Pass through income to LLC to secure Commercial Lending?

Question

Tax season is approaching!
I am a buy and hold investor in the DC area. Currently my properties each have their own LLC, and the taxes reflect the same. However, I know that down the road I would like to break into commercial lending, borrowing against an LLC. For that reason, does it make sense for all profits from the various LLC's to "pass through" to a central LLC? Perhaps two years from now it might be able to qualify for a loan? Any thoughts?

Steven Hamilton II · Answer

Will Stein,

Ultimately, the lender will want to know how the LLC is making money which will come down to seeing that it is rental income. They will then want to see the tax returns showing where the income came from.  You are probably looking at it being just extra paperwork but maybe Bill G. will hop in here and have some input.

-Steven

Will S. · Answer

Bill, your post surprises me. Not sure what facts I could derive from it other than needing '5mm$'? (annually? cash on hand? based on what value of a loan? just a little confused here with what you're even saying).

I would expect that an LLC clearing, say 100K in profits a year, with a D&B positive credit rating, could secure a loan for a simple $100k, or 200k equitable property.

My goal here was to see if anyone has some knowledge on the subject and I'm still open to any advice or tips from members of the community who might have something to contribute.

Bill Gulley · Answer

Basicly, having an llc strong enough to show that the llc doesn't need a personeel guarantee, I always provided a personal guarantee, meaning you'll never get there, show the company doesn't need the money. Really, I was never concerned about it. If that is your goal, you'll be losing out on financing opportunities. I suggest you just accept that you'll be personally guaranteeing the deal. It's not that big of a deal really. Think about it it, you want a lender to bet on a deal you aren't willing to cover yourself? Really? If you are trying to avoid personal responsibility, what does that imply on the deal? Maybe it's not a good deal! Get over say 5mm$ and you might get by, be realistic for Pete's sake! A newbie, less than 10 or 15 years in the business........really?????

Will S. · Answer

I'm definitely no good at the KISS method, and that's by design. John Starkey, I separate LLC's for liability purposes. If one LLC faces a lawsuit, the suitor can take only upto that property, where otherwise they could get their dirty hands on a few properties. The cost in Maryland is $300/yr per LLC.

At Bill G., could you expand on eliminating the personal guarantee? I understand obtaining commercial lending requires significant profit margins, cash reserves and a DandB credit profile, but if those are obtained, what kind of commercial criteria are we exactly looking at so there doesn't need to be a personal guarantee?

Bill Gulley · Answer

I suggest one LLC, see if your state has a series llc, but if not, use one and maintain it. Have insurance. Use the KISS method.

John Starkey · Answer

Interesting post.  It seems to make more sense securing a primary LLC to make everything simpler when going after what you’re interested in commercially.  I myself am looking into securing one LLC to put multiple properties under but when I saw that you had an LLC for each property owned it made me wonder.  Are there certain benefits in obtaining an LLC for each property? Tax breaks? Lower costs?

Bill Gulley · Answer

Yes, sorta, if you have a strong LLC with assets in that name the loan can be made in the name of the LLC, the hitch is, you'll be signing with your personal guarantee until the LLC can show it doesn't need a loan basically.  :)

Will S. · Answer

Thanks Steve. I don't mind providing the paperwork to show where the income came from, in fact it's expected. But wouldn't you agree it would be simpler to secure lending in the name of one LLC as opposed to six under a joint application?

Pass through income to LLC to secure Commercial Lending?

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