QUESTION
I own a residential property with two other individuals; however, I am the sole borrower on the loan which is secured by the property. We – the three co-owners – want to begin renting the property to tenants.
What should we do before renting the property to protect ourselves from legal liability?
What should we do before renting the property to protect ourselves from legal liability?
ATTORNEY'S ANSWER
Before acquiring title to real property with any person other than one’s spouse, it is always advisable to have in place some type of “co-ownership agreement.” (Spouses should consider using a marital property agreement, which is a special-purpose form of co-ownership agreement. Such agreements may be used as “stand-alone” agreements, or in conjunction with other asset-protection strategies.) The appropriate type, or form, of such agreement will depend on the objectives of the co-owners and the intended use of the property.
Often (but certainly not always), a Limited Liability Company (LLC) will provide co-owners of real property with an appropriate legal framework to effectively manage their asset, while also providing an acceptable level of asset-protection. Depending on your specific circumstances, a Series LLC might be a good choice.
A properly-drafted LLC Operating Agreement should address issues such how much capital each Member must contribute to the LLC, as well as each Member’s obligations and details concerning each Member’s ownership interest. For example, if a mortgage loan is to be obtained in the name of one or more, but not all, of the Members of the LLC, the issues relating to that loan should be addressed in the Operating Agreement. The Operating Agreement should also contain provisions for day-to-day operations and, in the event of disagreement or dispute, provisions for resolving conflict.
When an LLC or other form of business entity is set-up after an asset is acquired by one (or more) of the owners, title to the asset typically must be transferred to the entity. Issues raised in such circumstances may include selection of the jurisdiction where the entity will be formed or organized; the avoidance (if possible) of transfer and related taxes (depending on the state in which the real property which will be owned by the entity is located); and often in the case of real estate loans, avoidance of due-on-sale clauses.
For purposes of asset-protection, an LLC is often a very good choice of entity, as the only remedy that is usually available to judgment creditors of a Member is a Charging Order against that Member’s interest in the LLC. A Charging Order will allow a judgment creditor to “intercept” or receive any distributions from the LLC to the Debtor-Member, but will not allow a judgment creditor to obtain an ownership interest in the LLC itself (or in the assets of the LLC) or to otherwise interfere with the operation of an LLC.
Often (but certainly not always), a Limited Liability Company (LLC) will provide co-owners of real property with an appropriate legal framework to effectively manage their asset, while also providing an acceptable level of asset-protection. Depending on your specific circumstances, a Series LLC might be a good choice.
A properly-drafted LLC Operating Agreement should address issues such how much capital each Member must contribute to the LLC, as well as each Member’s obligations and details concerning each Member’s ownership interest. For example, if a mortgage loan is to be obtained in the name of one or more, but not all, of the Members of the LLC, the issues relating to that loan should be addressed in the Operating Agreement. The Operating Agreement should also contain provisions for day-to-day operations and, in the event of disagreement or dispute, provisions for resolving conflict.
When an LLC or other form of business entity is set-up after an asset is acquired by one (or more) of the owners, title to the asset typically must be transferred to the entity. Issues raised in such circumstances may include selection of the jurisdiction where the entity will be formed or organized; the avoidance (if possible) of transfer and related taxes (depending on the state in which the real property which will be owned by the entity is located); and often in the case of real estate loans, avoidance of due-on-sale clauses.
For purposes of asset-protection, an LLC is often a very good choice of entity, as the only remedy that is usually available to judgment creditors of a Member is a Charging Order against that Member’s interest in the LLC. A Charging Order will allow a judgment creditor to “intercept” or receive any distributions from the LLC to the Debtor-Member, but will not allow a judgment creditor to obtain an ownership interest in the LLC itself (or in the assets of the LLC) or to otherwise interfere with the operation of an LLC.
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DISCLAIMER
The information contained in this publication is provided by Lapin Law Group, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship. The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction. Do not rely on the information contained in this publication for any purpose. If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.
Lapin Law Group, with its principal office in the Dallas-Fort Worth Metroplex, serves all 254 Texas counties.
Lapin Law Group, with its principal office in the Dallas-Fort Worth Metroplex, serves all 254 Texas counties.
