Commercial Purchase and LLCs: What Would You Do?

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This week, it’s time for something different.

My articles tend to present my amazing readers with one of my opinions, supported by data of course.  This week I’m going to present a decision I’m grappling with, give you data I’m using to make said decision and see what you folks would do.  In a previous article I mentioned an auction I was attending.  Well…we were the highest bid on one of the properties…go us!

What I’m trying to figure out is how should we take title for said property?

Someone else's problem

The Question

The funds to make this purchase are in SBRE4, an Indiana LLC with assets approximating 4 million dollars, 1 million of which is cash.  This property is a retail location in Minnesota and will cost about $700k all in and yield about $75k in cash flow a year.

There are a number of options of how we take title:

  1. Buy the property into SBRE4 like any other investment to date.
  2. Form a new LLC, which is a wholly owned subsidiary of SBRE4, and put the building into that.
  3. Buy it into a new LLC, and take the funds out of SBRE4 to do so.

Removing an Option

Psych!  We’re not going to do number 3.  We believe that our investors, including us, should all be treated equally.  Creating multiple fund pools will create conflicts of interest and the hurt the overall diversification.


We’re making the initial purchase in cash.  We plan on working with a lender to either get conservative financing (50% loan to value) or a secured credit line (I like to call them YOYO’s).  This should bump our return a bit, but more importantly it will keep our “power dry.”

I’ve talked to a number of bankers to see what structure they would prefer.  Here are some considerations:

FHA Loans

To get a FHA loan, which has amazing rates, the borrower must be a single asset LLC.  From what I’ve garnered, most of these loans are to multifamily apartment complexes and since this property is retail a FHA loan might be a moot point.

Bank financing

One banker told me they would love this property in the same entity as our other holdings…more to go after if things go belly up.  However, the rate would not be as good as the FHA loan.

Other Considerations


If we put the property into its own LLC, then the “Limited” in “Limited Liability Company” would protect the rest of our assets if there is a slip and fall lawsuit.  On the other hand, we can use insurance to remove most of this risk, albeit at extra cost.

Administration and Bookkeeping

If we keep this in SBRE4, it will make our live easier:

  • Cheaper tax preparation (one less company saves us about $500 a year)
  • No new LLC startup costs.  We’ll still need to file to do business in Minnesota and pay the annual registered agent fees, but we’ll save ~$300 up front.
  • This property will create very few transactions (I would guess about 100 per YEAR), so not having to create a new bank account would save us some time and hassle throughout the year.


There won’t be much of an impact from for our income taxes.  Either way our profit/loss it will flow wind up on our SBRE4 return and our investors will get one K-1.  However…if we decide to switch from one to another at a later date, its a headache.  We would likely pay capital gains and depreciation recapture.

Wrap it up

This space intentionally left blank.

What do you think?  What am I not considering?  What am I wrong about?

Photo: Oberazzi

About Author

Kenneth Estes

During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Find more by and about Kenny on his personal blog and his recently created twitter account!


  1. Douglas Dowell

    Interesting choices indeed.

    My favorite quick and dirty decision rule is cost benefit analysis.
    It seems here the cost of the additional structure do not appear to outweigh the benefit.
    If the only way it would be acquired would be a bankruptcy remote entity like HUD requires, then of course the outcome would swing the other way. The additionally liability risk here does not appear unusually high to me unless the property were going to be leased to environmentally dirty activity or high rick activity like a skydiving, paint ball or carnival rides.

    Overall, I vote no new entity in this case.

  2. I went through this last year with my first commercial property purchase. I think it depends on your relationship with your investors.

    If your investors are also all partners in your SBRE4 LLC and they will have the same % of ownership in the new investment as they have in that LLC, then you maybe could use it.

    If they are not associated with SBRE4 then I would think you should create a new one.

  3. Kenny:

    Another advantage of putting the property into its own company (we don’t have LLCs up here, so we use an incorporated holding company {similar to a C corp}) is it gives you more options when it comes time to divest as you can always sell the company and not the property.

    Where interest rates are these days, there is a fair possibility that rates may be higher when you decided to sell, being able to sell the shares of the company to a buyer w/o having to obtain new financing could be a strong selling point.

  4. I’d do the new LLC.
    Seems like you’d be putting a lot of equity at risk having this with all your other properties.
    This is both directions as a lawsuit here puts all you other Property at risk and one from an existing. Property puts your shiny new free and clear, at least for now, $700k commercial place at serious risk.

    How many properties are in that LLC now. Seems like if it already has a lot in it there is already a heightened exposure.

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