Local Bank or Credit Union in Bay Area that lends to LLC?

Question

Hi Everyone,

Can anyone offer advice on where to start with getting a loan for an LLC with multiple owners?  This is for a 4-plex in the East Bay with ARV around $500-600k.  I see posts where people recommend local banks and Credit Unions, but I'm looking for specific names of where to start.   Thanks in advance for any recommendations!

Peter Myers · Answer

The concern I would have with conventional financing would be defrauding the lender (which is a crime) if the tenants in common are actually mere nominees of the LLC as the true owner.  If the lender finds out of the transfer to the LLC, they could trigger the due on sale clause.  Both of the above are rare, but the consequences are pretty ugly.

Assuming you and your fellow owners can stomach those risks, be careful.  LLCs can be messy, because it is extremely rare in non-family situations that everyone will think the exact same way indefinitely and get along.  There needs to be clear structure that matches the relative influence of each partner (member in an LLC) in the investment.  If one person is making the decisions and the others are passive, it may work (consider a limited partnership in that instance).

As far as real banks, just pick up the phone and dial for dollars. Mechanics Bank, Patelco Credit Union, Bank of the West - I'd start with those three.

Peter Myers · Answer

The LLC requires Articles of Organization.  These are filed with the CA Secty of State.  In addition, you will need to have an Operating Agreement among the members.  Typically, you would have the Operating Agreement prepared to reflect your deal, as opposed to ordering one "out of a box" that may not reflect the actual arrangement among the members of the LLC.  Yes, they are cheap to purchase, but very expensive when you consider that if they do not reflect the agreement, you will have lawyers fighting over what the canned Operating Agreement means (or should have said, or didn't consider, etc.), and needless to say, that is more expensive than getting the Operating Agreement right in the first place. But I am used to this discussion and at least half of the people who ask me, as a lawyer, about this question and ultimately choose to use some out-of-the-box solution.  I don't sell; I just provide information.  Sometimes it works and sometimes it does not.

A "put" right is a right to sell.  A "call right" is a right to buy.  They are both options.  With a buy-sell agreement inside an Operating Agreement, and this is very basic (I teach 3-hour classes to lawyers on buy-sell agreements) you can use the put right to determine what the voluntarily departing member would get paid if (s)he wants out.  You can use a call right to determine what the rest of the owners pay to the involuntarily (kicked-out) departing member who, say, stole from the bank account, or didn't post their capital when it was called by the manager (if you had a deficit restoration obligation, for example), or didn't show up to replace the toilets (at the granular level).

I may do a standalone piece/article/chapter for some of the forums I post to on doing buy-sells (either inside operating agreements or as standalone agreements - they can be done either way).  A form for a document that is titled "Operating Agreement" is not hard to find online.  All the advice and information that go along with the document, most of which has to be adjusted to the budget of the entity (in most instances, you don't spend $15K negotiating an operating agreement for a $50K business), is the valuable part.  (Like any legal document).  There are simple guidelines that most 12th graders can follow, and then there are some not-so-simple concepts that require a few years of experience in the business and some training in tax, finance and accounting to understand (the latter of which you probably won't need for the four-plex).  HTH.

Upen Patel · Answer

@Ori Skloot Even with LLC loan, LLC members will have to be guarantors on the loan. So why not buy it using conventional financing and have a purchase agreement. You can manage the property through a business structure, but the title would be in the name of individuals.

Chris Mason · Answer

Everyone doing fannie/freddie/va/fha loans is looking at the same basic, standard, guidelines.

The portfolio residential stuff, which is what the image in my above post was an example of, can vary. But that brings us back to those same issues, primarily timing. But, now I see that you are talking about buying cash and doing it as a refinance. Refinances don't really have the same timing requirements.

The problem you will encounter there is that portfolio lenders do not pre-flight scenarios or do hypotheticals. They want to see the fully ratified purchase contract and an appraisal ordered through their appraisal management company (for a purchase mortgage), or see that you own it and look at an appraisal through their AMC (for a refinance mortgage), before they will even look at it.

So the scenario where it would work would be if you are TOTALLY COOL buying all cash and not being able to get the equity back, but doing a cash out refinance would be icing on the cake. I'd preapprove you for a fannie refinance, knowing that fannie is more restrictive than most portfolio lenders, and then we'd submit it to them (with an appraisal and full credit package etc) once you purchase the place all cash and own it. But, again, because they don't preflight squat, you still need to be totally cool with NOT being able to refinance.

Chris Mason · Answer

Hi @Ori Skloot,

We all get crap like this in our inbox, but then you go look at their rates and it's well north of 5%, ARMs, and then you call around and learn that it takes forever to close, and alas that timing thing makes all of these product-lines irrelevant as purchase mortgage products in the Bay Area even if people wanted high interest rate, low LTV, ARMs.

Ori Skloot · Answer

@Peter Myers  thanks for the tip!  I'm not clear on what you mean when you say -"Consider a put right with an installment sale at lender's loan rate + 2.0% for any member who wants out.".   Could you explain?

Peter Myers · Answer

@Ori Skloot:  If you buy cash and refi the LLC, then take a look at PeerStreet lending or google their competitiors.  Again, watch out for that Operating Agreement.  Consider a put right with an installment sale at lender's loan rate + 2.0% for any member who wants out.

Ori Skloot · Answer

@Peter Myers  Thanks. Looks like our posts crossed each other in the air. Great answer to my question.

Ori Skloot · Answer

Thanks for feedback. To clarify, we are going to buy using cash and then immediately refinance.

@Upen Patel We want to take title as an LLC for liability purposes.

@Chris Mason Any insight about my question below?

@Jake Knight  Thanks for that idea Jake. I have read that if we get a conventional loan and then quit claim to an LLC that most conventional lenders won't allow that or it triggers a due clause.   Do you know of a conventional lender where that isn't the case?

Jake Knight · Answer

Most all banks you could locate in a google search will be able to do this. Bigger banks all have small business lending departments that can do this type of request and most community banks like CRE deals. But you can also do this as conventional as @Upen Patel said. Buy it as individuals and have it quit claimed to the LLC after closing.

Local Bank or Credit Union in Bay Area that lends to LLC?

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