All Forum Posts by: Ryan Seib

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Homestead of Waukesha, LLC v. Homestead Condo. ***'n, Inc., 370 Wis.2d 262, 881 N.W.2d 359(Table) (Wis. App., 2016)

Joe,

If you read my first paragraph you would notice I stated very clearly "Your actual taxable income and deductible business expenses should be the same." But, I forgive you.

As to your other comments. I agree he should talk to a local attorney. Given your response it is surprising you did not state your qualifications were as a local attorney, an IRS agent, even a resident of the same state.

Your assertion that my comments are wrong is silly. My comments are merely illustrations of a way in which it could be considered beneficial to operate as OP proposed. As I said above, "for many investors this approach would not yet be worth it" implying that OP should probably not implement this approach due to its complexity, extra cost, and minor benefit. Your burden would be very high to show that the statement "a pro se plaintiff may not understand how to file a lawsuit at all and may just sue the LLC rather than the owner" is actually wrong! It may be unlikely. But I did not present it in terms of its likelihood. Yet, of course, I do not personally know OP or his financial situation, as you do not. Perhaps it would make sense for him. Who knows! That is why he should speak to an attorney if he wants to pursue his scheme. Thus, my comments are not intended as recommendations but merely illustrations.

Your comments on the other hand might be construed as recommendations which some might consider giving legal advice, ie the unauthorized practice of law. We should help each other on this forum, not convince people we know how they ought to run their business. 

Finally, you asserted that a contract will not block lawsuits. I respectfully disagree. Contract law is very important in determining the outcome of lawsuits. Most cases are determined on that basis alone. In this case, all you have to do to protect the asset from a lawsuit judgment is show that the property owner is not liable for whatever reason. Imagine a shopping mall owned by a REIT. Tenant T in the shopping mall is a sole proprietor and signs a lease with property manager PM. The lease says that T is responsible for cleaning up spills on its own leased property. The NNN lease says PM is responsible for the standard stuff. If T slips on the floor can he sue PM for not putting in the right kind of tile? Yes. Can he win on the merits. Less likely. Can he sue REIT? Yes. Can he win on the merits. Even less likely. What if REIT had a contract with PM that PM was required to put in the tile a year ago. What if T was a signatory to that contract? That is all I am saying.

As to Trusts, I am not pretending to be an expert in trusts. But look at 12 USC Section 1701j-3(d)(8) (aka the Garn-St. Germain Act).

Yes, it could be tax advantageous to use an LLC. Running all deductions and expenses through an LLC is a lot better than doing so as a sole proprietorship. From the IRS's perspective, they would wonder why to treat you as a sole proprietorship. I would rather not have to do much convincing. Presumably, you have to obtain an EIN for either scenario in order to better legitimate your business expenses. So the extra step of an LLC takes 2 minutes and $130 plus some paperwork. I bet the bank would prefer an LLC bank account than an additional personal account as well. Not that important. Your actual taxable income and deductible business expenses should be the same.

Another category of advantage is as Marcus Auerbach said for marketing and branding.

The real advantage is liability protection. The first thing an LLC management company does is separate certain management aspects of the properties from the ownership. So with the slip and fall case, the LLC could defend the homeowner by pointing to the lease and mgmt agreement where it says the mgmt company is responsible for all maintenance and upkeep including shoveling and salting sidewalks. That could get you as the owner off the hook and shift liability only onto the mgmt company. And since the Mgmt company has no assets other than its bank account, there would be no risk to your personal assets or the properties.

And a pro se plaintiff may not understand how to file a lawsuit at all and may just sue the LLC rather than the owner. Many plaintiffs cannot afford a lawyer or do not want to hire one. So it raises the bar in that way as well. You can also legally obscure your identity as the owner of the property from various public information sources. If applicable, that could help make it less obvious to potential plaintiffs who actually owns the property in the first place. So, they may assume the LLC does.

The major drawbacks with this approach are it will increase complexity and possibly tax filing costs. I would recommend the LLC have a contract with the property owner (you) for example which shifts liability. You would also need to maintain the LLC as with any LLC. And, you would have more than one bank account and need separate books for the LLC. So, for many investors this approach would not yet be worth it. But as you scale, it is definitely something to consider.

On another note, if you are worried about asset protection and have other personal assets or a decent amount of equity in the 4 unit, the LLC strategy is only one line of defense. There are many ways to bolster that. The one I would mention that is probably the best defense is creating a trust. Federal law says you can transfer your properties out of your name into the name of a trust and banks cannot trigger a due on sale mortgage clause or anything like it. Plus, you do not need to record the trust anywhere public so no one can access it unless you let them.

Each bank or mortgage lender is going to evaluate the loan a little differently. Talk to several. It may help to put both the investment properties into LLCs and show the lender separate books (which hopefully indicate positive cashflow). If your W-2 is enough to make the mortgage on your personal property, and your investments cashflow, I would think you have a decent change of getting a loan on normal terms. 

Third Legal Blank. Generally investors really only need to consult an attorney if things get risky or confusing with a deal they are working on. Of course it is never a bad idea to get to look around for an attorney you can trust before you need their assistance!

Actually, I would like to amend my comment above slightly. If you start to work with an attorney and build a relationship, it becomes more easy as trust is built. I do not ask for up front payments from certain clients who I have been working with for years. If they call with a simple question there may be no charge generally. Also, there are such things as retainer agreements, where the investor pays his/her attorney a monthly rate in exchange for defined availability and services. This is very useful to the investor who wants to do a lot of consulting with their attorney over the course of, say, an ongoing development project or something that takes many months. Then the attorney is on call for whatever comes up during that time.

Your CPA can be in or out of state. You only need one. That is not advice on what to do though, just an explanation of the minimum requirement. 

Wisconsin lawyer here. I would agree with Jim Gobel that lawyers tend to get a lot of tire kicking. We expect it and recognize prospective clients in this category right away. Also the lawyer is thinking the same thing you are about what kind of relationship it may be. 

I always consider clients from multiple angles: Will they pay promptly, or ask for free work constantly? Will they have more business work, or just one transaction? Will they let me be the captain of the ship, or micromanage as the owner of the ship? Are they going to be ultimately satisfied with what they want help for? These are important questions for you to think about as well. For example, if you try to hire a lawyer to help you throw good money after bad, very few quality lawyers will help you do that. Most quality lawyers realize that you will be unhappy with the result you seek and will decline to be involved. 

On the other hand, if you want business advice, a lawyer with extensive business experience is absolutely invaluable. But you are going to pay a premium for their consultation. And it is generally going to be up to you to come up with framing for questions. 

What is not likely is that you will find a lawyer to act as your in-house counsel and review all aspects of your business with you for a cost effective price. Attorneys know this comprehensive service is not worth their time and your money and are not going to engage in it. Think of lawyer's services like al a carte menu items. You hire the lawyer only with respect to one matter/case/transaction at a time. If you have a different transaction, you need to re-hire the lawyer. 

Not to say you cannot build a relationship that transcends this essential division of work. It may take history with the attorney. Realize the attorney is usually working on many different transactions at once.

The fastest way around the above is to find a lawyer as a business partner. Some lawyers are interested in a piece of the action. Almost every corporation and nonprofit in America of sufficient size has at least one lawyer on its board of directors. Probably a clear reason for this is for ongoing, cost effective, pertinent legal advice.

Operating agreements can also be helpful if you bring on a partner, or in a liability situation such as a lawsuit. I have also seen people set up their LLCs incorrectly (or not at all). In one case one of the two landlords for a bigbox store property was an LLC that was deeded the property years prior to its formation. That creates a potentially huge problem.

That said, it may not be worth it to make the cash outlay at the beginning of your business unless you have the cashflow to justify it. If you have a few properties, I highly recommend having an attorney not only set up your LLC but serve as an outside advisor. If you have nothing, there is a lot less to protect. Make your own informed judgment, though! Research on BP and talking to an attorney is a great place to get some feedback.

In Wisconsin the land contract (seller financing) forms are standardized by the state bar. It is form 11-2003. Not that you have to use that form. And I always add addenda and cross out terms on the standard form anyway. Every deal is unique. But checking out the standard form can get you started on paperwork. Then put together your analysis for a good amortization and financing plan to attach to the offer to purchase. You most likely will need some private money or other source to cover a down payment. If the seller is getting rid of 200 units, it is doubtful that they want them back. Without a down payment, they are taking a big risk of just that.