Forming an LLC in advance of needing it to season it?

8 Replies


I am an active REI that has a successful company in OH. In a year and half I will be forming a new LLC operating in a different state where I plan to open and run a separate REI company under another LLC. I remember when I opened my first company The first two years I couldn't get ANY lenders to look at lending to my LLC simply because I hadn't been operating for 2 years they couldn't lend to the company even when it was successful. I don't want to go through that again. So I am posing the question, should I form the new LLC now with no intention of operation under it for another year and half for the sole reason of letting it season for lending purposes?

I understand there will be some minor cost associated with having an active LLC.

You are going to have a hard time finding any legit lending institution willing to make a loan to your LLC regardless of the seasoning time. You will have a better shot getting a loan for yourself.

Have you checked if any of your existing lenders operate in your target state, or have connections to lenders in that state?

@Curt Davis Thankyou for your input. Not the answer I expected. I have worked with several portfolio lenders that are happy to lend to my LLC after the 2 year mark.

@Daniel Huang I did ask them unfortunately the lenders I have used are one branch portfolio lenders that only fund deals in their area. Even those lenders didn't open up to my LLC until been open for 2 years.

Originally posted by @Curt Davis :

You are going to have a hard time finding any legit lending institution willing to make a loan to your LLC regardless of the seasoning time. You will have a better shot getting a loan for yourself. 

I think what you are getting at is the absentee owner syndrome? In my area, there are indeed local banks that use underwriting criteria that include "Past experience of the customer with the bank" and "residency record" in addition to the standard DTI, icome, credit, etc.

@Jered Sturm   in general I look at that kind of thing as game playing. In your specific case perhaps it makes sense since you know you will eventually be doing business there. 

To a good underwriter it is not going to fool them. Are you going to have bank records to show them? No bank account or simply an empty one and blank tax records won't go very far. 

However a good underwriter can look and see that you have been doing business successfully for several years and this just happens to be a new company you are starting. But sometimes banks have specific rules that can't be bent even if they make no sense.

Why ask us?

I presume you'll be looking for non-recourse type financing for your LLC?

Go to the places that you'll be operating in and ask regional banks and other direct lenders what they currently require. Policies and lending guidelines are dynamic and subject to the whims of competive pressure and regional market forces.

As a lender and as an investor, I can tell you that your length of time as an entity means little to me. I care about the collateral. Banks want to see a history of deposits and maybe, just maybe will lend on a percentage of your long term deposits. 

They'll probably ask for other guarantors prior to funding unless you are on their board of directors or otherwise an insider.

We started a series LLC. If your state allows them it is really handy. In Texas it only cost me $35 to file a new series of the master llc. This is a nice way to keep all the properties separate for liability reasons but under one entity for tax proposes. We also created a series which is the "property management series". We wrote the operating agreements to say that the series the properties were owned by were not allowed to manage their own money, and the property management series was not allowed to hold it's own assets. So if I get sued there is nothing to gain.

To the original question, it is hard to find people to loan on acquisition to an llc. So typically I have the debt in my name and then just deed the property to the LLC. I know this could trigger a due on sale clause, but that almost never happens as long as I pay the loan. Once we get 5-6 properties together we will refinance them into a commercial blanket loan in the name of the LLC.

Other companies like B2R financial will only write loans in the name of the llc. But they also do not have an acquisition product at this time. (I hear one is coming) Talk to community banks as well. They will typically be able to lend money to an LLC. Terms may not be great but they typically have a way.

Most lenders, like B2R Finance, focus on the seasoning of the property, not the LLC. Actually, if you a LLC that's been out there too long, it makes me wonder what liabilities may be hanging out with that company.

I recommended specific entities for specific purposes.  I have several LLCs, LPs, and C Corps depending on the business lines. 

B2R loans to LLCs, and I believe this will become more prevalent throughout the industry, including larger retail banks.  Wells is actively originating on portfolios, if you can qualify.

And, yes, we have some interesting acquisitions products and single home products coming soon.

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