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socrateaser
socrateaser, Attorney
Category: Finance
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Experience:  Retired (Mostly)
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I am looking to refinance 4 houses in Atlanta. it will be

Customer Question

Hello, I am looking to refinance 4 houses in Atlanta. it will be for 5 years. each house own by different llc, so there are 4 llcs that each one own 1 property. 2 of the properties (and the llcs) I own, and the other 2 my sister and my mom own. we found a lender that will refinance it as a package. lender ask to establish SPE llc for this loan. the new SPE llc will own the properties (and the llcs). my questions are- what is the differents from LLC (regular) and SPE (specific purpose entity)? how do we decide what percentage each one will get? there will be a transfer tax? what will happen after the 5 years? - we will have to cancel the SPE llc and get back like it was in the past (each llc own 2 property)- like "undoing" it? we will have to do a new title insurance?
Submitted: 1 year ago.
Category: Finance
Expert:  socrateaser replied 1 year ago.

Hello,

An SPE is a business entity that owns nothing but assets, and no liabilities. This makes the entity more appealing as a vehicle for lenders, because the SPE has no debt. Example:

You have LLC1, LLC2, and LLC3. Each LLC owns a property worth $100,000. Each LLC also has $80,000 in liabilities. The net equity of the three LLCs is $100,000 minus $80,000 = $20,000 times three: $60,000.

You create an SPE (which is simply another LLC) and transfer ownership in the properties to the SPE. The balance sheet of the SPE shows $100,000 times three properties = $300,000 and no liabilities. The other three LLCs show $80,000 in liabilities and no assets = $240,000 in liabilities. A lender will be happy to loan to the SPE, because it has nothing but assets and no liabilities -- but no one will lend to the other three LLCs, because they are now completely insolvent.

What I've described is legal, but extremely dangerous to the borrower, because it effectively permits borrowing far more money than the collateral is worth. The lender won't care, because it will have a secured interest in the properties worth their entire value. So, if the loan goes bad, the lendergets the properties, and the borrowers are stuck with three worthless legal entities.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer -- otherwise, I receive nothing for my efforts in your behalf.

Thanks again for using Justanswer!

Customer: replied 1 year ago.
Thanks. I didnt understand few things-
1. SPE will own the 4 llcs (and each llc own a property). SPE has no liabilities, but lets assume that each llcs has liabilities. doesnt it means that SPE has liabilities if the the memebers (the llcs) has liabilities?
2.How do we decide what percentage each one will get?
3.There will be a transfer tax?
4.What will happen after the 5 years? - we will have to cancel the SPE llc and get back like it was in the past (each llc own 2 property)- like "undoing" it?
5.We will have to do a new title insurance?
Expert:  socrateaser replied 1 year ago.

1. SPE will own the 4 llcs (and each llc own a property). SPE has no liabilities, but lets assume that each llcs has liabilities. doesnt it means that SPE has liabilities if the the memebers (the llcs) has liabilities?

A: What you are describing is not an SPE. To be an SPE, the four LLCs must transfer the asset property rights to the SPE, but not the liabilities. If the SPE were to own the LLCs, then you're correct, that the SPE would have the assets and liabilities, and the entire purpose of the SPE would be defeated. If this is what the lender is suggesting, then I don't think the lender understands the SPE concept -- and that would make me very skeptical of the loan offer.

2.How do we decide what percentage each one will get?

A: This is not a legal question. You (and your co-owners, if any) can arrange to use the loan proceeds however you choose.

3.There will be a transfer tax?

A: Yes (unless there is an exception, which may sometimes occur where the ownership percentages of the transferee entity is identical to that of the transferror entity. You're transferring the property asset to the SPE). This is a question of state tax law, and you will have to discuss the issue with your tax advisor.

4.What will happen after the 5 years? - we will have to cancel the SPE llc and get back like it was in the past (each llc own 2 property)- like "undoing" it?

A: You would have to transfer the property back, though you don't have to do so. The return transfer would be subject to the same issues as the original transfer.

5.We will have to do a new title insurance?

A: That's up to the lender. Most real estate lenders require "lender's" title insurance. "Owner's" insurance is your choice to make.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer -- otherwise, I receive nothing for my efforts in your behalf.

Thanks again for using Justanswer!