Co-owning/Developing land as a shared LLC?

Question

Hello BP Community,

I'm in discussions with a friend to co-own land as an LLC, and each build a home on it.  I have a few front of mind questions, but would appreciate any comments relative to blind spots I might have.  Questions:

How does borrowing against a shared LLC work, say if I want to Build and BRRR?  Can I leverage my %50 of the property value to further invest?

My friend has agreed to let my family inherit the property after his passing, and I would like to pass this down to my children. Anything to note on LLC's and transferring ownership to a child?

Cheers,

Carter

Ronald Rohde · Answer

Partnerships are a great way to leverage capital and risk. You'll want to decide how the Operating Agreement provides for costs, profits, break ups, etc.

It is a pretty simple agreement based on what you've described. Upon death, it triggers certain provisions within the LLC agreement. I would not recommend joint tenancy or any other individual names, stick to the LLC

David M. · Answer

@Carter Wallace

Well... generally, holding title to property in a LLC is not advised for tax reasons.  You guys might purchase the land in the LLC but after you build on it you'd sell it off to yourselves.  You'd have to subdivide most likely to build two homes (never heard of a residential zoning that allowed two homes on one lot, but I guess its possible).

I guess you could keep ownership of the land in a LLC and sign a 99year ground lease to each of yourselves so that the improvements are your personally, respectively.

As for estate planning, remember a LLC has corporate-like characteristics.  So, you should be able to pass along your interests by writing it into the Operating Agreement.  Of course, consult with a qualified professional or two.  But, my ground lease idea does make it kinda funky...

Make some sense how to thing about this?  Or, at least how I'm thinking about this?

Ronald Rohde · Answer

Personal risk, yes. You need to define FMV and the procedure to obtain it, there will be disagreements on the calculation, time periods, cost allocations, closing date, etc.

David M. · Answer

@Carter Wallace

Well, a joint tenancy or tenancy in common is generally much more "restrictive" on what/how you control the passing of the interests..  Also, there is no legal framework on how the property is to be managed/controlled...

When you talk about exit strategy, how are you reserving the right?  That would normally be done within a LLC.  I don't believe what you are saying is impossible, but its more, and more complicated work.

No, each party can't "borrow against their 50% share."  Lenders don't see a property by the ownership interest.  They only see a plot of land with improvements.  If you encumber the property with a lien, i.e. a loan, then both parties are liable for the full payments.  You can't, easily anyway, say that just because its a 50/50 ownership that only half the monthly payment applies to you or that since the "other owner" took out the loan that they are responsible for it.  Actually, everybody on Title has to sign anyway.  Also, that means for one loan, two parties (or however many are on TItle) have their credit/debt servicabiilty dinged by the full payment.

Adam Bartling · Answer

Buying the land in the LLC name is fine. It looks like you want to use it as an investment property and there are lenders that will let you build for rental property.  I may have been represent a few of them.

the other gentleman with the law firm he already answered the survivorship portion, work with him or another attorney it's actually really simple.

Carter Wallace · Answer

@Ronald Rohde, thank for the reply!  Any chance you can speak more to why you would avoid joint tenancy or tenancy in common?  Was that for liability in having individuals named?

As far as exit strategy, I was thinking of each of us reserving the right to buy the other out for fair market value in the event of someone wanting to exit.  But also, wouldn't either party be able to borrow against his/her %50 share in the equity?  And if that's the case, and said person defaulted on their loan, would that potentially trigger a forced sale on the property?

@David M. any thought on that?

Carter Wallace · Answer

@David M. Thank you for the thoughtful reply!  This is a rural property and 2 homes, plus an ADU are permitted, and for complicated reasons, I don't think we're going to elect to subdivide.  In short, having the combined acreage that we do allows for a number of development advantages.  Do you recommend any other type of legal arrangement for 2 parties (my family, and the single business partner) to co-own the land, and/or allow for borrowing against my 50%?

Co-owning/Developing land as a shared LLC?

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