Back-to-back lease using LLC

Dear All,

I own several properties held in my own name and seek additional asset protection above what insurance can provide. I do not want to transfer the properties to an LLC because of the due on sale clause and potential loss of attractive 30-year mortgage financing.

Is the following structure feasible as an asset protection strategy?

  • I set up an LLC called “RentCo” for which myself and family are managing members. Of course, we fully respect the independence of RentCo. It will have it’s own bank account, will be properly funded, we will hold meetings, take minutes, etc.
  • I lease my properties to RentCo under a triple net lease for 10 years. Under such lease, RentCo pays insurance, taxes, and maintenance, and also pays me a fixed rent. Also, much of the leasing risks are absorbed by RentCo in that rental agreement.
  • To earn revenue, RentCo leases the properties to tenants. Of course, RentCo earns a profit for it’s work to find tenants, manage the lease, maintain the property, etc.
  • if a tenant has a claim, he will have to pursue RentCo because it is the tenant’s contractual counter party. However, the tenant will not be able to claim any equity in the property because the property is held in my name.

Has anyone seen such back-to-back leases used before?

Are their pitfalls to such an approach?

I guess I’m trying to figure out why your so concerned about lawsuits,get a $5 MM umbrella,unless you have large personal holdings,and if you have large personal holdings you should be talking to your attorney about putting all rental holdings into an LLC and refinance into LLC’s name

if you have a $5MM umbrella no frivolous lawsuit will touch you,just keep everything up to date as far as inspections

For three reasons mainly: (i) large holdings, (ii) no umbrella insurance policy will cover everything, (iii) finance terms for LLC are not as attractive as for when I hold properties in my own name.

I am not an attorney, but I would be afraid if the house mortgage is still in your personal name,if it is a multi-million dollar loss and someone got a really good legal team, the LLC might not provide the protection you think it would, even with the setup you described, remember your name is still on the mortgage as an individual

Adding rental property to a personal umbrella is easy (now adding other things may not be),

I think the only way you will achieve the protection you want, is to put everything in the LLC"s name, even with the less desirable financing terms

If your HVAC guy tells you your unit in a house is leaking gas, and you don’t fix/replace it, and it blows up killing someone,you will have liability no matter what you have set-up,

In your setup, you are still the owner of the property and you are managing the property as the owner of the LLC. I don’t see that you have shielded yourself at all from any liability from a tenant lawsuit arising over something you did or should have done but didn’t.

Furthermore, by putting your LLC in place as a management company, whatever income the LLC earns becomes active income and subject to self-employment income taxes. If you just keep all the properties in your own name as you have it now, your rental income is passive income not subject to self-employment income taxes.

Liability insurance on each individual property for $1 million with an additional $5 million umbrella policy should give you up to $6 million to cover any judgement awarded from any lawsuit unsuccessfully defended by your insurance company (assuming the case was not settled out of court first).