PropCo/OpCo LLC formation - multi-family investing California

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PropCo/OpCo LLC formation - multi-family investing California

Roy Marks
Rental Property Investor · Los Angeles CA · Member since 2019 · 14 posts · 1 vote

Hi California investors,

Asking for a friend who is looking into multi-family investing in the Greater LA area and wanted to get a few quick data points from the community! 

- For a multifamily property in the ~$1m range, would you advise having two LLCs in place? For example, a PropCo (Asset Company vehicle which owns the property and the debt), and an OpCo (operating company, which operates and manages the property)? Alternatively, is it sufficient to have only one LLC in place? What are the pros/cons of each approach?

- What are benchmark figures for the cost of legal formation for the two entities? Received one quote at $6k, and curious to know if this is in the ball park for an OpCo/PropCo set up. 

- Any idea of ongoing annual legal costs for management of the OpCo and PropCo? I'd imagine that there would be management services agreement between the two entities, and wondering what sort of issues could pop on an annual basis that could/would require additional legal support. (I don't imagine many, to be honest...)

- Similarly, grateful to receive any benchmark costs on having 3rd party accounting/books for the two entities?

- Would you advise incorporating in CA (the property would be in CA, so a foreign LLC would likely still be subject to CA's $800 franchise fee) or are there benefits to incorporating in another state (WY, Delaware)?

- At the moment looking at only one deal, but would love to continue to invest in the future. Are there any implications to be considered, particularly for the OpCo? I'm wondering if for future deals, a subsidiary PropCo could be created for each property, keeping one OpCo in place. If the different properties would have different financial/equity partners, how do we account for this in the OpCo? Would those partners only be involved as shareholders in their respective PropCos?

Thanks in advance for your thoughts as always!

Best,

Roy

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    • Greg ScottPro Member
      Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
      6y

      I'll simplify this for you.

      "If the different properties would have different financial/equity partners"  This statement implies your friend should be hiring an SEC attorney to get this deal done.  An SEC attorney will answer all of these questions for up-front, and then you get a qualified opinion before you spend any money.

      From my experience, hiring an SEC attorney to put together a PPM will cost around $8-$15K all-in, depending on the size of the deal.

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    • Katie L.
      Attorney and CPA · San Diego, CA · Member since 2017 · 590 posts · 422 votes
      6y

      @Roy Marks

      California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don't buy CA property.

      This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

      Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction.

      California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts. It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC. Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner live in CA, you probably want to arbitrate in CA if the two of you had a disagreement. But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

      *This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.

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