LLCs to hold out-of-state RE

9 Replies

Hello all,

Is it permissible to form an LLC is one state, but then use that entity to hold RE in another state?

The reason I ask is I have some LLCs in my home state that currently do not hold any assets, but I am looking to purchase commercial properties in another state and would like to hold them in an LLC.

Thanks in advance!

Yes.  I have KY SMLLC that is registered as foreign entity and holds property in TN.  You just have to pay fees and keep current in both states.  

@Mark S. Thanks.

Is there typically a "foreign entity start up fee" or something that I would have to pay in the new state?  Just trying to ascertain my transactional and fixed costs moving forward in the new state.  The biennial fee back home would be minimal.

@Wesley W. ,

Depends on the state.  TN is $300/yr for foreign entity.  KY has LLET of $175/yr no matter what, in addition to other fees.  Research your states of interest and that should give you an idea.  

@Mark S.

So, in TN you you have to pay $300/yr to have an out of state LLC? And a $175/yr. fee for any LLC, regardless of origin?

How much does it cost one to get an LLC in TN? Seems like it might be worth it to get a KY LLC if the breakeven point is only a handful of years.

As a comparision, forming an LLC in NY is about $750+, but no other fees except $9 every two years. Not sure about foreign LLCs, but we don't have too many people out of NY that are looking to invest here. ;)

Originally posted by @Wesley W. :

@Mark S.

So, in TN you you have to pay $300/yr to have an out of state LLC? And a $175/yr. fee for any LLC, regardless of origin?

How much does it cost one to get an LLC in TN? Seems like it might be worth it to get a KY LLC if the breakeven point is only a handful of years.

As a comparision, forming an LLC in NY is about $750+, but no other fees except $9 every two years. Not sure about foreign LLCs, but we don't have too many people out of NY that are looking to invest here. ;)

Attorney in KY set up KY LLC at his fee to do so (about $450).

KY has their own Limited Liability Entity Tax (LLET) of $175 each year.  This is NOT a formation fee.  This is NOT, and is SEPARATE from, annual filing fees, etc.

TN has a $300/yr foreign entity registration fee.  

I pay both of these each year.  Each additional rental helps spread the cost to make it more easily palatable.   

I initially planned to use the LLC in KY and also live in KY and therefore I had it set up in KY. I later decided to invest in TN and therefore, instead of creating a new TN LLC, I simply registered my existing KY LLC in TN.

It sounds like you should consult an attorney to answer your specific questions regarding your specific situation.  I am not an attorney and simply stating what happened to work for me in my particular circumstances.

@Mark S.

No worries, you've been very helpful. It sounds like you are putting all your properties into LLC, however. Are you concerned about mitigating risk over multiple entities?

While you can own RE in a different state than your LLC, it's not really a great idea. You should typically have a local LLC hold your RE, and then you can have any other LLC over that. There are three main reasons. First, real estate law is state specific, and courts will generally ignore the laws of your LLC's state, and use the local LLC laws instead. So you don't get an advantage and you may lose some provisions of your operating agreement in the translation. Second, you will still need to register as a foreign LLC in the RE state, so you're paying twice. Third, for estate planning purposes, you may need to probate the RE in the local state if you're just using a single-member LLC (that's going to change state by state). May be easier to have a local LLC owned by the out-of-state LLC.

Originally posted by @Wesley W. :

@Mark S.

No worries, you've been very helpful. It sounds like you are putting all your properties into LLC, however. Are you concerned about mitigating risk over multiple entities?

Not really concerned at this point. In addition to the return components of the strategy, one "asset protection" feature that I'm "using" is intentionally keeping the properties highly leveraged (80% LTV with no immediate plans to accelerate payments). By keeping equity positions low, I feel like this lightens the target on my back. I also have very reputable, highly-experienced property management companies managing the properties which I feel also further reduces my risk. If one views the (deductible) property management fee as multi-faceted ("asset protection" in the form of professional management in addition to all the other PM functions), it's well worth it. All my properties have offer $1MM of liability protection and premiums are very affordable (I get the group rate offered to all the individual investors that use the PM and/or turnkey provider). Finally, the cost to set up, maintain, and track multiple LLCs for the small size of my current portfolio is also cost prohibitive at this time. For all these reasons, I am perfectly comfortable with this strategy at this time. As my portfolio grows, property type changes, etc., I will continue to evaluate the cost/benefit. Hope this helps.