Lenders - How do I show interest in LLC on personal financials?

5 Replies

Hello,

I have been working on coming up with a more accurate personal balance sheet (as have my two partners in my LLCs) and personal financial statements.

One things we are a bit confused on is how to show the assets (rental homes) and liabilities (mortgages) of the properties we hold in 3 way LLCs. Our lenders have told us that since we EACH needed to sign 'personal guarantees' on the loans to the LLCs each of our 'personal debt' for those properties shows up at 3 times what we each owe when divided up evenly.

An example would be if our LLC bought a property for 750K and borrowed 600K. Seems like we should each 'own' 250K worth of real estate, and 'owe' 200K in mortgage. Sounds easy enough. What lender is saying is that when they do credit check it shows up that EACH of us are responsible for the ENTIRE 600K.

So is there 'a generally acceptable method' of how this should show up when we come up with our personal financial statements? Do we each 'own' 750K and 'owe' 600K, or each just 1/3 of that? The later seems logical, but not sure.

Thanks, Dan Dietz

You should provide the lenders with balance sheets of each LLC. On your personal financial statement, you would indicate “X% of ABC LLC valued at XYZ”. That value would be the equity in the LLC that is apportioned to you as a member of said LLC.

@Daniel Dietz

Under your Liabilities, list 1/3 of each partnership loan obligation.  Create a separate liability group called "Contingent Liabilities" and list 2/3 of each partnership loan obligation.  Contingent Liabilities still add to your total liabilities, but does segregate the portion of the debt that you expect your partners to pay.

@Daniel Dietz

I agree with @Lance Lvovsky approach. If your lender does not understand it - you probably need a more experienced lender.

That said, I have (reluctantly) created quite a few ridiculous balance sheets and explanations on letterhead to placate certain lenders on behalf of my clients. Lenders, mostly their underwriters actually, are not thinkers but box checkers.

@Lance Lvovsky and @Michael Plaks most commercial lender's application forms do not permit showing the investment net of the debt.  The forms require listing the terms and amounts of each note and the sum of that list automatically feeds into the balance sheet.  Lenders also require a schedule of real estate owned and the debt and terms for each note is listed there and that schedule needs to tie to the balance sheet.

I don't know the answer to Daniel's question but my various lenders' forms have been more aligned with @Dave Toelkes gross rather than net presentation with a separate section in the forms for contingent liabilities.

I had never considered this 'extra benefit' of partnerships before.

So it is difficult to prove $50k in equity, yet what clearly shows on your credit report is the entire $600k debt? Yikes. Why is this little fact never discussed here on BP? Getting a partner is certainly recommended to those that lack enough capital. 'Get a partner' is said all the time. 

Banks are awesome. They got each of you to guarantee the $600k in full then turned around reported as much to the big 3.  

Is this a commercial loan as well? Adjustable, callable, bothering you every year to report your financials?   Just keeps getting better if so.

Sorry you are facing this. If it were me, I would hold a meeting with my partners/members and adopt a new policy of reporting each of your owning the LLC as it pertains to your PFSs. Or something. Banks shouldn't be able to have it both ways. If they make you responsible for the entire 600, show you own the thing. But I suppose only one gets to play dirty pool when playing against a bank. Following along to see how the pros handle things like this...

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