Conventional Loan Strategies with Partners - JV/LLC Issue

Tax, SDIRAs & Cost Segregation
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Conventional Loan Strategies with Partners - JV/LLC Issue

Mehran K.
Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes

Hi all, question on an issue I'm encountering:

Back Story: 

I originally contact my portfolio lender (who does conventional FNMA/FMCC loans as well), to ask if he does 30 year conventional loans to LLC's with personal guarantees. He said YES, so I went ahead and formed LLC's with 3 partners, had operating agreements drawn up by a lawyer (which wasn't cheap!) and even already opened up a business bank account with one of the partners. A big benefit of these partnerships is locking in the 30 year financing.

We got everything setup with the first partner and went to start the pre-approval process  and the lender tells me he can't do it, saying he thought I was talking about the portfolio product. 

Now I'm in a situation where I have entities setup with solid operating agreements, yet we can't take the loan or title in the LLC.

My thoughts on options we have: (while still pursuing conventional financing)

1) Have partner take the loan out in their personal name, we take title in BOTH our names. We collect rents and everything in the name of the LLC and deposit them in the business bank account. We use the operating agreement as a guideline on how to do operations.

Thoughts: Everything may work out tax-wise. But I'm concerned about not having anything actually binding as far as ownership % and profit/loss that is part of the operating agreement. These partnerships have varying ownership and contribution %'s (other than 50/50) so it's important we have a binding agreement in place.

Is there a way my lawyer can draft a document that would be able to keep everything kosher to our LLC, even though we don't own the property in the LLC name? 

2) Partner takes loan out in their personal name, takes title in their personal name, later down the line deed the property to the LLC.

Thoughts: Obviously have to worry about the due on sale clause. Any other concerns/thoughts about this?

3. Scrap the LLC, have a JV partnership agreement drafted. This way we can operate in our own names and still have legal agreements for operations.

Unfortunately my lawyer just went on vacation for 2 weeks and I'm looking to hear everyone's take/advice on the situation! This is all in Wisconsin by the way. Thanks so much in advance, I appreciate it.

I'm going to tag a few people I know have probably encountered these situations :) @Bill Gulley 

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Wendell De Guzman
Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
12y

Here's how you can get around the due on sale clause while still use your LLC as well.

1) get the bank financing in your partner's name; the deed will also be in your name as well as your partners'

2) deed the property to a land trust with your LLC as trustee and you and your partners as beneficiaries

Since the property is deeded to a land trust, the bank cannot call the loan due. With your LLC as trustee, your LLC maintains control. But the owners of the trust are YOU and your partners.

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  • Katharine Chartrand
    Real Estate Investor · Los Alamos, NM · Member since 2014 · 151 posts · 52 votes
    12y

    People routinely title property in their personal name, take out a conventional loan, then deed the property to an LLC. My banker even suggested it last week.

    I would not worry about the due on sale clause. There is an entire industry of people who take title to property in exchange for making payments on the original owners loan. This is the whole subject to strategy. The banks have no interest in disturbing a mortgage that is not in trouble. They don't pay attention to this, and when they do they won't disrupt a paying mortgage. In some ways this is a subject to sale from you to the LLC. So those discussions may educate you.

    I'd have some concern having the mortgage in my name. Now my credit is dependent on the actions of an LLC I do not control. That is a personal risk decision you have to make based on your knowledge of the situation. The risk may be mitigated if the sale agreement will allow the property to revert back to you in the case where the LLC stops making payments. The terms of the sale document are where you need to lawyer-up.

    >KNC<

    2Reply
  • Mehran K.
    OP
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    12y

    Thanks for the quick response @Katharine Chartrand 

    I think option 2 is very viable as I've heard many people do this before. We should be able to accept rent in the name of the LLC from day 1, which is good.

    Regarding the mortgage in their name: Part of our agreement was that the loans would be personally guaranteed by them either way. They are members of the LLC with equal voting rights as I and the operating agreement states PITI and all operating expenses are to be paid and reserves held prior to any disbursement of cashflow.

    I can definitely see where the terms of transferring the deed to the LLC would need a lawyer advising.

    1Reply
  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    Here's how you can get around the due on sale clause while still use your LLC as well.

    1) get the bank financing in your partner's name; the deed will also be in your name as well as your partners'

    2) deed the property to a land trust with your LLC as trustee and you and your partners as beneficiaries

    Since the property is deeded to a land trust, the bank cannot call the loan due. With your LLC as trustee, your LLC maintains control. But the owners of the trust are YOU and your partners.

    4Reply
  • Jonathan M.
    Investor · Los Angeles, CA · Member since 2013 · 71 posts · 16 votes
    12y

    Is creating a land trust an expensive or complicated process?

    1Reply
  • Mehran K.
    OP
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    12y

    @Wendell De Guzman Thank you very much for chiming in Sir. 

    As far as insurance goes: Under both our names at first while we're both individually on title, am I right? Then who do we add as additional insured once the property is deeded to the Trust? Do we add the Trust, the LLC, or are we able to just leave it as both our individual names since we are the owners of the Trust?

    0Reply
  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    As far as insurance goes, you can leave it under your personal names.

    0Reply
  • Mehran K.
    OP
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    12y

    @Wendell De Guzman Awesome, thanks. Will dig deeper into the land trust as I think this is the perfect way to accomplish what we're trying to do. I may have more questions as things progress :)

    0Reply
  • Amanda Hensley
    Investor · Portland, OR · Member since 2011 · 132 posts · 41 votes
    12y

    Let us know how it goes!

    1Reply
  • Mehran K.
    OP
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    12y

    @Wendell De Guzman can chime in? Thanks 

    0Reply
  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    The taxes will be treated as how the LLC files its taxes. When the LLC files the taxes as a partnership, then yeah K-1 it is. The land trust will have no effect. From the IRS point of view, it's as if the land trust does not exist.

    In reality, the land trust document is not public document anyway. You keep it in your file folder and is not recorded.

    1Reply
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