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

Multi-Family and Apartment Investing
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Wanting to purchase LLC entity that holds the real estate....how?

Nik S.
OH · Member since 2014 · 454 posts · 227 votes

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.

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y

@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.

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  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    7y

    Research Ohio law on controlling interest real estate transfer taxes. Not sure about the status of the proposed legislation but as of 2018 it was in the works.

    Yes, title companies and attorneys handle these types of transfers. These are typically done via a membership interest purchase and sale agreement (when the existing entity is purchased) and yes there is a closing with prorations and adjustments like a traditional sale. The most important element in such transactions is the indemnity from the seller... is it worth the paper it's printed on?

    Gimer Law516 Reviews
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  • Chris K.
    Attorney · Nashville, TN · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Nik S.

    I don't know anything about Ohio Law but I would check to see if such transactions would actually avoid the transfer tax. In Pennsylvania, it wouldn't. 

    Aside from the above, buying an LLC is a tricky process that requires a lot of due diligence. You should also note that most buyers prefer an "asset sale" versus a "stock sale" that you describe here. Granted, that's more likely the case when you are selling/buying a traditional business. But some of the concerns of a stock sale should apply to your situation as well. For example:

    • You will inherit all the liabilities. You can follow the advice from @Tom Gimer and ask for an indemnification. But it's a different manner to enforce an indemnification agreement. 
    • In most situations, a stock sale is unfavorable to the buyer when it comes to the tax basis.
    • Same when it comes to depreciation. 
    • There are also weird rules about write-offs depending on how the purchase price is structured. Way over my head but it came up as an issue in my past transactions.  

    I would work with an attorney and a CPA for this kind of transaction. While reassessment is a valid concern, there are many other issues to consider. 

    Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

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  • Nik S.
    OP
    OH · Member since 2014 · 454 posts · 227 votes
    7y

    After conversing with title co and atty, I will be purchasing a NEW LLC in which the seller created. Eliminating a few of the other precautions mentioned. I will follow up shortly. FYI, this is legal in ohio. As all have mentioned, title company will continue to handle the transaction as normal. Thanks to everyone for your support and info!

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  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Nik S.:

    After conversing with title co and atty, I will be purchasing a NEW LLC in which the seller created. Eliminating a few of the other precautions mentioned. I will follow up shortly. FYI, this is legal in ohio. As all have mentioned, title company will continue to handle the transaction as normal. Thanks to everyone for your support and info!

     Nik,

    I do "entity transfer" all the time. And you do need an attorney who is an expert in structuring one.

    Yes, it minimizes the RE taxes you have to pay but when I do my underwriting, I assume the taxes will go up based on the PP. If the property's NOI will not be high enough (with the higher taxes) to give me a high enough ROI, I won't do the deal.

    1Reply
  • Wilson Linder
    Member since 2020 · 19 posts · 4 votes
    6y

    @Michael Ealy - have you seen the property taxes raised up to the purchase price, or just increased a proportion from previous assessed value?

    Are you still able to depreciate the structure at the purchased price when buying through an LLC transfer? Or can you only depreciate from the previous assessed value? or assessed value on county site?

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  • Bobby Larsen
    Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
    6y

    If you're buying LLCs (or any entity) as opposed to the real estate, definitely consult with an experienced attorney. You're technically engaging in a corporate sale just as if you were buying a company and with that comes a completely different approach to depreciation, tax basis, etc. Not to mention your accepting all of the prior legal obligations and liabilities of that entity. This is essentially the process that you must follow when you acquire shares of a "baby" REIT, meaning a REIT with only one asset.

    I’m pretty sure that it’s also very state specific and certain states will still reassess it as if it were a regular real estate sale since it’s considered a PSA through entity.

    1Reply
  • Wilson Linder
    Member since 2020 · 19 posts · 4 votes
    6y

    It would be a new LLC, so less of a problem with leftover issues. It's very different from CA laws about these transfers

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  • Nik S.
    OP
    OH · Member since 2014 · 454 posts · 227 votes
    6y

    @Wilson Linder

    I successfully executed this recently on a deal. When you purchase the drop down LLC, you don't inherent any liabilities from past LLC. You also start fresh on the depreciation schedule.

    2Reply
  • Gordon MiddletonPro Member
    Rental Property Investor · Hudson Valley, NY · Member since 2022 · 25 posts · 5 votes
    2y
    Quote from @Nik S.:

    @Wilson Linder

    I successfully executed this recently on a deal. When you purchase the drop down LLC, you don't inherent any liabilities from past LLC. You also start fresh on the depreciation schedule.

    @Wilson Linder I know this is an old thread, but hoping you'll see this. I'm trying to determine the advantages of this in NY. By doing the drop-down LLC method, it's clear you avoid liabilities, which is great, but wouldn't the transfer of the LLC ownership after the fact still trigger the reassessment? If so, then what's the advantage here vs just buying the real property?

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