All Forum Posts by: David Gotsill

@Marcus Robert - I would always be hesitant to take property subject to any liens unless you know the full scope and potential cost of discharge for the liens.  What is the obligation underlying the liens?  I have not come a across anything referred to as a "grant lien" in my practice.  

As you note, you may not be able to find a willing buyer when you're ready to sell, if the properties are still subject to liens.  That might be a big enough deterrent, unless you're confident in the numbers until 2029.

Another point to consider is that lenders might be squeamish about those liens, and either unwilling to lend to you (or to your theoretical future buyer) or require some additional protection, through some personal guarantee or addition to their title insurance policy.

You could try to keep seller on the hook for any costs related to those liens, but not sure she/he would be willing to do so.

Good luck!

@Dan V. - Sounds like an interesting deal.  

I completely agree with @Michael Plaks, for the reasons he states (noting however, that I am an attorney).  

You could take over the current company, but your due diligence would need to step-up 10 fold.  And I doubt that it would actually improve your ability to get a business line of credit/loan, as I understand that banks diligence the owners of the business, where they would learn that you're newbies in any event.  Also, your purchase agreement would get much more complicated, as you tried to carve out all potential liabilities that should be, to the extent possible, allocated to seller and set up a complimentary indemnity mechanism.  

In the real estate context I might acquire the selling company rather than the actual property if it meant I got favorable tax treatment (e.g., by doing so I acquired carry-over losses that I could use), if it the company had substantial goodwill (meaning that the name/brand was well known and would benefit me, or if there was some other asset or assets that the company had that I wanted (imagine proprietary property management systems, lists of potential tenants, etc.). There are conceivably other scenarios as well, but pretty limited.  

Lacking any of those, I would buy the property only.  At a minimum, I'd suggest you contact a local bank and see if your partner's rational (preferential borrowing) even seems feasible.

Good luck!

Happy to report we just closed another deal in Huntsville, AL.  

I've said this before, but it bears repeating - there's no limit to the power of Bigger Pockets.  Our management team came together through connections on these forums, and many of our investors did as well.  Thanks BP community!

We're excited to begin to transition this property and keep rolling.  Here's a few details below.

Market: Madison, AL (Huntsville)

Units: 26 units (13 duplexes)

Purchase Price: $2.6M

Financing: Freddie Mac, @ 71% LTV

@Jenn Brenton - Congrats!  I'm also a Japan-based investor, and I too started with turnkey when I was based in Tokyo.

I love to connect with other Japan-based investors, so if you're interested let's try to chat sometime in the next few weeks.

Congrats again, that first one is a big step.

Best,

David

@Kevin Turano - 

First, I second the advice from @John Underwood.  Someone licensed in Texas.  You might also be able to get some good information from a local title company, if you know anyone in that space.  

I'm not familiar with Texas laws, but you might only be able to transfer a 1/2 interest in the whole (as opposed to 1/2 of the physical property).  In many states you would then become tenants-in-common.  It that's the case, then the buyer would also own 1/2 of the "other half" of the property.  You didn't state how this was being used, but I could imagine that being problematic. 

Perhaps any problems could be overcome by a solid Tenancy-In-Common Agreement, which would set forth whatever provisions you agree upon. For example, that each TIC can freely sell his/her TIC interest (his or her half), you share property taxes, restricted access (buyer can only access 1/2), access to septic and any other utilities, among others.

Just quickly considering an alternative - would the buyer be willing to settle for a long-term land lease?  You could lease the appropriate 1/2 for a long term (50 years), allow him/her the ability to assign and transfer the land lease (and make any sale by you of the property subject to the land lease), but you retain ownership. 

- Dave

This is not legal advice, just some ideas.

@John D. - 

I think we need to clarify in what situations an indemnity from the service provider (let's call them the "Agent") to the PM would kick in.  

In your initial comment, you theorize what if the PM is sued for harassment, which was in fact committed by the Agent.   There would likely be a strong argument that harassment is not within the scope of the services agreement b/w the PM and Agent, and therefore harassment is not part of the Agent's duties.  Contrast this to work that is genuinely part of Agent's duties which could also result in a suit.  Thinking about it in terms of fairness, I believe that in the first case, (and in respectful disagreement with @Nino G.), PM should be indemnified for any damages PM incurs due to Agent's harassment.  In the second case, PM probably should indemnify Agent for any damages Agent incurs due to Agent's performance of its duties.  

[I am not and was never a litigator, so this is merely supposition.]  There are many ways this (the harassment scenario) could play out in court if it ever got that far.  I would think the most likely, from a conceptual standpoint, is that PM would be found liable for Agent's acts - meaning that if the tenant was successful in their claim, PM would be liable.  Then, PM would seek recourse against Agent.  In practice, whether this is grouped in one suit or separate wold vary greatly, I think.

@Jaclyn P. - Good questions.  Like @Curt Smith and @Daniel Dietz noted, there are a number of ways you can potentially keep the property after the end of your scheduled hold period.

Personally, I'm a fan of a buy-out of a member's LLC interest. This is #4 in Curt's list. Buy-outs can be structured in a number of ways (members could be granted ROFO/ROFR options, or put/call options), so speak to your attorney about options. One thing to keep in mind is whether any partner who is likely to want out will be signing on or guaranteeing any portion of the loan. If so, that partner can't get out without lender's consent, which would likely be subject to lender approving a replacement guarantor.

@Ali Horbach - Curt means that the property owning LLC will have to classes of members - let's call them Class A and Class B. Class A membership interests are determined by their proportionate contributions. Assuming Jacyln has 5 equal equity partners, each puts in 1/5th of the capital and gets a 20% Class A membership interest. Class B membership interests, however, are not linked to capital but are instead allocated to managers. Being in Jaclyn's corner, we want her to have all the Class B membership interests. You might then expect the OA to say either (i) all management decisions are decided by the Class B members (i.e., Jacyln has complete control regardless of the fact she only OWNS 20%), or (ii) Class B members decide most management decisions, but Class A vote on certain listed actions (often called "major decisions) (i.e., Jaclyn gets to decide everything except when to sell, when to refi, when to undertake major renovations, when to change the business plan, and other major items).

This is not legal advice, just my personal thoughts.

@Jeffrey Decedue - That sounds like a pretty crappy situation, and does seem that the bank lead you on.  Based on what you've shared and what I understand of the lending market right now, however, it seems to me more likely that the bank was just busy/hasty, rather than being intentionally deceptive.  Another possibility is that their underwriting has changed, as so much is in flux these past 12+ months. 

In general a pre-qual is tentative (the pre-qual letter should state as much), subject to further underwriting prior to making of the loan and, depending on that underwriting, new terms and conditions may be required.  Like you, I think that repayment of separate debts and a higher percentage down are material terms, therefore we'd hope that they don't change from the initial pre-qual, but they sometimes do.  Based on conversations with other investors and hanging out on this forum, the situation you described is not all that uncommon.  

Cutting to the chase - based only on what you've described, I find it very unlikely that you would successfully be able to bring a claim against the bank.  As I see it, you either perform to meet the bank's new demands, or leave this bank in favor of another lender.  Can you not at least get back your earnest money with a financing contingency (if you decide to leave this bank)?

- David

Hey @James Elden - these are some interesting questions.  

For the LLC as manager/operator of a property owned in your name, there are a few ways you could do it. As you suggest, you could enter into a master lease from you (master lessor) to the LLC (master lessee), who would then rent it out (as sub-lessor) to a tenant (sub-lessee). This is very common in multi-tenant properties (office buildings and shopping malls, for example). Alternatively, you cold have a management agreement between you and the LLC, which authorizes the LLC to enter into leases on your behalf. The LLC would be owner's agent, but ultimately owner is still the lessor. The management agreement could also authorize the LLC to deal with the property manager and undertake other services that it seems you are contemplating for the LLC to handle. One would expect the LLC to be paid a fee for these services (and for which owner takes an expense).

As to jurisdiction, the LLC need not be formed in the jurisdiction in which it operates, but I imagine it must be registered there in order to lawfully do business (could be some variance by state?). Meaning, you could form a Del LLC to manage a property in Cali, but it would have to register in Cali as a foreign entity. It's hard to generalize, but if you're speaking of your first property, it's hard for me to come up with a situation in which you'd be better off forming in a state other than where it operates. Perhaps tax or administration reasons?

Taking a step back, I'm not sure what advantage there is to you in having operations flow through an LLC as manager? I see that it could be simpler to track business-related expenses, but that could be handled with a separate account. Are you anticipating other advantages to using an LLC? Have you confirmed there are no adverse tax consequences? As you note, since the LLC isn't the property owner, you miss out on one of the primary reasons many investors use an LLC - limited liability for the owner. Just curious.

Good luck!

- David

@Dorothea Elizabeth Schaeffer - I think you should rephrase your question. No LLCs are required for this structure - you could do it all in your own name. You might want to have an LLC or LLCs for the reasons they are typically used - limited liability, asset protection, taxation.

It's fairly common for big fish investors to have one entity that owns title and a separate entity that runs management.  This is often the case when the investor has many properties, and the management entity is the same for all properties (as a convenience for the ultimate owner) but lender/investors need separate ownership of each property.  If this is your only property, a CPA might be able to help you better decide whether 2 entities are better than 1 - comparing the tax implications and administrative burden.  

As to the commercial tenant, if you are going to set up a business that rents space there, whether or not that business is an LLC would be a completely separate question, and not at all related to the fact that it rents space in a building owned by an LLC that you control. It's a business decision for that business - usually determined by an analysis of the same factors: liability, asset protection, taxation.

Curious if you're getting financing for the purchase?  If so, your lender may have some thoughts on the structure you propose, so you'd be better served by raising it with lender sooner rather than later.

Good luck!

-Dave