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Business Structuring - Real Estate Investing

phlgirl

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I am hoping Diane might have time to respond to this one but would appreciate any feedback, from people with experience on this topic.

I have 2 LLCs - let's call the first one Company A. It was set up in 2003, filed very limited tax returns for 2 years and then went into an inactive status. Instead of filing through the LLC, I just put the properties on my personal return.

Company B - setup in Feb 2006, has filed one tax return and has since been much more active in investing than company A.

The issue we are facing is in obtaining business loans for company B. Due to the fact that the nature of the business is real estate investing, the company always shows a significant loss. I am finding that, when attempting to obtain business loans, banks are typically looking for three things:
  • 2 years of history
  • solid D&B rating
  • Cash Flow
My question is this.... would it make sense for me to file back taxes for Company A, adding back a few of the older properties (to minimize gains) and also show Company A as having loaned Company B funds (our capital investment in company B was several hundred thousand dollars), to produce cash flow? This way, after building a solid D&B score, I now have that for which banks are typically looking - a company, with over 2 years history, a solid score, and cash flow.

In future years, I would continue to loan from A to B and, hopefully, continue to increase the creditworthiness of Company A. Access as many LOCs as possible, to better fund the real estate investment company?

Please feel free to shoot holes..... I have a lot to learn and am trying to make sure we best take advantage of the structures (particularly the aged ones), which we have available.

Thank you for your time.
 

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phlgirl

phlgirl

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Sorry, Yankees.... should have been more clear. It is a Dun & Bradstreet score - basically, the king/queen, when it comes to business credit.

http://www.dnb.com/us/

They rate companies, based on a scale of 1 - 100. In my research, I have been told that a score of 80 equates to 750, on a personal level (premium lending).
 

Peter2

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Aug 2, 2007
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Access as many LOCs as possible, to better fund the real estate investment company?

Please feel free to shoot holes.....
Your business credit will not matter much when trying to get a LOC. Almost all banks will pull your personal credit report only, and you will still have to personally guarantee the LOC.

Real estate investing is considered a high risk business, and most banks will not give you a LOC for your business.
 

Yankees338

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Sorry, Yankees.... should have been more clear. It is a Dun & Bradstreet score - basically, the king/queen, when it comes to business credit.

http://www.dnb.com/us/

They rate companies, based on a scale of 1 - 100. In my research, I have been told that a score of 80 equates to 750, on a personal level (premium lending).
:thankyousign:
 
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phlgirl

phlgirl

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Aug 29, 2007
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Real estate investing is considered a high risk business, and most banks will not give you a LOC for your business.
Agreed. So would it be smart to have a second entity, which is listed as a Consulting company or perhaps a Property Management company, which would be viewed as a more favorable (less risky) candidate?

Thanks for the feedback, Peter.
 

Peter2

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Aug 2, 2007
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Agreed. So would it be smart to have a second entity, which is listed as a Consulting company or perhaps a Property Management company, which would be viewed as a more favorable (less risky) candidate?
Yes.:)
 

RE Taipan

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Aug 28, 2007
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This is what I did and was able to get LOC's from major banks.

Like an RE investment company, an asset based logisitcs operation is considered high risk by banks. So I created a logistics management and consulting company with a name different from the pure logistics operation. I used that to build my credit. To help build credit, I used the pure logistics operation to act as a reference for the management side. Each was a separate entity under the law and did business with each other with invoices, so it was completely legit.

Once I had 2yrs under my belt, I applied for the LOCs and was able to get them for the management side. Both the D/B and the Experian Business Report were pristine. The management side then loaned the money at a typical interest rate to the pure logistics operations and secured the loan with a UCC-1 filing against the assests and receivables of the pure logistics operation.

Note: The banks still pulled my personal reports as well as D/B and Experian Business. Each required a PG from me and took approx 60days from start to finish.

Hope that helps.

--Robert
 

RE Taipan

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Aug 28, 2007
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Agreed. So would it be smart to have a second entity, which is listed as a Consulting company or perhaps a Property Management company, which would be viewed as a more favorable (less risky) candidate?

Thanks for the feedback, Peter.
I would suggest that you stay away from "Property" Management and keep it something very generic...such as X Consulting, X Management..so you can put on the app that you are a consulting company for companies who are engaged in real estate development, etc.
 

Peter2

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Aug 2, 2007
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I would suggest that you stay away from "Property" Management and keep it something very generic...such as X Consulting, X Management..so you can put on the app that you are a consulting company for companies who are engaged in real estate development, etc.
:iamwithstupid:
 
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phlgirl

phlgirl

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So here is what I have to work with...... one LLC (A), established in 2003, is based in Pennsylvania and is titled 'XYZ Properties'.

Second LLC (B), established in 2006, in the state of Florida and has filed one (very complicated) tax return and is titled 'XYZ Financial'.

Seeing as this 2 year history thing seems to be such a sticking point, I, of course, would prefer to use one of my exisiting companies but I dont suppose XYZ Properties would be a very wise choice.

So, here is my thought..... could I purchase XYZ Properties (A), with a new entity - XYZ Consulting (C) and thereby absorb their history?? Does it matter if the experience/history is out of state? Otherwise, I suppose I would have to use XYZ Financial (B), move all real estate assets to a new XYZ Consulting (C) and restate prior tax returns?

A bit confusing..... my apologies.

Thanks so much for taking the time to work through this with me. I greatly appreciate it!!
 

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RE Taipan

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So here is what I have to work with...... one LLC (A), established in 2003, is based in Pennsylvania and is titled 'XYZ Properties'.

Second LLC (B), established in 2006, in the state of Florida and has filed one (very complicated) tax return and is titled 'XYZ Financial'.

Seeing as this 2 year history thing seems to be such a sticking point, I, of course, would prefer to use one of my exisiting companies but I dont suppose XYZ Properties would be a very wise choice.

So, here is my thought..... could I purchase XYZ Properties (A), with a new entity - XYZ Consulting (C) and thereby absorb their history?? Does it matter if the experience/history is out of state? Otherwise, I suppose I would have to use XYZ Financial (B), move all real estate assets to a new XYZ Consulting (C) and restate prior tax returns?

A bit confusing..... my apologies.

Thanks so much for taking the time to work through this with me. I greatly appreciate it!!

PHL...no prob...asking questions is how we learn..

First off, the 2 yr thing has been my experience with the lenders I have gone to. While I doubt that you would find one with a lower time in biz, you might find others that require 3yrs..or more...all depends on their underwriting criteria for LOCs.

Finding this out is not always that easy (I initially ran into a lot of "it does not matter as long as "X" looks good"...only to find that was far from the case in reality...a couple of ways that work is 1) to befriend a business banker at the local branch of the lender you are trying to get the LOC from and approach them with the "I don't want to waste your time, the banks money or an inquiry on my CRAs if this will not be approved"...or 2) get the lenders LOC application and read thru it. Many times they will tell you their how many yrs they like to see you be in biz.

As for one biz purchasing the other...Might be worth having the LLC form a corp (as C Corp) as XYZ Group, XYZ Company, XYZ, Inc...again something generic. That would allow the C Corp to get the history of the LLC as you can legitimately tell people that you incorporated the biz for tax advantages.

...if you set up Consulting as a division of XYZ...then you can again legitimately put down that Consulting has been in business since the day of the Property biz. I would at the same time, create a second division, called something just slightly diff from Property and keep the property in that divisions name.

As you think through this, think of General Motors and how they are structured (Chevrolet, Buick, Pontiac, Cadillac, etc -- each is a separte division of GM)...its the same as most any large business is...my thinking is that if it works for them it can work for me too...here is the flow diagram

LLC ---(owns 100% stock of)
--- XYZ, a C Corp -- (which has divisions of)---
---- XYZ Consulting
---- XYZ Management
---- XYZ Staffing
---- XYZ on and on
Each has their own TIN and files a separate return. The LLC no longer does any "active" business, I would suggest that you incorp in a state such as NV as the stock there is bearer stock. This means that whomever is holding the stock at a specific period of time is the owner of that stock.

The bearer stock is important for this next point....I would then suggest that you loan the LLC a sum of money which loaned money is secured by the stock that LLC owns in XYZ Corp. This allows you to put down on any application that you (as holder of the XYZ Bearer stock) are the 100% owner of XYZ company. This is important b/c most LOC apps require that you disclose the names and SSIDs of every holder of more than 10% of the company and that each of those individuals execute a PG.

Now...have you thought about financing through credit card(s) instead?

--Robert
 
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phlgirl

phlgirl

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Ok, we are definitely on the same page. I worked with our CPA and attorney, a few months back, to compile a list of referrals to bankers and went on a mini 'fund raising campaign'. I probably sat with 6-8 different VPs or Ps of smaller local banks and then later with multiple reps at larger bank branches.

I went with docs in hand - tax returns, financial statements, rent rolls, etc. I had some really great discussions and learned a great deal. In all cases, the 2 year history was brought up - so I am in full agreement with you there. Almost everyone asked that I come back (some have stayed in touch), once we hit 2 years. The other main issue was cash flow. Our business model is such that we pay ourselves out of the equity in the homes we buy - not real 'income' on paper. Although we have some other streams of income and all of our properties are cash flow positive, it does not add up to enough to keep three acting partners 'fed'.

So, as we are coming up upon our 2 year mark, I am looking to solve each and every issue, for the bank, with the thought that if I can solve their problem, it will make the lending as easy for them as possible. 90% of them really seemed to love our business model, the experience of the partners, etc. but were restricted by the commercial lending laws of their organizations.

This led me to exactly the thought pattern you mentioned regarding GM. When I was in consulting, I would see all these major companies, with their hundreds of smaller entities and in every case, some of those entities were 'dogs' (lost money every single yr) and some of them were 'hogs' (showed a significant profit each year). This lead me to think, why cannot I just do the same, but on a smaller scale. Real estate doesn't look great on paper and apparently, it's high risk, so why not build two companies - one that makes money and one that just holds its own? I then remembered that I had this other LLC sitting around, inactive, which has been in existance for almost 5 years now.

Technically, I am thinking now that I should have been treating this entity as a real business all along- the business of ME, Inc. I should have continued to file with my PA properties and then, when we came to FL, to start this venture, I should have written up the capital investment as a loan from PA LLC to FL LLC. This way PA LLC would show 5 years of history as a 'cash flowing' entity, right?

I think the idea of the C Corp is a GREAT one - with the stock shares and the loan to the C Corp, so that only one person 'owns'. Again, you are exactly right in that every bank wanted all 3 partners credit, all three tax returns, etc. I would be SO much easier if it could just be one person. Being in the business of RE, our credit is priceless - our most valuable asset - cannot have people pinging all the time.

So, would it be best to restate tax returns for the PA LLC (which is only in my name anyway) and build some type of C Corp on top of that? Do I still need the C Corp? I think I do, if for no other reason than the name of PA LLC (Properties). But then, aren't they just going to ask for XYZ Properties tax returns anyway? If XYZ Consulting owns XYZ Properties and that is where all the activity took place?

If I was not making banking transactions to pay the interest (from FL to PA) on the capital investment, over the past two years, can I still go back and state that as income (if I pay it all now)?

I have not really thought about using credit cards but am completley open to suggestions. We are looking for a fairly significant chunk of change. 300-500k LOC, to start and, ideally, I would like the company to work its way up to millions so we can buy as much of this discounted RE as possible and also have a great credit base, to start our next venture.

The other wrench I will throw in (just for fun) is to say that I, as an individual already have close to 2MM in my name (real estate debt). My credit is great - but at a certain point, the banks just stop loaning to an individual. Some say 10 properties is the limit, others freak on the debt to income. We are now working our way through the other partners credit (and outside JV investors) but at some point, we are going to hit the wall. I need to find an alternate financing source, before we get to that point.

I honestly cannot thank you enough for your insight. It really makes sense and is helping to make me think through all possible scenarios (you should see my whiteboard!!).
 

RE Taipan

Contributor
Aug 28, 2007
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Balboa Island, CA
Thanks PHL...you are most welcome. Keep in mind that this is based only on my experiences...yours may ultimately be different.

..I have several meetings this AM...including the one I am in (and suppsoed to be paying attention to...thank god for mute, so they cannot hear me hitting the keys...LOL) now.

I'll read thru and see if I can provide something additional later on.

--R
 
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phlgirl

phlgirl

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Aug 29, 2007
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New Question/Same Topic:

So, I think I came up with a work-around for the business name 'XYZ Properties'. It seems that I am able to change the name of the company, once per year, without raising any 'red flags'. I will do that and alter the name to XYZ Consulting. This way, I will now have a company, which has been in business 4+ years.

Now, when I go to file my back taxes, should I bother to include the cash flowing properties, which I have filed on my personal return? I want the company to show as much income as possible but then, perhaps, showing rental RE holdings would not be a good thing (since the banks don't seem to like lending to RE companies these days)?

Also, is any of this going to matter at all, seeing that once they pull my credit, they are going to see a ton of RE debt regardless?

We need a banker to join this forum :)

Would appreciate any thoughts/suggestions. Thank you.
 

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