All Forum Posts by: Christopher Mendoza

Hi BP Community. What are the implications for a 1031 Exchange if a long-term rental property is rehabbed prior to sale?  For example, the homeowner improves the interior of the house (vacant with no tenants) in order to get a better offer and return on investment. 

Is it a sliding scale (e.g., a certain amount of work will convert the rental into a flip)? If there is a sliding scale, where is that delineating line between rental (with 1031 benefits) and flip (loss of 1031 benefits)? 

Any and all answers or thoughts are appreciated. Thanks in advance. 

@Gerald Harris If they are a legitimate hedge fund and solicit investors, then it should have a private placement memorandum (also known as a confidential information memorandum) (normally referred to as PPM or CIM, respectively). The PPM will contain the hedge fund's business plan--goals, disclosures, etc. I doubt the hedge fund will give you a PPM to take home and review, but they may allow you to see it while at their office. If they do that, expect them to require you to sign a confidentiality agreement. 

As general background, hedge funds are normally structured as follows:

Management Company --> oversees and manages --> Fund (a collective investment vehicle). The arrangement is analogous to the Fund being a brokerage account and the Management Company being the trader. The Management Company is generally the manager or general partner of the Fund. 

If you have any questions regarding hedge funds, contact me. I am a hedge fund attorney and deal with these entities regularly. 

@swat khan There are some legitimate concerns in simply buying the current owner's membership interests in the LLC. A big concern is that you are buying the company's liabilities as well. So be sure to do some due diligence before taking ownership of the LLC. Also, I quickly glanced at the Texas form you suggested. It wont effectuate the ownership transfer; it can, however, effectuate the change in management. Have u considered doing an asset purchase agreement? Take all of the assets and leave the liabilities behind (who knows what liabilities are tied to that llc, e.g., debts owed, lawsuits, etc.)

@Leigh C Here is a PriceWaterhouseCoopers client alert on Act 22: http://www.pwc.com/en_GX/gx/hr-management-services/newsletters/global-watch/assets/pwc-puerto-rico-income-tax-exemption-granted-non-residents.pdf 

@Ken Lagana From a legal perspective, the LLC provides some benefits. But, RE isn't all about just being risk adverse and mitigating all risks, you have to consider the comments of @Jamal Pitts . Will having an LLC cause issues for you in obtaining future financing? Is there a preferred best available alternative (e.g., umbrella insurance)? Just some things to consider.  

I am not familiar with Ohio, but in California there is transmutation, which is the transformation of property from separate to marital. In other words, there are actions that occur during marriage that transforms a separate asset (a house, which is owned by you) into a marital asset (a house, whereby the marital union has an interest in the house).  Example: Right now you have a few rental properties. After marriage, you tell your wife that you are going to share the rental properties with her 50/50. You may not write up an agreement, but you treat it as being 50/50, e.g., you represent to third-parties that she also owns 50% of the property. A court may deem that rental property as no longer being yours, but rather belonging to the marital union. Just go over this stuff with your attorney. Perhaps you can roll all your assets into an entity and be the sole owner of the entity. As long as you don't transform the entity ownership from a single to a marital asset, you may be ok. 

Not worth the risk. I appreciate your entrepreneurial spirit, but this may get pretty close to practicing law without a license. You may say, "Well, the people buying them know that I am not an attorney." However, the court won't look at it that way. The court will view it from the buyer's (recipient's) perspective. The buyer can argue that the contract was purchased to solidify the legal rights of each party, which could be framed as practicing law. In addition, the exchange of money would demonstrate that there was some formal relationship between the parties (e.g., attorney-client relationship, but without you being an attorney). Does this mean you can't share these items? The general answer is no. You can probably tell someone: "This is the agreement I use" and send it over to them. But, selling the agreement to someone in order to establish the legal rights of each party in a formal agreement is pretty close to providing legal advice. Not worth the risk of being hit with a lawsuit if a buyer loses in court based on the contract you provided. 

Also, I don't think the applications would be providing legal advice, in part, because it is not providing legal advice. it is more a mechanism (tool) to gather information for the purpose of making a primarily business decision; however, providing legal advice is defined differently by each state. So, if you really want to do this, it may be worth it to talk to an attorney in your area about it. Try to get a flat fee, instead of an hourly fee. 

Thank you for this tip, I will be adding it to my review list I perform every year on my units. Preventative measures are key. 

@curtis bidwell The LLC can have multiple membership classes. The classes can be discriminated by the LLC in regards to voting, distribution of profits, and allocations of losses. The LLC, as an entity, would continue to own both SFRs and apartments. Consider transferring the apartments to a separate entity so that you can separate management, owmership, and profits from the SFRs, especially if you and your partner have equal management rights in the LLC. There may be alternative solutions, but that may require more detailed information. For example, a series llc may be appropriate.

@Ben Wilson Hey Ben. Welcome to BP. Are you looking in particular geographic regions?