A Guide To Real Estate Investment in So. Fla.: Part 1December 11, 2013 – Articles Law360
As the country continues to recover from the hardships caused by the economic crisis of 2008, a surge in real estate investment has taken place. Real estate investors, including everyone from large institutional investors to individuals, have recognized the opportunities to invest in real estate that exist in many of the countries' hardest hit markets.
Florida in particular has seen a boom in real estate sales to investors. In Florida, the real estate owned and foreclosure markets provide investors with an efficient opportunity to purchase homes from banks that have an "urgent need to get the bad loans off their books" as quickly as possible.
This article, and a series of subsequent articles, will serve as a resource to address legal issues that can arise for investors when they choose to invest in Florida real estate through the judicial foreclosure or bank REO process. The articles will cover everything from the types of corporate entities that investors can create as vehicles for purchasing real estate to issues that arise after a foreclosure auction is complete.
The series will also cover information ranging from how to contact the clerks of court who handle the foreclosure auctions to registering and participating in foreclosure auctions in Palm Beach, Broward and Miami-Dade counties. This information will help investors to begin navigating the nuanced system of foreclosure auctions that take place on a county-by-county basis.
Asset Protection From the Outset — Creating an Investment Vehicle
As a general rule, real estate in Florida should be owned by a corporate entity that is a limited liability company. The primary reason for owning investment property through an LLC is to avoid personal liability that can arise from owning or leasing, or after the sale of, real estate.
If you own real estate in your individual capacity, or through an otherwise functioning capitalized business entity, you or your business assets could be subject to significant liability for a host of unforeseeable issues, including personal injuries that occur on the property.
While you will likely have insurance that will cover most issues that arise from property ownership, a properly formed LLC will further protect you from individual liability that may arise from insurance coverage exclusions or a judgment amount in excess of your policy limits.
How Many LLCs?
Real estate investors are wise to form an LLC prior to purchasing any investment property and to have the property titled in the name of the LLC. In fact, it is a best practice to form an individual LLC for each property purchased. This ensures that the investor's liability exposure for any one property is limited to that property alone.
If multiple properties are owned by one LLC, liability resulting from one of the properties could lead to an exposure and execution on all of the properties owned by the LLC. If each property is owned by an individual LLC, the maximum exposure on any one property or LLC would be limited to the property owned by the LLC.
To illustrate, consider that two investors each own two investment properties. The first investor owns both of his properties through one LLC. The second investor owns each property through a separate LLC. Coincidentally, the heating, ventilation and air conditioning system explodes in one of each of the two investors' homes, killing a tenant.
The first investor loses his equity in both of his properties. The second investor only loses the equity in the house that exploded. His other property is protected by the separate LLC. Of course, this example does not account for insurance. However, it demonstrates the value of separate LLC ownership where insurance is insufficient or otherwise lacking.
LLC Tax Treatment
Unlike a corporation, a Florida LLC is a "pass-through" entity for tax purposes. In other words, instead of taxing profits at both the company and individual level, any tax liability will 'pass through" the LLC to the tax return of the individual members of the LLC.
Steps to Forming a Florida LLC
Several steps are required in order to form a Florida LLC and it is advisable that investors contact an attorney for assistance with the process. In particular, in order to form a Florida LLC, an investor must:
- Choose a proper name: The name must contain the words "Limited Company" or 'Limited Liability Company" or the abbreviations LC or LLC. The name must be available, which means that it must be recognizable (different) from the names of other business already on file with the Florida Department of State.
- Draft articles of organization: The articles must include; the LLC's name and address; the name, address and signature of the LLC's registered agent; the names and addresses of the LLC's managers; and the effective date of the LLC (if other than date of filing). The filing fee is $125. The articles may be filed online or by mail.
- Appoint a registered agent: Florida LLCs must have an agent for service of process in the state. A registered agent may be either an individual resident or business entity that is authorized to do business in Florida. The registered agent must have a physical street address in Florida. Essentially, the registered agent is the person or entity authorized to accept service of legal process on behalf of the LLC.
- Prepare an operating agreement: An LLC operating agreement is not required in Florida. However, creating an operating agreement is advisable, especially in light of Florida's new LLC act and the provisions of the act that govern management of the LLC in the absence of an operating agreement. An attorney's assistance in preparing an operating agreement can help you understand the flexible portions of the new act and the nonwaivable provisions of the act that apply to all LLCs.
- File annual reports: All Florida LLCs (and other corporate entities) must file annual reports if the LLC is to remain active. Failure to file annual reports can lead to administrative dissolution of the LLC.
- Comply with tax and other regulatory requirements: An attorney can help one manage tax implications of obtaining an employer identification number and appropriate business licenses.
There are certain nuances and aspects of LLC formation that real estate investors should consider. Factors such as the number of prospective members of the LLC and the waivable provisions of the LLC act can affect not only how an LLC operates, but also the liability of the LLC members. Ultimately, the cost of speaking with an attorney and creating an asset protection tool is nominal in light of the reduction or elimination of personal liability for the investor if the LLC is properly formed.
Originally published in the December 11, 2013 edition of Law360. (c) 2013, Portfolio Media, Inc. Further duplication without permission is prohibited. All rights reserved.