I am often asked whether to transfer residential property into a limited liability company (LLC). Consider the following…
Why transfer residential property to an LLC?
It is not uncommon for an individual or a group of individuals to derive rental income from residential property such as a vacation home, a shore house or multifamily house. Like any business endeavor, if the property is owned by an individual (i.e., sole proprietorship) or a group of individuals (i.e., a general partnership), the owner(s) face unlimited personal liability for debts that arise in the course of operating the property. As a general rule, owners of LLCs are not personally liable for the LLCs. Insofar as there are risks associated with operating a rental property, it is not unreasonable to consider limiting the risks by owning the property through an LLC rather than in one’s individual capacity. The formation of an LLC is easy enough. However, merely forming an LLC does not accomplish the goal.
Key considerations and steps regarding the transfer?
- Conveying the property. LLCs are legally distinct from their owners, and merely forming an LLC does not make affect the current ownership of the property. Once the LLC is formed, the property must be conveyed by deed to the LLC—even if the current owners of the property are also the owners of the LLC.
- Realty Transfer Fee. Conveying property by deed into an LLC could trigger the requirement to pay a realty transfer fee.
- Title insurance. If the property is currently covered by a title insurance, the policy may cover the LLC. A new policy or policy endorsement may be required.
- Casualty and liability insurance. If the property’s current casualty (e.g., fire) and liability (e.g., slip and fall) policies insure the individual owners, new policies or policy endorsements many be needed.
- Mortgages. If the property secures a mortgage loan, the transfer of the property may trigger a “due on transfer” clause (i.e., require that the mortgage loan be paid-off). The current mortgage will likely need to be assigned or paid off in favor of a new mortgage. Available mortgage rates and terms for a corporate entity (e.g., LLC) may be less favorable than individual loans.
- Eviction-Ejectment. It is usually more difficult for a “corporate” landlord to evict tenants than when the property is individually owned and owner-occupied.
- Leases. If the tenancies are subject to leases, the current landlords will need to assign the leases to the LLC.
- Zoning and land use. The conveyance of property may trigger the need to obtain a new certificate of occupancy or otherwise trigger undesirable zoning or land use compliance matters.
- Operating Agreements. Where property is owned by an LLC, it is critical to have an operating agreement that addresses the financial, managerial and transitional rights of the company and its members (i.e., “owners”). Even in the case of a sole member LLC, and operating agreement is essential to facilitate and coordinate the transition of the company upon events such as death or disability of the member.
Should the property be transferred?
Clearly, transferring income producing residential to an LLC requires more than the mere formation of an LLC. Many more steps will be required, and each step will have an associated expense. In addition, the transfer of the property could trigger zoning or land use compliance issues. Thus, determining whether the property should be transferred into an LLC requires a thorough assessment of the potential risks associated with the ownership and rental of the property, the ability to insure those risks, the cost of conveying the property, the impact of the conveyance on existing mortgage loans, insurance policies and leases, and whether a conveyance will trigger any new or undesirable zoning or land use compliance issues.
Would you like more information?
Please feel free to contact me for more information about transferring property to an LLC.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, Suite 102
Springfield, New Jersey 07081
DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.