I have been approached with an “opportunity” to invest as a shareholder in an LLC, with the sole intent of the corporation “assuming the ownership of this property”. The method of transfer is not very clear. Here goes:
Property management owner purchased a 16 unit apartment bldg with a loan, solely in his name. The note is in his name. Very successful management company doing business over 10 years in the same city.
Property management owner established an LLC and has secured investors who have funded the LLC with about $620K, including about $200K of his own money for a large stake in the LLC. Shares in the LLC have been distributed. With rehab, title owner’s downpayment, etc, this comes to about $670 K.
The same property management company continues to manage the property at a very competitive rate.
I invest $50K to bring the total into the LLC to $670K, and this covers rehab costs, owners downpayment, management fees ($670K), which goes to the owner of the building.
The owner of the building states that a quitclaim deed will provide the legal TRANSFER of ownership…
The owner of the building would still carry the liability for the note, but will have granted his interest in the property to the grantee (the LLC).
Is this a typical real estate transaction, or are there mines in this water???
The property is in a great location one block from the beach, and the rehab has been completed in 8 of the units. The numbers work out to about 13% cash return, excluding depreciation of the building, and market appreciation of the property, with realistic vacancy rates.
Any input is appreciated, as I am a newbie in this area…
The real question is what type of vote do you get you in the LLC. If the majority holders decide who gets paid and when, it is a crummy investment. You will get whacked with income taxes for income you have not received.
My vote is a percentage or $50K/$670K or about 7.5%.
The current LLC language includes distribution of profits to individuals based on % of ownership.
My real concern is the quitclaim deed and transfer of “ownership”. A Warranty Deed would be nice, but the bank has a lien on the property, so that won’t work. Is there any other transactions or documents that can supplement a quitclaim deed to minimize the risk that a warranty deed would provide??
I question what you are receiving a deed to. If it is a partial interest in the property, then you AND the LLC are co-owners. I don’t see that you are a member of the LLC and would not have any voting interest.
If you are receiving an interest in the LLC, then you don’t get a deed to the property because the LLC remains the titled owner. You own a piece of the company that owns the LLC. If the LLC needs an additional capital infusion or declares bankruptcy what are your responsibilities and obligations.
I think this is something you should have evaluated by your attorney. Best if you can have your attorney review a copy of the LLC’s operating agreement.
You are getting a small percentage of a business that owns real estate. You don’t get a deed or any interest in the property. You only have rights to a distribution from the LLC. However, you get to pay 7.5% of the income taxes due, even if the managers decide to distribute nothing in a given year.