For development projects (or possible development projects), we recommend using 3 LLCs as follows:
- A single-purpose venture/title-holding entity (SPV) — This LLC will hold title to the property and will become the borrower for any subsequent construction loan,
- A manager-managed LLC that will pool money from investors (investor-level LLC) — This LLC is the sole owner of the SPV, and
- A syndicate manager LLC — This LLC manages the investor-level LLC.
The reason you need an SPV is that if you decide to develop the property, the construction lender will want to see a title-holding entity that is one step removed from the investor-level LLC. Additionally, you will have the flexibility of selling the SPV to a buyer if you decide not to develop the property, which could offer some tax savings to a buyer; and third, you will have the ability to do a 1031 exchange by having the SPV exchange its property for another property, all of which could result in significant tax savings for you and your investors.
For more information, please get a copy of Kim Lisa Taylor, Esq.’s book at Amazon, entitled “How to Raise Capital for Real Estate Legally.” Chapter 18 discusses Development Project Structures.