't that provide info to the public?). From what I read,  shouldn't there not be one as technically no real estate is being sold, just an entity? This is all new to me, obviously meeting with an attorney asap however just trying to see if anyone else has some experience with how this is suppose to be done properly and effectively.  

I almost did this recently, but for completely different reasons.  If your main reason is to avoid a tiny conveyance fee and value reassessment from the county,  there is too much risk. 

You have to vet the entity and the property. Whose to say this LLC isn't about to sued or have a judgement against it? Do you know how many disgruntled ex-tenants are out there with deposit refund disputes? What will your cost and depreciation basis be? Do you like payimg forensic accountants?

The conveyance fee is what  $100?  The purchase price is what?  You're in OH.  So what if the assessed value rises $1200.

My transaction would have saved me $43,000 buying the entity vs the RE on a $600k PP.  Plus pain. I wouldn't have had to put new debt on it.  Biggest reason.  The entity only existed for 23 months and this was it's only asset.  The tenants were also businesses.  

How long has this LLC existed? Is it the only asset? How many members? This isn't something you do to save less than 10s of thousands of dollars IMO. Too much risk and tax accounting pain.

Originally posted by @Steve Vaughan :
Originally posted by @Nik S.:

They are charging a conveyance fee (wouldn't that provide info to the public?). From what I read,  shouldn't there not be one as technically no real estate is being sold, just an entity? This is all new to me, obviously meeting with an attorney asap however just trying to see if anyone else has some experience with how this is suppose to be done properly and effectively.  

I almost did this recently, but for completely different reasons.  If your main reason is to avoid a tiny conveyance fee and value reassessment from the county,  there is too much risk. 

You have to vet the entity and the property. Whose to say this LLC isn't about to sued or have a judgement against it? Do you know how many disgruntled ex-tenants are out there with deposit refund disputes? What will your cost and depreciation basis be? Do you like payimg forensic accountants?

The conveyance fee is what  $100?  The purchase price is what?  You're in OH.  So what if the assessed value rises $1200.

My transaction would have saved me $43,000 buying the entity vs the RE on a $600k PP.  Plus pain. I wouldn't have had to put new debt on it.  Biggest reason.  The entity only existed for 23 months and this was it's only asset.  The tenants were also businesses.  

How long has this LLC existed? Is it the only asset? How many members? This isn't something you do to save less than 10s of thousands of dollars IMO. Too much risk and tax accounting pain.

LLC has existed 10 years. It is the only asset in the LLC. Husband / Wife are members. I am not trying to save the conveyance fee just need to shield purchase price from public records to avoid tax reassessment (44k annual increase). I've read the success on it but yet to do it. This deal needs this to happen. Deal PP is $2.2m

 

Originally posted by @Nik S. :
Originally posted by @Steve Vaughan:
Originally posted by @Nik S.:

They are charging a conveyance fee (wouldn't that provide info to the public?). From what I read,  shouldn't there not be one as technically no real estate is being sold, just an entity? This is all new to me, obviously meeting with an attorney asap however just trying to see if anyone else has some experience with how this is suppose to be done properly and effectively.  

I almost did this recently, but for completely different reasons.  If your main reason is to avoid a tiny conveyance fee and value reassessment from the county,  there is too much risk. 

You have to vet the entity and the property. Whose to say this LLC isn't about to sued or have a judgement against it? Do you know how many disgruntled ex-tenants are out there with deposit refund disputes? What will your cost and depreciation basis be? Do you like payimg forensic accountants?

The conveyance fee is what  $100?  The purchase price is what?  You're in OH.  So what if the assessed value rises $1200.

My transaction would have saved me $43,000 buying the entity vs the RE on a $600k PP.  Plus pain. I wouldn't have had to put new debt on it.  Biggest reason.  The entity only existed for 23 months and this was it's only asset.  The tenants were also businesses.  

How long has this LLC existed? Is it the only asset? How many members? This isn't something you do to save less than 10s of thousands of dollars IMO. Too much risk and tax accounting pain.

LLC has existed 10 years. It is the only asset in the LLC. Husband / Wife are members. I am not trying to save the conveyance fee just need to shield purchase price from public records to avoid tax reassessment (44k annual increase). I've read the success on it but yet to do it. This deal needs this to happen. Deal PP is $2.2m

 

Good info to know.  It appears worth doing.  

If the sellers were smart, they would each own less than 50%. Selling a majority interest will trigger the reconveyance with the state.  Majority is 50% or more.

For this reason, my wife and I only own 48% of our larger LLCs. Our 2 boys own 2% each. We can sell over 3 calendar years to avoid all kinds of fees. Most M&P sophistication stops at an LLC. No way to hide a 50% or more transfer of interest. You will have to underwrite to a 44k higher annual property tax expense is my guess.

 

@Steve Vaughan

Thanks for the responses Steve. My next question is who facilities this type of transaction. As of now, a title company just got our contract. Is this strictly an atty transaction? Or title company has to be involved to handle escrows, prorations etc..? I have meeting setup with an atty tmwr as well as email out to VP of title company handling transaction. Just happens that this Labor day of mine is being consumed by this :-)

Originally posted by @Nik S. :

@Steve Vaughan

Thanks for the responses Steve. My next question is who facilities this type of transaction. As of now, a title company just got our contract. Is this strictly an atty transaction? Or title company has to be involved to handle escrows, prorations etc..? I have meeting setup with an atty tmwr as well as email out to VP of title company handling transaction. Just happens that this Labor day of mine is being consumed by this :-)

Since real property isn't really involved, we were just going to use an attorney.  Title co's are there to insure title and convey real property.  Neither of  those  will happen your proposed way. 

My title co won't even do escrow only for me without title insurance.  And I get invited to their Christmas parties. LOL

Originally posted by @Nik S. :

@Steve Vaughan

Ok I had a feeling this was the case....need to act quick. Can/Do attorneys handle the prorations etc?

I've never even been to OH so have no idea what is customary in your area.  Ask them.

@Nik S. in Ohio, When you do the into the transaction it involves two transactions. First, there's the drop-down LLC. The property is transferred from the original LLC into the drop-down. You do not own the drop-down LLC, This is owned by the seller. Well technically the property transfers, since the transfer is between an entity to another entity with the same beneficial ownership, it is a transfer for no consideration. This is what will be reported on the public record. This transaction happens first. Then, on closing day, you were by the beneficial interest in the new LLC. There is no transfer of the real estate at that time, so nobody knows what your truly paid for the property Besides you your accountant and the bank, and the seller.


@Nik S. your title company should handle this and the documents that need to be prepared, however, make sure you are using a title company that handles a lot of commercial transactions. If your title company pretty much does residential real estate and single family transactions, I would use someone else, because this is a very form driven and procedural transaction, And if the title company doesn’t know what they’re doing, they can easily screw this up. You’re welcome to PM me if you need anybody in Ohio that can do this

@Nik S. You need to have a lawyer representing you on this one. An entity sale is NOT always as clean as it's supposed to be and there are all kinds of potential problems. For example, if there is currently a loan to that entity and the property is collateral, a sale of the entity will quite possibly trigger the Due on Sale clause that's probably in the Security Agreement / Mortgage / Deed of Trust on the property.

I highly recommend you get a lawyer if you don't already have one.

Originally posted by @Nik S. :
Originally posted by @Steve Vaughan:
Originally posted by @Nik S.:

They are charging a conveyance fee (wouldn't that provide info to the public?). From what I read,  shouldn't there not be one as technically no real estate is being sold, just an entity? This is all new to me, obviously meeting with an attorney asap however just trying to see if anyone else has some experience with how this is suppose to be done properly and effectively.  

I almost did this recently, but for completely different reasons.  If your main reason is to avoid a tiny conveyance fee and value reassessment from the county,  there is too much risk. 

You have to vet the entity and the property. Whose to say this LLC isn't about to sued or have a judgement against it? Do you know how many disgruntled ex-tenants are out there with deposit refund disputes? What will your cost and depreciation basis be? Do you like payimg forensic accountants?

The conveyance fee is what  $100?  The purchase price is what?  You're in OH.  So what if the assessed value rises $1200.

My transaction would have saved me $43,000 buying the entity vs the RE on a $600k PP.  Plus pain. I wouldn't have had to put new debt on it.  Biggest reason.  The entity only existed for 23 months and this was it's only asset.  The tenants were also businesses.  

How long has this LLC existed? Is it the only asset? How many members? This isn't something you do to save less than 10s of thousands of dollars IMO. Too much risk and tax accounting pain.

LLC has existed 10 years. It is the only asset in the LLC. Husband / Wife are members. I am not trying to save the conveyance fee just need to shield purchase price from public records to avoid tax reassessment (44k annual increase). I've read the success on it but yet to do it. This deal needs this to happen. Deal PP is $2.2m

 

Lower or raise the purchase price on the closing statement, make up the difference with out of closing payments/credits.  I do this often to get a higher purchase price for a higher loan. 

@Nik S.

@Stanley Bronstein

To go along with what Stanley said, I would make sure the title company is 

1) one that does commercial deals and

2) connected with a law firm based in Ohio

Not all title companies are made equal and not all law firms are made equal. Don’t hire a firm from Sharon PA to close a deal in Youngstown even if the attorney has an Ohio license. Make sure they are experts in Ohio real estate law

Originally posted by @John Duston :

@Nik S. Typically people buy the assets out of an LLC and move it to another one to avoid any possible liabilities associated with the LLC

Yes that’s what I want to do however there will be a public display of purchase price which in my area triggers reassessment. 

Drop property into a new llc how? 

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