As the country continues to recover from the economic 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 that exist to invest in real estate in many of the countries’ hardest hit real estate markets. Florida in particular has seen a boom in real estate sales to investors. In Florida, the REO 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 guide was created as a resource to address legal issues that can arise for investors when they chose to invest in Florida real estate through the judicial foreclosure or bank REO process. The materials 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. Finally, the appendix contains detailed information such as 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. We provide this information so that investors can begin navigating the nuanced system of foreclosure auctions that take place on a county by county basis.
II. Asset Protection from the Outset – Creating an Investment Vehicle
As a general rule, real estate in Florida should be owned by a corporate entity known as a Limited Liability Company (LLC). 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.
a. How Many LLCs?
Real estate investors are wise to form an LLC prior to purchasing any investment property and having 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, 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 HVAC 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.
b. 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.
c. 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 L.C. or L.L.C. 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; 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 LLC’s 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 the new Act and the provisions of the Act that govern management of the LLC in the absence of an operating agreement. An attorneys’ assistance in preparing an operating agreement can help you understand the flexible portions of the new ACT and the non-waivable 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 you manage tax implication of obtaining an EIN and appropriate business licenses.
There are certain nuances and aspects of LLC formation that real estate investors should consider. Factors including the number of prospective members of the LLC to waiveable provisions of the 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.
W Mason is a litigaton attorney in Fox Rothschild’s West Palm Beach office. W is admitted and practices in Florida’s state and federal courts, representing clients in construction and commercial litigation matters. You can contact W at 561 804-4432 or email@example.com.
Florida recently enacted changes to its Limited Liability Company Act (the “Act”). The new Act continues to provide pass-through taxation, limited liability for the members of the LLC for the debts of the LLC, and the flexibility to contract among the members for the way in which the LLC is operated. An attorney can assist you with determining whether the new Act would impact your current LLC and whether amendments to your governing documents are needed.