MultiFamily - Buying the Business Entity (LLC, Corp, etc...)?

Question

Hello BP'ers,

This question is more for experience Commercial multifamily investors. Is it possible, or even preferred, to purchase or take over the existing Business Entity (LLC, Corporation, or whatever) when purchasing a medium to large size MultiFamily Apartment Building?

What are the benefits in doing so? I wouldn't have to form my own, I would think you would get all of the history associated with the LLC, such as length of existence, credit rating, name recognition, etc... I would think that existing agreements with PM would stay in place. I would also guess that buying the Entity rather than the property would not trigger the "Due on Sale" clause because if the property is in the Business name, then it isn't technically being transferred or sold right? Yes/No?

What are the negatives in doing so? Would I have to pay more? If the entity had bad credit or lots of debt that would be a negative. If the Entity had any negative judgments or lawsuits against it.... what else?

Thanks in advance!

Jeremy Tillotson · Answer

@Alexander Merritt I dont ever do this because of the unknown. What if a former employee of 5 years previous sues, it would now be on your company. I also look at value add turn around so new name and management can be good for us.

Roy N. · Answer

Ben:  There can be other benefits at disposition as you have more options available to you.

viz.  Here if you sell a property and vendor finance it (mortgage or instalment sale) you can defer your capital gains over multiple years (up to five).   If I sell a company a few shares at a time, I can absorb any capital gain at an even slower rate.

Hmmm that got me thinking ... If I sold the company and not the building, then there would/should be no capital cost allowance (CCA) recovery {aka: depreciation recovery} which would be good for the vendor, but maybe not so good for the buyer.   I'm sure the CRA has a way to force the recapture.  Nonetheless, it sounds like a question for an accountant  (Oh, @Steven Hamilton II)

Roy N. · Answer

@Alexander Merritt

It use to be a common practice up here - and likely down there as well - to incorporate a holding company which would own one or more pieces of commercial real estate ...i.e. a 50 unit apartment complex.

The advantage was you could sell the company with the existing financing in-place  - the new owner(s) would simply acquire the shares of the company and life carried on.  Lenders, who never like to not be in control, have since altered their terms such that an change in ownership or control of a corporate body holding the mortgage triggers - at the lenders discretion - the due on sale clause.

There are still other advantages to holding real estate in its own holding company, but not the big one which previously enabled financing to travel with the property.

If you are acquiring a real estate holding company, I would check to see if there are any leans or actions against the company.  I would not be so concerned with past employees as there are likely to be none - one would normally handle operations separate from the asset holding company.  You would also have the officers/owners of the company indemnify you against any adverse proceedings arising while they were at the helm.

If you are really paranoid, you can collapse the entity after it has been acquired and transfer the assets to a new entity.

Josh Eitingon · Answer

I know it is pretty common in Ohio as it would allowed you to avoid the tax reassessment at the newly purchased price.  That said, it is getting less common as local governments are catching on to it.  I'm all for it but, I would not bake that into your going in numbers.  If you can successfully transfer the LLC and not get hit with the tax hike then I see that as just a bonus.

Jeff Rabinowitz · Answer

I was involved in the purchase of a building the owners of which had recently challenged their property taxes and were successful in getting them reduced significantly. My group did not want a quick visit from the assessor so we formed an LLC which purchased the existing LLC. The building was the only asset of both LLCs. This did not show up on the public records as a sale of real estate. This made the transaction very private. Each of the investors in our group formed LLCs which bought shares of our parent LLC which purchased the LLC which owned the building. (If it is confusing read the previous sentence again slowly--I think you'll get it.) Another benefit was that in Michigan there is a transfer tax that is owed to the State upon the sale of real estate. I would have to check to be sure but I do not believe we had to pay that.

Roy N. · Answer

@Alexander Merritt

You need to look at it on a case-by-case basis.  I probably would put a residential property or a small multi (6-8) units in a holding company on its own, but I would, and have, put several properties in a given area in a single holding company - the idea being we would sell them all together.   A larger commercial building I would place in its own holding company - particularly if it were being purchased with partners.

Even though you may not be able to see the entity and keep financing in-place, if you owned the properties outright at the time of sale, selling the shares in the holding company could very well be easier - and may have tax benefits - to selling the properties individually.

In general, I am for using holding companies where the potential benefits outweigh the extra administration and accounting effort and cost.

Ben Leybovich · Answer

I've not done it.  Yes, I would - I see no real down-side to doing it.  Yes, that's about it as to the benefits :)

Alexander Merritt · Answer

@Ben Leybovich Is that the only advantage you can see? Have you ever done it before? If not, would you?

Ben Leybovich · Answer

It's still done a lot.  The main benefit is with respect to property taxes.  In those municipalities that "chase" sale prices in their assessment of the value basis, it is some what advantageous to "fly under the radar" by purchasing the holding entity.  This was, the title does not change hands, while the ownership does, which leads to a longer period of time before the municipality catches on and re-assess.

In the end, though, they always do, so you better underwrite taxes the right way :)

Roy N. · Answer

@Alexander Merritt

An LLC could serve as the holding company - we do not have LLCs in Canada, so your choices are to own in your own name (sole proprietor) or within a corporation (like a C corp in the U.S.A.).

I would consult with your real estate attorney and CPA before setting up any ownership hierarchy (nested or serial LLCs, C-Corp, S-Corp, etc) to see what best fits your current and future needs.

The principal distinction, at least here, is the holding company only holds assets and does not engage in an active business.

MultiFamily - Buying the Business Entity (LLC, Corp, etc...)?

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