All Forum Posts by: Philip M.

Quote from @Bill B.:

The best way is to wait until he passes. Other options involve you getting stuck with his low basis and owing lots of taxes or him paying a lot of taxes. He shouldn’t sell then to you and he definitely shouldn’t give them to you. 

If you’re willing to do the work as well as a professional management team for the same price he can keep some money “in the family” by hiring you. But that means you have to become a small time PM, not an exciting prospect. 

What are you trying to change? If it's having father do less work or have more free time he should just hire a PM. That should involve less than an hour or two per week. He could do an exchange in to a NNN lease, but if that's not his field of expertise expect a lower income with his deuces work. But whatever you do, don't transfer ownership to you and/or your sister before his death. That mistake could cost you hundreds of thousands.

Hi Bill, returning here to your comment.  The situation has evolved to my Dad just wanting to be totally done, ie. ownership would transfer to my sister and I.  Again, the properties are owned free and clear.  He is willing to set up very amenable owner financing terms and take the capital gains hits on monthly payments we work out as part of the deal.  I know that it might not be ideal, but this is likely the scenario we are working with.  Any and all advice given this change would be very valuable, and thanks for your input so far!  Concepts I'm looking into, but that may not apply, are friendly loan, gifting, gift of equity, etc.

Hi there, I want to start by thanking anyone who can weigh in here.  My father is 68 and looking to retire from managing and owning a 54 unit rental business in our town.  He owns all of the properties free and clear, with no more mortgages.  Discussions have led to the concept of my sister (35) and myself (37) taking over the business.  My father is not interested in keeping the properties in his name and simply having us manage them, but is open to the concept of us owner financing them from him with a long term, friendly agreement.  He simply wants to be 100% done.

Given the above mentioned scenario, I am wondering what the best possible situation would be to make this happen, while possibly still maintaining the option to pull out equity for capital improvement projects with a bank.  Concepts I'm looking into are a friendly loan, and/or gift of equity, that still might allow for additional re-financing.  My father would be willing to help us out in basically any way that he could, in exchange for modest monthly payments going forward, and is content limiting his capital gains exposure with the owner financing.  As an aside, he has a property in a neighboring town that he will sell for the lump sum.

I know there are better options (ie. him keeping the property in his name, refinancing, us managing, etc.) but the above scenario is all that we are looking to explore at this point.  Any and all help is appreciated - thank you!

Phil

Quote from @Kory Reynolds:

Just one idea, but probably a dozen ways to accomplish this. 

1) Father drops the property into an LLC, if it isn't already

2) You and Sister are introduced as "profits interest" members of this LLC

3) You can then structure how the profits are shared, but Dad owns all of the appreciation that has already occurred, and would get a step up upon death. You arrange the LLC deal so that in the waterfall, you and Sis get the majority of profits over this baseline threshhold. Maybe give Dad a preferred return to reflect how much capital he has locked up on this deal.

IE say property is worth $4m with no debt (keeping it simple), and cash flows $800k annually. The below terms are near infinitely flexible from what I have below, but the idea is that you and Sis only share in the future profits - no part of Dad's original appreciation. Operating Cash Waterfall looks as follows:

1) Dad gets 10% pref on his unreturned capital ($4m * 10%) = $400k

2) Dad / You / Sis split the next profits 20 / 40 / 40 - $80k / $160k / $160k

Cash Waterfall on a capital event (cash out refi or sale) as follows - lets say it sells for $5m in a few years

1) First dad is paid back on his unreturned capital + any unpaid preferred returns - $4m

2) Then balance is split Dad / You / Sis   20/40/40 - $200k / $400k / $400k

You could do management fees for additional involvement, fees upon a sale, etc - can go wild.  Just think of Dad as an LP investor and this is a syndication, and he is contributing property.

If Dad passes away before it is sold in this structure, his Partnership interest is what is stepped up to FMV, which can allow for a step up in the basis of his share of the assets to FMV. IE in above if instead of selling for $5m, your father passes away when it is worth $5m. Effectively his share of the building is stepped up to $4.2m (his share of the FMV). Discuss valuation discounts as they may apply with your estate tax experts.

 Kory, really interested in exploring this concept, thanks very much for sharing.  Sorry if I didn't gather from your initial comment, but does this scenario still avoid the primary issue of being named as a part owner, losing us the step up in basis later on down the line?  We wouldn't want to sacrifice that, but I am really interested in the profit sharing option as mentioned in your post, if it can be achieved without sacrificing the step up.  Also, it's very possible we wouldn't be selling the properties in our lifetime either, and perhaps we would even be expanding the portfolio.  Thanks again!

Quote from @Bill B.:

The best way is to wait until he passes. Other options involve you getting stuck with his low basis and owing lots of taxes or him paying a lot of taxes. He shouldn’t sell then to you and he definitely shouldn’t give them to you. 

If you’re willing to do the work as well as a professional management team for the same price he can keep some money “in the family” by hiring you. But that means you have to become a small time PM, not an exciting prospect. 

What are you trying to change? If it's having father do less work or have more free time he should just hire a PM. That should involve less than an hour or two per week. He could do an exchange in to a NNN lease, but if that's not his field of expertise expect a lower income with his deuces work. But whatever you do, don't transfer ownership to you and/or your sister before his death. That mistake could cost you hundreds of thousands.

A lot of good stuff in here, thanks Bill. I will look into NNN leases to become more acquainted. Before a PM could have a chance at getting good clientele, we have some work on the exterior of some of the buildings to do. We also need to get more than 50% of the units rented so the cash flow is better and we can afford a PM, if that’s the route we go.

One thought would be to be classified as an employee of the different property LLC’s while we accomplish the goals mentioned above, in addition to managing day to day things. The LLC’s could be put into a trust which would negate the tax downsides at the time of my fathers passing (which hopefully won’t be for another 30 yrs or so). My sister and I could then be “employees” of the business, with managerial powers, and the businesses would be in a trust to avoid probate at the time of my fathers passing.  Would love to hear your thoughts on this scenario.

Hi Bill,

Thanks for the input!  Plan is so that he can retire and him and my Mom can be financially secure on rental income while my sister and I manage the properties in the trust.  I believe ownership would stay with him, as the Grantor of the trust, until he passes.  Then the trust beneficiaries (my sister and I) inherit the properties at the stepped up cost basis.  

As these properties are all paid off in full, we are considering re-financing a few of them at some point for repairs, but also to potentially expand the portfolio as well.

Thanks again,

Phil

 

Hi All,

First off, thanks to anyone who has any type of insight here, it is greatly appreciated!  I am 36, own a very successful Air BNB at a local ski hill, and am in the process of looking into the best way to get involved in my father's 54 unit rental property business.  He just turned 68 and is ready to be done in an active role as a self-managed landlord for all of his properties.  I have a sister, 34, who also is very interested in getting involved with the business as well.  Some of the properties could be better off in both exterior condition, as well as units rented (which is currently probably at around 50% or less).  Part of the reason for this is that this past year was a tough year for my Dad, as he lost his father, and there was an unfortunate legal battle (which has since calmed down), with an unfortunately uncommunicative sibling in charge of the estate.  It took up most of his time and energy.  My father has also just generally gotten worn out, I believe, from being a self managed landlord and one man maintenance show for all of those units for the past 30+ years.  My sister and I are looking to bring a renewed energy, and urgency to maximize income to the business.  We also see the long term potential of rental properties and what they could mean for both of our growing families.

That said, I am doing a lot of research right now into the best ways to structure the legal entities so as to get us involved and for tax efficiency purposes.  When it comes to management, I would be taking on a more active role in day-to-day maintenance, tenant acquisition, renovations, etc.  However, the goal would be to increase the amount of units rented to close to 100%, maximizing income, then potentially outsource management duties - either by hiring a capable manager/maintenance person, or by getting a property management company involved.  My sister and I are not opposed to some sort of buy in as well, as it would likely help my father clear up some debts, and would just be nice to help him realize some sort of lump sum gain, in addition to what would likely be a share of monthly rental income.

We are looking at setting up a trust to accomplish all of this, but are just at the beginning of this journey.  If there is anyone out there who has advice or experience who could weigh in, it would be greatly appreciated.  Thank you very much!

- Phil