Ok, so I have been wondering how RE investment firms have their legal structures in place.
For example, we have a company call XYZ Capital, which specializes in multifamily acquisitions. So essentially they set up XYZ Capital as a LLC since it may be family owned or only have a few partners, but then they create a LLC for each acquisition. So like XYZ Capital LLC would own "Multifamily Property LLC". They would create a new LLC under XYZ Capital for each acquisition. However, I am being told by lawyers that this structure is very bad and leaves you open to heavy liabilities.
Lawyers I spoke to say that in this case, the real estate and operations should be split to limit the liability. So instead of just XYZ Capital owning a LLC which owns the property, the new structure would have XYZ Capital leasing the entire building to the LLC which would operate that multifamily property. The multifamily property then would pay yearly rent to XYZ Capital. Lawyers said you could even make the rent like $1 a year or something. So essentially even though both LLCs may have the same owners, they would be splitting their real estate and operations.
Many of you guys here work for small RE investment firms. How do you guys have your legal structure setup for acquisitions and even development?
The short answer, based on my clients is entities within entities. ABC LLC takes title. XYZ LLC and 123 LLC take shares to the owning entity of ABC LLC split however appropriate.
I owned my office building for about 2 years (2004-2006). Title was in a personal trust and my business, a brokerage that's incorporated paid the lease. Personally I took the depreciation deductions and so on.
Usually there will always be a separate entity for the management. At least with my clients that manage their own.
The problem you'll run into potentially here is getting someone to loan an LLC any money. I have a few quad residential units, and I can't get a bank to do shit with an LLC. Even if I could, they'd still have me "co-sign" my own loan. It's stupid, but if you want to leverage it that's just how it works. Now if I had a portfolio of 50 quads and was doing a loan through a Capital Markets Group or something, that might be different. But as a small operator it's very tough to use an LLC to protect yourself and get any ACTUAL benefit.
The link below is to a redacted org chart for a multifamily acquisition. It should also be pretty useful for understanding how a fund is structured.
http://imgur.com/lDbF09V
That's really interesting to see, thanks. Is that the kind of structure you've used for single acquisitions or for a fund that was raised? Would it not be overly complicated unless you're talking about 100+ unit sized acquisitions? The paperwork alone makes my head hurt. Or should Donny shut the fuck because he's out of his element.....
The SPE at the top is the LLC that will own the acquired asset. The rest of the table outlines the ownership (organizational) structure of the fund. In my understanding, this structure should be viable regardless of the asset type (disclaimer: I'm not a lawyer). Also, in my company's case, we self-manage so once we buy a deal the SPE enters into a management agreement with our company so that we can limit liability to the SPE.
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