I have been asked for some further information on this, so I am going to post this:
Limited Liability Company Buyout
Basic Concept
This acquisition structure can be utilized for the buy/sell transaction of most commercial properties. The buyer and seller form a new limited liability company, single-purpose entity, to hold title to the property. The seller will be the managing member and majority owner. The buyer will be a minority member (1% to 20% ownership). Title to the property is transferred into the newly created LLC. The seller secures new, non-recourse, permanent financing with terms mutually acceptable to buyer and seller. This will be a cash out refinance transaction to pay off the seller’s current loan(s) and provide cash to the seller.
After the refinance transaction has been completed, the seller can be bought out of the LLC for a mutually agreeable price. It could be a token payment ($20) depending on state-specific contract law, or some other more substantial payment amount. This payment could come from the refinance proceeds or directly from the buyer. With non-recourse financing in place, the seller exits with no further financial or management obligation. If acceptable non-recourse financing is not available, short-term bridge financing could be secured with the understanding that the buyer would refinance within a mutually-agreeable period of time.
The amount of cash to the seller from the refinance, buyer’s down payment (if any), seller-carried second, amount of cash to buy out the seller are all negotiable and largely dependent on the financing that can be obtained on the property. The closing costs for the refinance loan can be paid by either the buyer or seller or split equally.
Advantages to the buyer.
Under this structure, typically the buyer will be able to acquire income-producing commercial property with minimal down payment and without meeting the net worth, liquidity, management experience level, and credit profile considerations of conventional lenders.
Advantages to the seller.
One of the huge advantages to the seller is that cash proceeds from the refinance transaction are non-taxable: they are loan proceeds. Other advantages include selling the property closer to full asking price instead of at a large discount, and opening up the prospective buyer pool to include those who would not be able to qualify for bank financing.
I have been asked for some further information on this, so I am going to post this:
Limited Liability Company Buyout
Basic Concept
This acquisition structure can be utilized for the buy/sell transaction of most commercial properties. The buyer and seller form a new limited liability company, single-purpose entity, to hold title to the property. The seller will be the managing member and majority owner. The buyer will be a minority member (1% to 20% ownership). Title to the property is transferred into the newly created LLC. The seller secures new, non-recourse, permanent financing with terms mutually acceptable to buyer and seller. This will be a cash out refinance transaction to pay off the seller’s current loan(s) and provide cash to the seller.
After the refinance transaction has been completed, the seller can be bought out of the LLC for a mutually agreeable price. It could be a token payment ($20) depending on state-specific contract law, or some other more substantial payment amount. This payment could come from the refinance proceeds or directly from the buyer. With non-recourse financing in place, the seller exits with no further financial or management obligation. If acceptable non-recourse financing is not available, short-term bridge financing could be secured with the understanding that the buyer would refinance within a mutually-agreeable period of time.
The amount of cash to the seller from the refinance, buyer’s down payment (if any), seller-carried second, amount of cash to buy out the seller are all negotiable and largely dependent on the financing that can be obtained on the property. The closing costs for the refinance loan can be paid by either the buyer or seller or split equally.
Advantages to the buyer.
Under this structure, typically the buyer will be able to acquire income-producing commercial property with minimal down payment and without meeting the net worth, liquidity, management experience level, and credit profile considerations of conventional lenders.
Advantages to the seller.
One of the huge advantages to the seller is that cash proceeds from the refinance transaction are non-taxable: they are loan proceeds. Other advantages include selling the property closer to full asking price instead of at a large discount, and opening up the prospective buyer pool to include those who would not be able to qualify for bank financing.