Master Leasing using an LLC

[Vincent Damico]

Hi, I am working on a deal to manage 6 apartment units. I am renovating and updating them to get them up to market value. We just started the process of creating an LLC so we can can track finances and submit for tax purposes. As it stands now, I am going to renovate the apartments, the tenants will pay me and I will communicate with them directly about all issues with the property etc. I will pay the property owner a lump sum for all 6 units. Does anyone know if I need any type of license for this type of transaction. Thanks in advance for your insights

[Stuart Udis]

There are far more important items you should be prioritizing but first so I am clear on the strategy, it sounds like the business plan is to go under contract, renovate the building and then purchase the building once renovated and stabilized? I suppose if the property appraises well and you can show the costs incurred you will will receive favorable financing at time of purchase and recieve your return of capital through the same financing process. Is that the end goal?

1. Based on what you described you will be incurring significant expenses renovating the building. How are you enforcing the sale? What happens if you undertake the renovation and management and then the seller decides not to sell the building even if there is a contract? The answer is specific performance if you want the building or filing an unjust enrichment claim. Both are lengthy processes and while the fact pattern is favorable on your end are you prepared to possibly wait years for your capital to be returned or take title to the property? 

2. Have you already reviewed a title report ensuring the payoffs for any liens will be below your purchase price? Any other deed restrictions, use restrictions or other misc. items that are adverse to your objectives?

3. Who is responsible for insuring the building? If it is the seller, are you confirming they added builders risk coverage and all other insurance is suitable? Who is responsible for risk of loss during the renovation and management period?

4. Are you pulling permits for the work? If permits are required for the scope of work but they are not obtained  and there is ultimately a claim filed the insurance carrier may not pick up coverage.

5. Is there an existing loan on the building?  If so, and new insurance is added, the lenders mortgagee clause will have to be added so they will presumably become notified of the arrangement.

As for your initial question about managing the property, if you are under contract you are considered the equitable owner. I am not familiar with property management rules in PA, but it sounds like you have to be the property owner or have a broker license.  Does the state real estate commission differentiate between record owner and equitable owner? I suppose you could also paper your purchase ageement as an installment stale contract where a deed is executed but not recorded. This may be an even stronger argument in your favor.