All Forum Posts by: Jer Fortenberry

Asking for different types of clauses is like asking for different types of sentences or paragraphs. A clause is simply a group of words in a document with a legal effect. There are hundreds of clauses and thousands of different variations on the high-level categories of clauses. What type of clauses are you looking for? 

@Jasmine Cotes You're welcome. You would want the ability to take title in the name of the LLC even though you are listed as the buyer in the contract. Depending on the terms of the agreement, the contract may not be assignable. That means that you would be required to take title in your own name since you are listed as the buyer in the contract. To protect against this, you would want to include a provision in the contract that allows you to take title in the name of the LLC. And, of course, you would need the LLC to be formed before you could take title in the name of the LLC.

I noticed that the formatting is off at the top of my screen. It hides the first section below the top navigation section. This happens even when I have not scrolled down in the browser. I've attached a screenshot to show an example. I'm using Google Chrome. 

There are several reasons why you need an LLC. The first one in liability protection. There are all sorts of liabilities associated with investment property. An injury on the property or lawsuit could result in a judgment against you. Without proper protection in place, that judgment would be against you personally. That means that the plaintiff could come after your personal assets--things like your home, vehicles, or bank account.

An LLC is a cheap form of insurance against liability. If it is properly formed and operated, and LLC will help protect your assets. It restricts the plaintiff to the assets that are held in the name of the LLC. So, for example, if your first rental is held in an LLC and you get sued, the most that the plaintiff could get is whatever equity you have in the rental property.

The second reason is more of a "soft" reason: it adds professionalism. Tenants, buyers, banks, and other third parties are more likely to view you as a legitimate business if you actually operate as a business entity. For example, each of your leases would be between the tenant and your LLC (instead of the tenant and you individually). Most people feel that this is a more "business-like" way to do business.

Another reason is that LLCs can make it easier to transfer assets. This may not be as much of a concern now, but there may come a day when you want to add partners or perhaps transition control to children or family members. If all of your assets are properly titled in LLCs, you can transfer interests in the LLCs without having to actually retitle the property. 

That said, I agree with @Mark Langdon that you should find the property first. There's no need to set up an unfunded LLC until you know that you are moving forward with a purchase. But (a) be sure that your purchase contract allows you to take title in the name of an LLC that is wholly owned by you or by you and your husband and (b) be sure that the LLC is formed before you close. This is also something that you will want to discuss with a lender.

I think it depends on the contract. In your purchase contract, you consider including a clause that allows the buyer and/or the buyer's agents to enter the property during the term of the agreement with reasonable notice to the occupants (if any). That would give you the ability to show the property to prospective purchasers. 

@Chris Shuptar A holding company/subsidiary structure is one where you set up one LLC as a holding company, then set up other LLCs underneath it to hold each property. The holding company is the owner of the individual LLCs, and you are the owner of the holding company. That type of structure provides you with the same benefits of a series (protection at the property level), but without the uncertainty.

Here's the thing: We don't really know whether investors are really doing series LLCs with great success. You can't tell that when everything is going well. You don't find that out until the series is in bankruptcy and the bankruptcy court has to decide how to treat the series. That hasn't been well-tested. To my knowledge, there is only one case (Dominion), which involved a Delaware series LLC.

@Chris Shuptar There are several reasons. For one thing, only a handful of states have enacted series LLC laws, and it is not clear that those laws will be respected in states that have not adopted series LLC laws. But the bigger issue, in my opinion, is that there is significant uncertainty in the bankruptcy laws. State law defines "person" differently from the Bankruptcy Code. State law may treat each series as a "person" that can enter into contracts, sue and be sued, etc. The Bankruptcy Code doesn't include series in its definition of a "person." So the Federal Bankruptcy law may not follow state law. This could cause the plan to file if the series is ever forced into bankruptcy. Until that issue is straightened out, I typically recommend a holding company/subsidiary structure over a series LLC.

I have never bought an investment property without an LLC, even when I used a lender. As long as you are personally liable for the loan, the lender shouldn't mind if you take title in the name of the LLC. They will be secure due to the mortgage on the property coupled with your personal liability.

You can close in your own name, then transfer to the LLC at a later point. But most mortgage documents contain what is known as an "acceleration clause" that will allow the lender to declare the entire unpaid balance to be immediately due and payable if the property is transferred. You can ask for permission, but in my experience lenders will ignore the request since they have no incentive to approve it. The better route is to get it set up in the name of the LLC on the front end.

In terms of choice of entity, an LLC is likely to be your best bet for tax efficiency, all-around liability protection, and ease of operation. But you will want to consult with an attorney in your area to confirm and to find out if there are any state-specific tax or filing requirements that could change the analysis.

A word of caution: If you have already quitclaimed the property from your name to the LLC, you may be in violation of the mortgage documents. Mortgage documents usually contain an acceleration clause that requires the full principal amount to be repaid in a short period of time if the property is transferred. These types of transfers usually stay under the radar, so they are not usually a problem. But if you contact your mortgage company, you may be alerting them to the fact that you have already transferred the property in violation of the terms of the mortgage agreement.

I don't like series LLCs and don't usually recommend them to clients, but that's another story. 

A few top-of-head thoughts. First, from the attorney's standpoint, it is usually helpful if the client is prepared. Be sure that you have all of the information that the attorney may need, including the names, addresses, and contact information of everyone involved and any deeds to any property that may be involved. Have a list of your concerns and goals and be ready to discuss them. 

You will also want to be sure that the attorney understands this area of the law inside and out. You will need to form at least one entity (probably an LLC), maybe more. From a legal standpoint, there are two types of liabilities to be concerned about. First, there is your personal liability for any judgments against the LLC (inside liability). You want to be sure that you have a rock-solid LLC agreement in place for each LLC that you form. As importantly, you will want to understand how to operate the LLC on a day-to-day basis (avoid commingling funds, execute contracts in the name of the LLC, etc.). This will help ensure that you're not personally liable for any obligations or liabilities of the LLC.

The second type of liability is outside liability. This has to do with protecting the assets of the LLC against any claims that may be made against you, personally. This will involve charging order protection. You will want to be sure that the attorney understands charging order protection and knows whether it will apply to single-member LLCs in your jurisdiction. Otherwise, you may need to either (a) form the LLC in another jurisdiction or (b) add multiple owners.

You will also want to think about how the business structure fits into your estate plan. Is there a succession/exit strategy in place? Depending on your asset profile, an asset protection trust could add another layer of protection. 

You will also want to be sure that the entity is tax-efficient. The attorney should understand the tax implications of the various classifications available to LLCs under the check-the-box regulations. It is likely that the LLC will either be a disregarded entity (if you are the only owner) or taxed as a partnership (if there are multiple owners). Your attorney should be able to explain this to you and discuss the pros and cons of each option.

Above all, be sure that you are comfortable with the attorney's expertise. Unlike the medical profession (where professionals must go through rigorous, hands-on training to be considered a specialist), there is often nothing from preventing an attorney from claiming to be a "business lawyer" when he or she actually has very little experience in the area. It always rankles me to see an attorney advertise as, for example, a personal injury lawyer and a sophisticated business lawyer and a DUI lawyer. In my opinion, it is not possible to have deep expertise in that may diverse areas of the law. You should be sure that your attorney devotes a substantial portion of his or her practice to real estate/business law and asset protection. 

I hope that helps.