Operate Your Investment Property Like a Business - Part 2

In this installment we will look at the process of registering a new limited liability company with the Washington Secretary of State Corporations by submitting a “certificate of formation.” But first let’s take a look at why we are choosing a LLC over a sole proprietorship or corporation. Limited liability companies are a creature of statute.


Happily, an LLC is a “best of both worlds” form of business organization because it features the flexibility of operating a business like a sole proprietorship (i.e., an unincorporated business owned by an individual without existence apart from its owner), but has the liability shield of a corporation (i.e., with a few qualified exceptions, a party only has standing to sue the company, not the owners of the company).


A “single member” or a “husband and wife” LLC is considered a disregarded entity for tax purposes. This simply means that the LLC is taxed like a sole proprietorship. However, once a third-party is brought in to the LLC as a “member,” then the “manager(s)” or “member(s)” (we’ll get into the significance of what that means in a later post), must elect to have their LLC taxed as either a partnership or corporation. I leave tax issues to the tax gurus and always recommend that my clients engage a CPA as part of the business formation team.


Here is a checklist of information that you will need to file a Certificate of Formation for a Limited Liability Company:

• Name of Company & Two Alternative Names;
• Contact Information for questions regarding the application;
• The Business Purpose of the LLC (e.g., real estate investments, any lawful purpose);
• The date you want the company to go “live” (e.g., date of filing or specific date);
• The “duration” of the company (e.g., perpetual or specific date);
• The LLC’s Principal Place of Business (e.g., your home or business address, or if you have an office at the MHC property location, then that address);
• Company Management (i.e., member- or manager-managed);
• Name, physical and email address of the “registered agent” (i.e., the person that interacts with the secretary of state and accepts service of process if the company is sued). Some of our clients prefer that we act as registered agent, others prefer to act as their own registered agent; and
• The names of the “members” (e.g., you, or, your spouse and you). There can be any number of additional members of the company. In fact, members of the company don’t even have to be human beings. We’ll go over that in later past too.

We usually also prepare the company’s Online “Initial Report” at the time of the filing of the Certificate of Formation as that is an option offered during the online filing process. A company’s initial report must be delivered to the Secretary of State within one hundred twenty days of the date on which a company’s Certificate of Formation is filed [RCW 25.15.105(3)].


The only thing you need in addition to the information provided with the Certificate of Formation is a brief statement of the nature of the business. But that’s easy; we’re in the real estate business, investing in real estate, so the nature of business may be stated as something as simple as “Real Estate Investments” or “Property Management.” Easy as that!


Once filed, you will need to wait about one week to hear back from the Washington Secretary of State, or your lawyer if he or she filed for you, on the status of your filing. Once you are notified that your application has been accepted then you will be issued a formal embossed Certificate of Formation from the Washington Secretary of State at which time your LLC is officially operating.


Now that you own a brand new limited liability company, we need to get busy with preparing a member agreement and transferring property into the name of the company. We will delve into “members,” “member agreements,” and “conveyances into the company” in the following posts.

Operate Your Investment Property Like a Business – Part 1

A great number of Washington State individuals and families that acquired investment properties over the past several decades have seen an inflation-adjusted increase in value far beyond their initial expectations.  During the same time period the myriad of new case law and regulations impacting the zoning, land use, development, redevelopment, financing and leasing, and brokerage of those properties have put full- and part-time real estate investors in a potentially precarious position.  Given the density of development in Washington State and in particularly King, Pierce and Snohomish Counties, and the litigious nature of our society in general, the potential risks facing investment property owners can dampen those inflation-adjusted returns on investment.  However, there are a number of things an investor can do to increase his or her chances of success and to avoid unnecessary legal risk.  


The fact of the matter is your investment property is a form of business. It shares a number of characteristics of a traditional brick and mortar business and should be run like a business.  In this and the next few postings to my blog I will address what it takes to operate your investment property like a business.  


While we will explore the concept of operating an investment property like a business in context of owning and operating a manufactured home community (MHC), the same principals apply to any investment property, including shopping centers, manufacturing facilities and warehouse properties, apartments, or even tri-plexs or single family homes for that matter.  


Examples of similarity between a MHC and traditional “brick and mortar” business include the means of holding ownership, marketing and promotion, product differentiation, qualifying customers/tenants, sales of goods/rentals of pads or developed pads with homes, accounts receivables, payments of operating expenses and sales related expenses, tax accounting, management, the list goes on and on.  


In advising clients on good business practices to apply to their real estate investment strategy, the first thing we look at is how their property is held.  The most common form of ownership of family investment properties are in the name of the individual or in the name of the estate.  For example, taking title as “Betty Brown as her separate property,” “the Estate of Bob Brown,” “Bobby and Betty Brown, as joint tenants with the right of survivorship,” or the like.  The problem is that with property held in an individual’s or an estate’s name is risk.  That is why savvy commercial property owners have their properties vest into either a limited liability company or S-corp.  


There are three forms of business ownership - sole proprietorship, corporation or, limited liability company.  Most business are held and operated as either a corporation or a limited liability company.  The most prevalent form of commercial real estate ownership is through a limited liability company.  The reason for vesting title to investment real property in a limited liability company, or LLC, is simple.  An LLC offers flexibility of management and distributions, and offers its owners, called “members,” just what the name says – a limitation of liability.  


Before exploring the kinds of liability that the members are limited from incurring, or the flexibility of management and distribution of income, expenses and tax benefits, let’s look at what it takes to register a new limited liability company.  


What is meant by “register a new limited liability company?” Washington State LLCs must be registered with the Washington Secretary of State Corporations to be effective.  A limited liability company may be registered online at https://corps2.sos.wa.gov/LLC/Pages/StartPage.aspx, or the forms may be downloaded and delivered to the Secretary of State Corporations via regular mail.  


In our next installment we will look closer at the registration process and the information you will need to furnish your lawyer, or if you’re a DIYer, the information you will need to furnish the Department of Corporations to initiate the registration process, better known as filing a “Certificate of Formation.”

For Flawless Real Estate Deals

A run-in with the law is the last thing we expect when we enter into any contracts in pursuit of the good life.  But a legal hassle does confront many unsuspecting people because of the all too common practice of allowing the wrong kind of lawyers handle the legal aspects of such contracts for them.  For example, you acquire a piece of real estate and let the legal paperwork be done entirely by a law office that specializes in civil cases.  This is courting legal problems later on since civil lawyers are experts on cases arising from property or money disputes but not the finer points of real estate laws.    

It is precisely for this reason that boutique law firms have gained tremendous popularity in recent years.  Attorneys specializing in one niche area of practice are in fact now regarded as the future of the legal profession. While most law firms structure themselves to offer a broad range of services, a growing number of lawyers are setting up boutique law practices. These new firms are choosing to focus their work on one area of the law rather than try to maintain the general practice culture of the big law firms.  As such, they rarely fail their clients who are assured of a dedicated legal service whose attention and expertise are fixated on the subject they are hired for.  

One such law firm that proves to be a cut above the rest is the friendly and accommodating Brettin Law Offices PLLC that concentrates on real estate, business and franchise transactions and litigation.  Brettin is now a byword when it comes to legal advise/counseling on property acquisition and development, buy and sell of homes and small businesses, commercial and residential landlord-tenant relationships, and buy and sell of franchisees.  The firm is based in Seattle, Washington and serves clients from all over.   

The principal of Brettin Law OfficesPLLC, Lee Brettin, is a real estate attorney with over 30 years of hands-on business experience and over 20 years of experience practicing real estate law. 

Examples of Lee’s real estate business and real estate law background include:

1)     Negotiating and documenting real estate purchase and sale agreements for home buyers and sellers.

2)     Negotiating and documenting commercial real estate purchase and sale agreements.

3)     Drafting, negotiating and managing successful commercial leasing efforts on behalf of real estate developers, owners, and tenants. 

4)     Assisting homeowners in distress understand and negotiate short sales, loan modifications, and qualify for and participate in mediation under the Washington Foreclose Fairness Act.

5)     Representing aggrieved individuals and business entities in real property disputes, mediation and litigation.

6)     Acting as receiver, or representing receivers of office buildings, mixed use projects and shopping centers.

7)     Handling commercial and residential landlord-tenant issues, including unlawful detainer actions and unjust evictions.

8)     Representation of manufactured home communities and homeowner associations.

9)     Representation of real estate brokers and brokerages, property managers and property management companies and other real estate professionals with matters of company policy, regulation, licensing, legal compliance, management and commission disputes, and consumer protection claims.

The Brettin Law Office has a diversified real estate, business and franchise law practice.  It helps clients protect their interests, understand the potential risks and liabilities of a transaction, identify opportunities to expand their businesses, and avoid any future problem with the law.

Brettin prides itself on added-value billing and quick turnaround.  Most of our transactional work is performed on a very reasonable flat fee basis.  If you are considering entering into a real estate transaction, or think that you need a dedicated lawyer to evaluate and represent you in court, call Brettin now for an initial free consultation to determine if its services are a good match for your transaction or case.

About Brettin Law Offices PLLC

Who we are

Friendly, down to earth, and courteous, Brettin Law Offices PLLC is a conveniently located Seattle boutique law firm that concentrates on real estate, business and franchise transactions and litigation. We are trusted advisors and legal counsel for – 

• Individual & institutional investors, and commercial & multi-tenant property owners & developers;
• Commercial & residential landlords and tenants;
• Franchisors and franchisees, and those looking to purchase or sell an existing franchise;
• Buyers and Sellers of homes, condos, and residential building lots;
• Small business owners and those seeking to establish, buy or sell small businesses.

Lee Brettin - Real Estate Attorney

Lee Brettin, principal of Brettin Law Offices PLLC is a real estate attorney with over 30 years of hands-on business experience and over 20 years of experience practicing real estate law.  

  

Examples of Lee’s real estate business and real estate law background include:

- Negotiating and documenting real estate purchase and sale agreements for home buyers and sellers.  We are often called upon to review purchase agreements prepared by real estate brokers and home owners selling real estate “by owner.”  In addition to preparing or reviewing purchase agreements, we represent both buyers and sellers through closing of the sale, including reviewing and clearing title issues, closing statements, deeds, financing documents, condominium declarations and resale certificates.


- Negotiating and documenting commercial real estate purchase and sale agreements.  Our experience ranges from developing pro forma cash flow analysis to assist buyers or sellers calculate anticipated cash flow and returns on investment, negotiating with sellers of prime real estate for the purpose of amassing critical real estate parcels for the development of shopping centers and free standing buildings, zoning, planning, permitting, lot line elimination, exclusive and shared easements for utilities and ingress and egress, title work, construction loan documents, and closing.


- Drafting, negotiating and managing successful commercial leasing efforts on behalf of real estate developers, owners, and tenants.  Lee’s commercial lease experience encompasses managing the leasing efforts for over two million square feet of prime regional malls and power shopping centers; representing start-up business owners, as well as local and national brands in their negotiations for locations in regional malls and downtown retail cores nationally.


- Assisting homeowners in distress understand and negotiate short sales, loan modifications, and qualify for and participate in mediation under the Washington Foreclose Fairness Act.


- Representing aggrieved individuals and business entities in real property disputes, mediation and litigation.


- Acting as receiver, or representing receivers of office buildings, mixed use projects and shopping centers.


- Commercial and residential landlord-tenant issues, including unlawful detainer actions and unjust evictions.


- Representation of manufactured home communities and home owner associations.


- Representation of real estate brokers and brokerages, property managers and property management companies and other real estate professionals with matters of company policy, regulation, licensing, legal compliance, management and commission disputes, and consumer protection claims.
 

We pride ourselves on value billing and quick turn-around. Most of our transactional work is performed on a very reasonable flat fee basis. If you are considering entering into a real estate transaction, or think that you need a lawyer to evaluate and represent you in court, call us today for an initial free consultation to determine if our services are a good match for your transaction or case.