Limited liability companies are an important part of apartment syndication. The information presented here will be invaluable to you from an educational standpoint, but you should always seek the professional advice of legal counsel before setting up LLCs for your syndications.
A great way to dig deeper into the structure of an LLC for a syndication is by looking at real-life examples. Joe Fairless uses several types of LLC structures to create his deals, so a deep dive into these structures is a great starting point.
The Four Types of LLCs
A multifamily syndication essentially uses four different entities. The first is the main company’s LLC. Its operating agreement sets the terms for responsibilities, roles, and ownership percentages, and more for the primary partners of the syndication company.
While there are different points when you could create an LLC for the syndication, it may be advisable to identify the first property to purchase and to have that property under contract before creating the structure.
Keep in mind that it only takes about a week to fully set up a limited liability company, so it is best to wait to enter into a legal contract until you have secured a property that you and your partners are interested in buying.
The second limited liability company used for apartment syndications creates the general partnership. It will specifically be used to purchase the property in question.
When you sign the contract for the property that you have identified, you will use this general partnership LLC as the buyer of the property. The managing members for this LLC will sign on the loan for the property. Because this LLC will have ownership of the property, its managing members will have unlimited liability for the deal.
Keep in mind that a new LLC at this level of the apartment syndication structure will need to be created for each property that the main company purchases. Because these are property-specific entities, the LLC name often corresponds to the name of the multifamily property.
The third type of LLC becomes the general partner of the previous LLC described. Generally, it is the sole general partner in the second deal. As a result, this LLC has an ownership stake in the second type of LLC used in the syndication. This entity layer is what allows the partners to make a profit from the property’s operations.
The fourth type of LLC becomes the limited partner of the second LLC described. This is the entity where the passive investors in the syndication are named. It also identifies their ownership percentage of the property.
Notably, this property-specific LLC will be structured with a subscription agreement. Through this agreement, the general partners who are identified in the third LLC agree to give the limited partners identified in the fourth type of LLC an ownership stake in the property. More than that, the subscription agreement specifies the exact price per unit that the investors will pay for that property.
LLC Class Types
This takes you to the class types of the four LLCs. Generally, you will have a Class A and Class B structure, but you may also have a Class C ownership level.
Class A ownership is reserved for the main company’s partners. These would be the partners who own the first LLC described above. The second LLC layer will also have a Class A and B or C structure. Its general partners, who are defined in the third LLC, will have superior stock in the LLC. The limited partners, who are defined in the fourth LLC, will have the lower-level stock in the second LLC.
To summarize, the main company will be a member of the second LLC. That second LLC will be comprised of the general partnership LLC, or the third LLC described. It will also be comprised of the limited partnership LLC, or the fourth LLC described.
The general partnership LLC will be the property LLC’s sole general member, and the limited partnership LLC will outline the ownership percentages of all of the passive investors for that specific property.
The ownership structure for apartment syndications is undeniably complex with multiple layers of LLCs. These limited liability companies each serve a distinctive purpose in the overall structure of the syndication.
While the first LLC will remain the same regardless of how large the syndication grows, each new property purchased under that primary entity will have its own second-layer LLC. In turn, this LLC will have its own third- and fourth-layer limited liability companies under it. The passive investors and their ownership percentages for each property owned could vary.
While you may be eager to get a jumpstart on creating your main company’s LLC, it is important to first identify the property that you want to purchase with your primary partner.
Once the property has been identified and your main LLC has been created, you can then work with your attorney to create the second, third, and fourth LLC operating agreements. Because the paperwork can be completed quickly, it is best to get the deal lined up before formalizing a legal structure.
You can continue learning more about multifamily syndications and hearing about real-life experiences from other investors through upcoming and previously recorded episodes of the Best Ever Show and Syndication School podcasts. The Best Ever Apartment Syndication Book by Joe Fairless and Theo Hicks is also an excellent resource to check out.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.