Asset Protection for Rental Properties

[M Amin]

If you own several rental apartment buildings. Which is better way to legally structure the properties for protecting assets against tenant lawsuits.

Scenarion#1:

Have each property in its own series under Series LLC. Use Series LLC to handle management activities, including collecting rent and signing leases.

Scenarion#2:

Have each property is in its own series under Series LLC. Create a separate "operating" LLC to handle management activities, including collecting rent and signing leases. The operating LLC doesn't own any asset, just liquid cash that is rental income from tenant and expenses against rental properties. Could the shared management function create a "common enterprise" argument that might compromise the intended separation between series?

Is there a alternate way to structure it, please suggest.

[Clint Coons]

@M Amin You may want to exercise caution when using a series LLC for commercial property. Typically, commercial properties are financed in the name of the entity that holds them. When using a standard LLC, the process is generally straightforward for lenders. For example, the entity is registered with the state, providing transparency and avoiding title issues, which makes lenders more comfortable with the arrangement. However, a series LLC presents more challenges because of its opaqueness. With the exception of a few states, the individual cells within a series LLC are not filed with the secretary of state. This lack of registration can create complications for both lenders and title companies, as they may view the structure as less transparent or reliable.

Texas has recently made changes to its series LLC laws to allow for cell registration, which is a step forward in addressing these concerns. However, in my experience, even with these changes, lenders are often still hesitant and uncomfortable with financing properties held within a series LLC structure. For this reason, I typically recommend using series LLCs for single-family homes, where the structure can be more practical, and keeping commercial properties in their own separate LLCs for simplicity and to avoid unnecessary complications.

In terms of management, I always advise structuring the series LLC with a separate management entity to address the concerns you raised.