Our clients often ask us about the benefits of transferring their rental properties into a Limited Liability Company (L.L.C.). While LLCs and other corporate entities offer some degree of protection from the personal liability, there are a myriad of factors that must be considered in making the decision to transfer your properties into one of those entities.
Due on Sale Clause
We will start our discussion with a familiar concept that owners often overlook when deciding to transfer their properties to an LLC. In cases where the property is encumbered by a mortgage or loan, it is extremely likely that the loan document contains a “Due on Sale” clause. This provision, contained in nearly all loan agreements, sets forth that, upon the sale of the property, the lender may require the borrower to pay the full balance of the loan. While this clause is clearly intended to protect the lender in the vast majority of sales, where the property is sold to a completely unrelated party, it can also be invoked in cases where the owner is merely trying to deed the property to corporate entity in which the owner remains a member or shareholder. Accordingly, in all cases where the owner intends to deed a mortgaged property to an L.L.C., the owner should first consult with the lender to get a decision in writing whether the deed transfer would trigger the due on sale clause.