Forming an LLC happens with each new deal in apartment syndications. Theo will be going over some of the details of how when to set them up, and how to do it, and what the LLC’s usually consist of. We’ve included a document for you to use to follow along with Theo, but this does not take the place of legal counsel! You will NEED to consult with an SEC attorney when pursuing an apartment syndication. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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TRANSCRIPTION
Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.
Each week we air two Syndication School episodes; those are released on the best real estate investing advice ever show on iTunes, and then we also post them a little bit later in the week in video form on our YouTube channel, so you can check those out in either form. Those focus on a specific aspect of the apartment syndication investment strategy. For a lot of these series we offer a free resource. These are free PowerPoint presentation templates, free Excel calculator templates, free how-to guides, something for you to download for free that accompanies the episode and the series. All of those free documents, as well as past Syndication School series and episodes can be found at SyndicationSchool.com.
In this episode we’re going to dive into the limited liability companies in apartment syndications. This is gonna contain everything you need to know about the LLCs in apartment syndication. This is gonna be a pretty detailed episode, so we’re going to offer the document that I’m using as a guide for free; that way you can read through all of this and have an understanding of all the various LLCs you’re going to want to create when you’re doing an apartment syndication deal.
This is particularly what Joe does for his deals. This is not the end all be all, it’s just gonna be an example of how Joe does his deals, and most likely what most syndicators do… But before we get into that, disclaimer – as you know, I’m not a securities attorney, I’m not a real estate attorney, so this is gonna be a general overview of the types of LLCs that Joe uses for his deals when he’s doing his apartment syndications, based on his experience.
We always recommend speaking with your real estate attorney, your securities attorney prior to forming any sort of LLC, prior to making any sort of legal decision. This is just a guide to push you in the right direction.
So if you’re able to, I recommend having this document open; if not, no problem. Download it later and read through it. It’s pretty self-explanatory.
There are actually gonna be four different LLCs that are created for the purposes of an apartment syndication. The first one is just gonna be your company’s LLC, so Theo Hicks LLC, Joe Fairless LLC, Ashcroft Capital LLC. This is gonna be the limited liability company that has an operating agreement that defines the roles, responsibilities and ownership percentages for the apartment syndicators. So this is gonna be the main LLC that you will create for your company. If it’s you and one other business partner, you create this LLC and the operating agreement is between you and your business partner, outlining who does what and who owns what percentage of the company.
Then a little bit later on, when we talk about the third LLC — so your company LLC is actually going to be a member of a later LLC. I’ll explain that once I get down to that point. These are all connected like a web, which is why it’s important to have this document, so you can follow along easier. And then this LLC also has the contractual rights to purchase properties, and then it has a right to assign the contract to the property’s specific LLC, which we’ll get into next.
So when do you create this LLC? Well, the specific time to create your company’s LLC – people have different opinions on when to create it. Our recommendation is to actually wait until you have your first deal under contract. It doesn’t take a long time to create an LLC; it’ll be like a week… And it’s better to do it once you have the deal under contract, just because if for some reason you and your business partner don’t end up doing a deal, you’ve kind of wasted that money required to form the LLC… And at the very least, don’t form it until you are familiar with the apartment syndication process and are serious about doing a deal.
So don’t just listen to Syndication School one time and be like “Oh, that sounds great. I wanna become an apartment syndicator” and before listening to all Syndication School episodes, before finding a business partner, before creating a team, before educating yourself on the process, you just go out there and form an LLC. That’s not what you wanna do.
At the very least, wait until you’re actually educated on the process and are committed to doing a deal. So that’s number one, it’s gonna be your company LLC. Number two is gonna be the general partnership LLC for the specific property. This is what’s actually going to be the property that you assign the contract to. When you actually put a deal under contract, you either have your company LLC created or you don’t; that’s gonna be the company that actually signs on the contract, and then you’re actually going to assign that contract to the general partnership LLC for that particular property that you’ve created.
So your company LLC is gonna be used for all deals; these next ones are gonna be specific to a deal. So the property, general partnership LLC is the property that owns and operates the apartment. And then the sole member of the LLC is gonna be an LLC that we’ll talk about in a second, and the managers of this LLC are the individuals who sign on the loan.
Being the general partnership LLC, this is the LLC that has unlimited liability in the deal, whereas your passive investors, the LP, has limited liability in the deal. As I mentioned, this LLC is gonna be newly created for each new deal, and you create this LLC once you have the deal under contract, because you don’t know how to name the thing until you actually have the deal under contract. The format of this is gonna be Property Name GP LLC.
Number three is gonna be Your Company Name, Property Name LLC. And this LLC is the sole member of the general partner, which is the LLC I just talked about… And this is actually considered a class B limited partner, or a class C limited partner, if you’re offering class A and class B shares to your limited partners. In other words, this LLC has an ownership stake in the specific property LLC, and this ownership stake is the percentage of the deal that is taken by the GP.
If you are doing a 70/30 split, then this LLC – Your Company Name, Property Name LLC – has a 30% share in the deal. So this LLC is what allows you as a syndicator to take your portion of the profits. Now, the members of this LLC are going to be your Main Company Name LLC (the last LLC, that we’ll talk about in a second), as well as if the loan guarantor is a third-party, and then the managers of this LLC are going to be you and your business partners. And like the previous LLC, as I mentioned, these are going to be newly-created for each deal, and it won’t be created until the deal is under contract.
The last LLC is going to be the Property Name LLC. This is the LLC that your investors – and also the previous LLC we’ve talked about, Your Company Name + Property Name LLC – owns units of. So if it’s 70/30, then Your Company Name, Property Name LLC owns 30%, and then your individual investors own 70% combined. Maybe one owns 1%, 10%, 12%, whatever; depending on how much they invested.
And then there’s gonna be a subscription agreement for this Property Name LLC that outlines the price of the units which the investors agree to pay, and the general partners agree to give them the specified ownership stake in that LLC.
So class A and then class B, when applicable, if you’re doing class A and class B [unintelligible [00:09:25].11] are owned by your investors, and then class B or class C – again, if you’re doing class A and class B for your investors – are owned by you and your company. And this is a newly-created LLC for each deal, and it is going to be created after you put the deal under contract.
To summarize, you’ve got your Main Company LLC, which is going to be a member of that LLC that I talked about, the third LLC, which owns a 30% stake in the deal… And it also has the right to assign the contract to the general partnership LLC. The general partnership LLC is going to be the sole member of the LLC that has a 30% stake in the deal, and then the Your Company Name + Property Name LLC is the one that has the 30% stake in the deal. And then the deal itself, that is 100%, is the Property Name LLC, where 30% goes to the GP, and then 70% goes to your pool of investors.
So again, I highly recommend downloading this free document, just so you can clearly see what LLC is a member of what, who is a manager of what, how the money flows from the deal to the GP and the LPs and things like that. We’re gonna have that document available for free to download in the show notes of this episode, as well as in the description of the YouTube channel. And of course, you’re gonna also find it at SyndicationSchool.com.
A little bit of a shorter of an episode. Again, I recommend downloading the document, but as well consulting with your attorney before you start creating these LLCs, which you’re gonna have to do anyways when you’re creating the PPM, so you might as well have them help you create the LLCs.
Until Syndication School next week and until Follow Along Friday tomorrow, I recommend listening to some of our other Syndication School series about the how-to’s of apartment syndication, and make sure you also, again, download this free document to have a better understanding of what we discussed today.
Thank you for listening. Until we talk again, have a best ever day, and we will talk to you soon.
