Purchasing The Membership Interests Of A Single Purpose Entity

Douglas L. Burgess, Esq.

Background

• Maryland transfer/recordation tax generally not imposed on transfer of membership interests of LLCs
• Ownership of property owned by an LLC can be acquired by "Assignment of Membership Interests" in lieu of "Deed."

Representing the Seller

• Do a Cost-Benefit Analysis
  • Rule of Thumb - Professional Fees and Risk exceeds Benefit for deals less than $500,000.00
• Watch the Traps ... or when not to propose membership sale:
  • 1031 Exchange Contemplated and Multi-Member Entity
  • Seller is not Single Purpose Entity and/or not a pure Holding Company
  • Outstanding Judgments or Environmental Issues
  • Individual members do not want to stand behind deal
• Give yourself an "Out"
  • Draft contract as standard deal but add provision to allow membership sale if all parties consent and no more warranty obligations are assumed than if deed transfer occurred.
• Record Keeping - Assist the Seller in getting its Minute Book, P/L and Rent Rolls, Tax Returns in order as they will be scrutinized.   Get a confidentiality agreement or provision in contract prior to divulging.

Representing the Buyer

• Do the same Cost-Benefit Analysis as above
  • Fees are hourly; range from $2,500 to $15,000.
• The "Out"
  • Contract for option to obtain membership interest but not obligation.
  • Attach proposed form of Assignment of Membership Interest (including Affidavit and Indemnity) and attach it to theContract as an Exhibit so there is no argument later
• The "Traps"
  • See above under "Seller"
  • Failure to provide in agreement for tax accounting cooperation   including IRC 754 election (step up in basis) and   new tax year election on date of settlement
  • Failure to provide for seller member warranty and indemnity for any inchoate liens or issues that arise post closing; Assignment should provide for this; similar to scope of special warranty in deed  

Due Diligence/Clean Up

• Title search and Judgment search
• Title binder w/non imputation endorsement
• Ask Lender to "OK" structure of deal up front
• Apply for new tax ID # + address + 754 election   from IRS; change the SDAT mailing address so you get notices
• Confirm deal structure will allow investment expense (mortgage interest) will be a deduction against investment income (triple net lease income); can be an issue in actively managed properties such as shopping centers unless structured correctly; can be handled by the proper tax accounting team if identified early in the deal
• Send out letters to IRS, Comptroller and Division of Labor to determine if Seller entity has open issues
• Review Minute Book, P/L, Rent Rolls, FFE List, Vendor List and Three Years Tax returns

Respectfully submitted,
Douglas L. Burgess, Esq.
502 Washington Avenue
Suite 700, Nottingham Centre
Towson, MD   21204
410-823-7800   x7857
dburgess@nolanplumhoff.com

Copyright (c) 2005 by Douglas L. Burgess., Esq,   All Rights Reserved.   This is intended to be a guide and not legal or tax advice. You should seek professional advice about your particular transaction.

Mr. Burgess is an attorney at Nolan, Plumhoff & Williams, Chtd. a general practice law firm in Towson, Md. with a concentration in real estate and business transactions.   He can be reached at 502 Washington Avenue, Suite 700, Towson, Maryland 21204      (410)-823-7800, x 7857;   dburgess@nolanplumhoff.com.

Permission to reproduce this document is granted for non-commercial educational use only and provided attribution is given to the author.