Boot camp attendee here. First post on the forum, so thanks in advance for any insight that you provide.
I am about to put my first park under contract. It is coming with some POHs, so I am breaking up the deal into two transactions - one for the park, and one for the homes. Each transaction will be with a separate LLC, which I have yet to establish. Two questions:
First question - what is the best way to allocate the purchase price between the park transaction and the home transaction? Purchase price is $750,000, coming with 51 POHs. The homes are old and not in great shape, and I’m planning on offloading them as soon as possible, either with a quick cash transactions or through a rent credit program. I could flip the park in 2 years, or I could hold onto it for 20. Haven’t decided yet. Any thoughts on the price allocation that makes the most sense from a depreciation / tax perspective would be appreciated.
Second question - how much of the corporate legwork should I do upfront before I get the park under contract? Should I have the LLCs established, bank accounts opened, etc., before getting it under contract?
Thanks again.
The second question is easily answered. No, no, and no. They can be done easily and quickly toward the end of the due diligence.
Allocation is somewhat tricky and case specific. Different people have different views on this. Considerations are as follows:
- Banks will lend only on the MHP and not on the POHs so you might want to keep the MHP as high as possible. Depreciation on the park is much shorter since much of the value is in the improvements (roads, utilities, fences, etc.) many of which can be depreciated over 15 years.
- Having a low POH basis would subject you to short term gains if you sell the homes prior to one year (even if you hold the mortgage, there will be gain but no or little cash) so that cuts the opposite way.
- Many taxing entities re-assess the MHP upon sale using the purchase price as FMV. You need to check what the process is during the due diligence period.
- Comparable sales and what a bank appraiser would do carry a lot of weight with me. The allocation needs to be reasonable for IRS depreciation purposes.
Those are the major considerations for me. I try to deal with that in the contract with a total purchase price and the ability to allocate prior to closing. In the end, it is somewhat of a balancing act that you feel comfortable with.
Howard
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Howard –
Thank you for the response. Very much appreciated.
On the corporate formalities issue, do you just sign the purchase agreement in your own name, and then assign it over to the LLC at closing?
We have a high level LLC which signs the contract, but there is no problem with the personal signature that I see. I would recommend that the contract have as the ultimate purchaser a “to be named LLC.”
Howard
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I can agree with hsschwar here. Using your own name is not very risky. If you are super risk adverse, you can certainly create an entity that goes under contract and then assign the contract at a later date. Don’t get wrapped up in the entity whirlwind though. That’s not your job. Your attorney and accountant went to school for years to be nerdy about those subjects so let them handle that nonsense. Your job is to evaluate and make a good investment. The fee they charge is a small price to pay for doing business.
As for your other questions, the banks, lawyers, and accountants you involve will advise you on those issues as well. If you’ve vetted your team properly, they will provide you much better answers than any of us possibly could. Investing in real estate always starts with a great lawyer and a great accountant. Having those two team members allows you to be great without getting bogged down with all of the crap that comes along with it.
Charles, Howard, thank you both.