Joint Ownership of Real Estate: What’s an LLC Got to Do with it?
When owning real estate with other persons, whether they be family or business partners, knowing how to manage that real estate and the expectations of everyone involved is key. Owning real estate jointly presents some unique challenges, such as paying for the costs involved with the ownership, i.e. taxes, maintenance and upkeep, insurance, and utilities. Although not terribly burdensome, knowing how these costs are to be handled can prevent a lot of unneeded stress. Owning real estate in a Limited Liability Company (LLC) can have distinct advantages in managing such issues.
Liability: The biggest protection, however, and in our opinion the most important, is the liability protection afforded by a business entity. As it stands now, if any owner were to have an accident, become ill, or otherwise have a situation where they might have creditors—those creditors could attach (receive a judgment) to your property, real or personal which would allow them to sell the real estate. This in turn would make it very difficult to carry on a rental operation. The same scenario applies to any property, personal or real, and that is why the protections of a business entity, such as an LLC, are so important. Should anything happen to anyone of you, or should anyone become indebted to another—that catastrophe or those creditors would not be able to upset the rental operation. Although powerful in its ability to shield owners from liability, the LLC structure is no substitute for adequate liability insurance.
Costs: Owning real estate in an LLC, especially income producing real estate, helps manage the costs of the real estate. Transferring ownership of real estate you would otherwise own jointly with others turns the real estate into a small business. Doing so can have tax advantages, but it also allows owners to give authority in writing to one or more persons to handle those costs. The extra responsibility means extra work, so whoever that person is can also be compensated for their time and effort. Discussing and reducing agreements to writing with regard to compensation, if any, helps to ensure clarity of the issue among the owners.
Authority: In dealing with the costs or responsibilities of real estate where there are multiple owners, companies or providers of services might question who has the authority to contract for those services on behalf of the owners. The LLC operating agreement makes sure not only the owners know who they can rely on to complete tasks with regard to the property, but also whom tenants should deal with and can rely on.
Transfers: What if someone wants to sell their interest? When you own property jointly with others they are under no obligation to sell their share to you first. It’s also unlikely that there is much of a market for a fractional share of real estate. So, what generally happens is the owner wanting to sell petitions the court to partition the land, which usually ends up in a forced sale of the real estate. Additionally, the other owners are not required to buy out another if they wanted to sell, and even if others wanted to, without a written agreement on what to do, tensions can rise for any number of reasons.
The LLC, by its operating agreement, alleviates this possible headache by spelling out exactly what happens in such a situation—however the owners agree. In most cases, such an agreement would specify that if an owner cannot convince the other members to buy his or her interest at a mutually acceptable price, that member can give a written notice to the company and other members that he or she wants to get out. That notice then triggers a series of options in the company and other members to buy out the interest of the departing member. With all these options spelled out in great detail and agreed to prior to any sale, the operating agreement promotes a fair and congenial resolution to a situation where one owner, for whatever reason, needs to “get out”.
For all of the above headings, and many other reasons, the LLC offers an advantageous ownership structure to joint owners of real estate. Most of all, the LLC structure offers flexibility, where most any issue or concern regarding joint ownership can be adequately addressed. Nothing is quite as difficult if you can know in some remote degree what to expect.
Christopher L. Nusbaum