The vast majority of co-op buildings in NYC do not allow prospective purchasers to buy using an LLC, however some co-ops permit LLCs. Co-op buildings which permit LLC buying may charge additional upfront fees pertaining to the extra paperwork associated with an LLC purchase. In addition, some co-ops may charge recurring monthly or annual fees for units owned via LLC.
The specific policies, fees and procedures associated with buying a co-op via an LLC vary by building. The easiest way to find out whether a co-op allows LLCs is by having your buyer’s agent ping the listing agent, who will typically reconfirm the policy with the building’s managing agent.
While condos in NYC are more likely to permit purchasing via LLC, it’s always a good idea to obtain written confirmation of the building’s policy prior to seriously pursuing an apartment.
If a co-op permits LLC buying, be sure to also confirm the building’s policy regarding occupancy for immediate family members. Who is allowed to occupy a co-op unit might be different for an LLC vs. an individual owner.
In the rare instance a co-op allows a buyer to purchase through an LLC, the buyer won’t achieve any additional anonymity or privacy vs. purchasing in her or his name directly. This is because the co-op board will still require the buyer to reveal copious amounts of personal information as part of the co-op board package and board approval process.
The same goes for condo buyers who are purchasing via an LLC. Except in the case of new developments, a condo buyer who takes title in the name of an LLC will still have to reveal financial and other personal information as part of the condo purchase application. Therefore, the name of the individual behind an LLC which purchases a NYC condo will be no secret to the condo board and the building’s managing agent.
While buying a NYC co-op or condo through an LLC won’t give you total anonymity with your board or building, it may reduce the risk of a NY residency tax audit. Depending on your personal situation, purchasing in an LLC may also yield tax or estate planning advantages.
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Co-ops are generally averse to allowing shareholders to buy via an LLC because it adds an extra layer of complexity when it comes to being able to collect on unpaid monthly maintenance fees and ensuring that the purchase adheres to the building’s resale and subletting procedures as well as the house rules.
It’s much harder for a co-op to pursue a business entity (i.e. the LLC) as opposed to an individual when it comes to collecting on any unpaid maintenance, special assessments or fines levied by the building against the unit. This is particularly acute when the underlying owner of the LLC lives outside of New York and holds most if not all assets outside of New York or in another country altogether.
Co-ops who allow LLCs typically solve this problem by requiring the individual purchaser to serve as a financial guarantor of the LLC.
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Co-ops are also weary of LLCs because of the fact that the ownership structure makes it easier for the owner to bypass the co-op board approval process when subletting or selling.
Generally speaking, the co-op board has the right to reject any prospective purchaser or renter for an apartment.
For example, a co-op unit owner who purchased via an LLC could surreptitiously sell an interest in the LLC to another individual or entity. While the original LLC is still technically the owner of the apartment, the economic interest has effectively been transferred to another person or entity who has not been subjected to the usual co-op board approval process.
Moreover, the arms-length nature of ownership via an LLC creates confusion and potential risks for the co-op with respect to which individuals have the right to occupy the apartment.
A co-op building which permits LLC buying will typically require the purchaser to go through two additional hoops:
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Buyer must sign an occupancy agreement (also known as an inducement agreement).
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Buyer must personally guarantee the payment of monthly maintenance and other fees.
Be prepared for additional closing costs if you’re buying in an LLC, as most co-ops will require the buyer to pay for legal fees associated with drafting these agreements.
The occupancy agreement is designed to reduce the risk of the LLC bypassing the co-op’s board approval process for sublets or resales.
The occupancy agreement prevents unauthorized subletting by specifying who has the right to live in the apartment. Any change in occupancy is considered a sublet under the agreement, thereby obligating the LLC to receive co-op board approval.
The inducement (occupancy) agreement prevents unauthorized resales of the apartment by prohibiting the LLC from making any changes in underlying ownership without co-op board approval.
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The purchaser’s personal guarantee of the unit’s monthly maintenance payment ensures that the co-op will not have any difficulty collecting unpaid maintenance, assessments or fines from the LLC.
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What’s the advantage of buying real estate using an LLC?
Buying real estate using an LLC provides two key advantages: privacy as well as the limitation of personal liability. There may also be tax and/or estate planning advantages depending on your personal financial situation.
With respect to privacy, buying real estate via an LLC shields the name of the true owner from the public eye. This is ideal for public figures as well as individuals who prefer to maintain a degree of anonymity with respect to property ownership, which is a matter of public record throughout the United States.
With respect to liability, buying property through a limited liability corporation (LLC) shields the purchaser from financial liability beyond the value of the assets contained within the LLC (which is usually just the property). This is particularly important for someone with a net worth which significantly exceeds the value of the property being purchased.
Here’s an example:
Let’s say a house worth $500,000 is purchased under an LLC. The owner of the LLC has a net worth of $7,000,000 excluding the value of the property in the LLC. The owner utilizes the home as an investment property, and there are currently tenants in place.
One day, the property burns down due to some unavoidable defect with the electrical wiring which was not caused by any form of negligence or lack of routine maintenance on the part of the landlord.
One of the tenants dies, and another person who was staying in the property at the time of the fire is permanently scarred and disfigured.
The family of the deceased as well as the other injured individual hire lawyers and sue for $4,000,000 in damages. If the property is owned under an LLC as is the case in this example, the tenants cannot easily recoup more than the value of the assets owned by the LLC. In this example, the LLC owns a single property (the one which burned down) which had a market value of $500,000.
As a result, the owner’s net worth outside this particular property, which totals $7,000,000, is essentially shielded against financial liability from the injured parties.
If, on the other hand, the property was owned directly in the personal name of the owner, the tenants may be able to go after the personal assets of the owner in order to collect any amount of damages which exceed the market value of the property in question.
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What are the disadvantages to buying real estate using an LLC?
Buying via an LLC in NYC may disqualify you for certain tax benefits such as the Condo Co-op Tax Abatement. It’s also harder to obtain a mortgage when buying in the name of an LLC. Homeowners insurance may also be more expensive for a property owned via an LLC.
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Aside from the formation costs of the LLC, you may also incur additional upfront and/or recurring fees specific to the co-op building you’re buying into.
If your main objective of buying via an LLC is liability protection, it may be more efficient and less expensive to purchase a personal umbrella insurance policy.
Good idea to reach out to co-op to see if any special requirements. LLC formation docs could say you can do anything that’s legal. But co-op may want specific language, and say this LLC can only own this apt, not other random assets like a convenience store. Good to get this info upfront.
Can sign a contract individually, and build in a right to transfer/assign to a LLC or trust. Good technique to lock in deal and have more time to make a decision if you want to do this. Can form LLC in 1-2 business days.
Sellers can put in language, as long as things go smoothly, sure do your LLC, but if problem you still have to close in your individual name, without a backdoor to cancel.
Some banks will lend to LLCs, some won’t. Some will still require individual to be borrower on the note. This is simplest for banks. If owner is LLC, borrower on loan is also LLC, the individual serves as guarantor on loan. Maybe anonymity. Lenders like to see that it’s a single purpose entity. If LLC owns a few other rental properties that’s usually ok, if easy to understand. Generally want all owners of LLC to be a party to the loan.
What about after close on loan, then transfer title to LLC? If owner of record changes, lender can call the loan, big risk. Due on sale close on every mortgage. Even if economically the parties are the same. Still a breach can trigger a due on sale clause on mortgage.
Companies in US are unique in that there are no capital requirements to form the entity. That’s why banks need to make sure there’s a truly monied party behind that LLC.
1098 is issued by bank to interest payer. Having a 1098 in individual’s name when it comes to tax time can be important, for tax writeoff.