Accounting challenges to Holding LLC

[Steven Medina]

How common and are there significant/sufficient benefits to have a Master Holding LLC own sub LLC's (property deeded to the sub LLC?) We currently have three rental SF properties in two LLC's currently and will have two more properties in two more LLC's in 3-6 months, all in Colorado. In the future, we will look to add a few more properties and can put them in LLC's and partner with our adult children (three in early 20's in age) for a total approaching 10 SF properties. We stack our insurance with renters, required to have insurance, landlord insurance on the property, Property manager with insurance for their work and we have a large umbrella policy overall.

Our Attorney advocates the Holding LLC and having it in WY for asset preservation and for my wife and I to own the WY Holding LLC and then the WY Holding LLC owns the sub LLCs that own the property. The approach seems sound, but my accountant who handles many RE clients is informing me of some of the challenges/cons they see:

- Adding complexity, i.e. the sub LLC's are not owned by me, but rather by the Holding LLC so will the lenders have issues? I know that Fannie and Freddie have in the last couple of years changed their policies and allow owner occupied properties to be placed into the name of an LLC so long as the loan is still attached to the original buyers. But not sure how having the LLC that owns the property being owned by another LLC changes that or not.

- Each LLC will only be able to collect and pay expenses for itself and we have to complete owner draw or input owner equity through the Holding LLC.

- Additional return and costs for maintaining the holding LLC and the return tax prep fees

- Tracking in Quickbooks for the Holding LLC and the sub LLC's

- Does it really have the protections that are worth the effort?

- Other complications, selling in the future, etc.

Anyone use this process or have knowledge that they can share. I don't want to overcomplicate unnecessarily and pay the Atty for a complex system that is time, expense, and challenging to implement. I also am trying to put the right amount of protection in place for the properties in my wife's and my name and those that would be in joint ownership LLC's with our children.

The alternative is to just have the four LLC's with no holding LLC and have the insurance on the rentals and large umbrella insurance policy vs the holding LLC. Or other ideas?

Thanks for any insight or experience you can share.

[V.G Jason]

It gets complicated, and I for sure think it's worth it. But I learned the easiest way to do, but also the most time consuming up front is to do this.

Create on WY Holding LLC. Then per state you invest in, create two child LLCs each owned by the WY Holding LLC. There will be an operating agreement between the WY Holding LLC and each Child LLC.

One of the two child LLCs actually owns the assets. The other manages the asset. These two child LLCs are binded by a management agreement. The LLC that manages the assets hires the PM, and gets delegated all the actual management stuff. The LLC that owns the assets pays the mortgage directly to the lender, but otherwise pays/receives money from the management LLC.

At the end of the fiscal year, the management LLC will show no profit or loss as a pass thru entity. The WY Holding shows no profit or loss as a pass thru entity. The LLC that owns the asset will show. Very easy to do the taxes in that essentially 1 LLC that has a green or red line. It also is a great way to prevent creating LLCs per property to limit exposure, and also if you ever get sued by your PM or your tenant they're suing a LLC with essentially nothing but a cash flow process. The management agreements and operating agreements are paramount. That's really where the up front lawyers fee account for.