New LLC Financing issues-need guidance

7 Replies

My partner and I have formed an LLC. We have 3 properties that we are trying to transfer into the LLC through a Quit-Claim deed transaction. Simple enough. However two of the houses have financing on them through a bank-and the loans are in our personal names. The bank does not appear willing to transfer the loans into the LLC. We are soon closing on another and while the bank says we can move the title of the property into the LLC POST closing-the loan will have to remain in my partner's name. The obvious issue-does this defeat the purpose of having an LLC in the first place? If something ever happens (God forbid) and we get sued-we would lose the investment properties and still have notes out to the bank. While we did protect our personal assets we still have the liabilities(notes) and would be screwed if we continue to scale up.

What can we do-or is this standard? Do I need to find a new bank that would write up the loans in the LLC? Is offering a personal guarantee the same as the above scenario-we'd just end up with the note if something happens? Looking for any guidance or advice.

@Kyle Galloway

I am not an attorney and you should certainly seek expert professional advice.

During my MBA degree I completed a business law course that briefly covered LLC structures. My understanding is a personal guarantee backing a loan under the LLC entity pierces the corporate veil that separates personal assets from business assets. This piercing of the corporate veil defeats the protection purpose of the LLC and exposes owners to personal liability.

Again, I am not a lawyer and you should definitely consult with a professional.

Your LLC will not 'protect' your family personal from defaulting on the loans associated with the properties. For example; if you are over/under on a property and your LLC goes 'bankrupt' the bank will still come after you personally for any outstanding debts associated with the LLC (because you have to sign as a guarantor on the mortgages that are in the LLC name).

An LLC is only there for liability claims... banks will still get their money from you even if the property and note are in the LLCs name.

@jon reed-I appreciate your response. That is what I was starting to understand-the MAIN purpose of the LLC is to protect me personally from claims. In short-it still makes complete sense to form the LLC, put the deeds in the LLC and all transactions in the LLC, and still have the loans in my personal name if I have to. Would you agree?

@Kyle Galloway You would have to ask your mortgage lender about that... Personally, I keep my investment property notes in the LLC name to keep the notes from going against my personal credit report.

For example... if you have 4 mortgages under your own name and you go to buy a car and they pull your credit history they will see that you have four mortgage payments... then you have to explain to them that they are rentals, show proof of income, and so on. If they mortgage notes are in your LLC name and you go to buy a personal car they will not even show up on the credit report. You also get into the conversation/argument between using personal mortgages to buy real estate vs. a commercial loan.... that is just another can of worms.

I hear you. My current bank doesn't want the loans in the LLC name-even if we offer a personal guarantee. I am stuck. Sounds like this isn't a huge deal though. Thanks for the help.

@Kyle Galloway

I threw four of my properties in an LLC that have loans in my name. I did it about a year after I got the loans. I just did a cash out refi with one of the banks and they found out I switched the deeds into my LLC when they were running a credit check on me. One of my loans showed I owed nothing and they asked me why. I told them I switched the deed and put it in my LLC. They told me not to do that any more. Said my notes could be called if I was ever late etc.

99% of the time you are going to have to guarantee a loan even if it is in the name of an LLC