Financing property held in an LLC or trust

Many families hold real estate in a limited liability company or a trust rather than in their own names. The reasons are usually sound, from liability separation to estate planning. The structure matters when it is time to borrow. Lenders underwrite the property, but they also underwrite the borrower, and an entity or trust adds questions a personal loan never raises. Knowing those questions in advance keeps a financing from stalling late in the process.

Why ownership structure matters to a lender

A lender wants to know three things about any borrower. Who has the legal power to sign. Who stands behind the loan if something goes wrong. Whether the borrower can be enforced against cleanly if it comes to that. When the owner is an individual, the answers are simple. When the owner is an entity or a trust, the lender has to confirm them through documents.

Expect the lender and its counsel to review the formation and governing documents in detail. Gaps in those documents are a common reason closings slip.

Borrowing through an LLC

Most commercial and investment lenders prefer to lend to an entity. Many require it. Typical requests include:

• Articles of organization and a current certificate of good standing
• The operating agreement, with any amendments
• A resolution or consent authorizing the loan and naming who may sign
• An ownership chart showing every member, and every owner behind any member that is itself an entity

Some lenders, especially for larger loans, require a single purpose entity. That means the LLC owns only the financed property and agrees to limits on other activity. If several properties sit in one LLC today, a lender may ask that the financed property be moved into its own entity first. That step takes time and has its own transfer, tax, and title questions, so it is worth raising early.

Guarantees still apply

An LLC borrower does not remove personal exposure. Lenders usually ask one or more owners to sign a guarantee. On a recourse loan it may cover the full balance. On a non recourse loan it typically covers carve outs such as fraud, unauthorized transfers, and environmental issues. The lender will review the guarantor's personal financial statement and liquidity, not just the property.

Borrowing when a trust holds title

Trusts raise different questions. A trust is not an entity in the same sense as an LLC. The trustee acts for it, and the trust document defines what the trustee may do.

Lenders will generally want to see:

• The trust agreement, or a certification of trust where state law permits one
• Confirmation that the trustee has the power to borrow and to pledge real estate
• The identity of the current trustee and any successor trustee
• Who the guarantor will be, since a trust may not have assets or income the lender can rely on by itself

Revocable trusts are generally familiar to residential and small balance lenders. Irrevocable trusts can take longer, because the lender may need comfort that the borrowing is consistent with the trust terms and that the right person is signing. Some lenders will not lend to certain trust structures at all. Others prefer that the trust own an LLC, which then owns the property and borrows.

Steps that make the process smoother

Preparation helps:

• Collect the documents first. Have formation documents, amendments, and trust certifications organized before you approach lenders.
• Confirm signing authority. Make sure the people expected to sign actually have that power under the current documents.
• Decide on guarantors early. Know who is willing to guarantee and what financial information they can provide.
• Bring in your CPA and attorney. Changes to title or structure can have tax, estate, and liability consequences that should be reviewed before anything moves.
• Match the lender to the structure. Not every lender is comfortable with every arrangement. Asking the question at the start avoids a late surprise.

Bringing it together

The way a family owns its real estate should serve its long term goals, and financing should fit that structure rather than force a rushed change at closing. If you are planning to borrow against property held in an LLC or a trust, our capital readiness tool is a useful place to start organizing what lenders will ask for. When you are ready to talk through a specific situation, contact us.

Thomas Capital Holdings does not provide tax or legal advice. Consult your CPA and attorney about your situation.