Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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March | April | 2016 Commercial Investment Real Estate L EG AL BRIE F S • is allowed to choose its own entity classi- f cation independent of other series; and • should only be liable for federal income taxes related to that series. T e proposed regulations do not address entity status for federal taxes or whether each series should obtain a separate employer identif cation number and f le a separate federal tax return. T e Treasury Department is expected to release of cial regulations, but as of January, no f nal regu- lations have been issued. Real Estate Applications By utilizing series LLCs, real estate owners can achieve a more streamlined, ef cient process for asset protection. A real estate developer, for example, can choose to orga- nize one traditional LLC, and then create separate, protected series for each parcel of real property with the liability of each series limited to the real property and other assets held by that series only. T e debts and liabilities of one series cannot spill over and be enforced against a dif erent series so long as certain statutory conditions are met at formation. Essentially, if each series keeps separate records and bank accounts and is treated as its own entity, the assets of each series will be unaf ected by judgments against other series. With this structure, real estate owners will also realize lower state business f ling fees. In Illinois, for example, where busi- ness f ling fees are higher than most states, the cost to form a standard LLC is $500. While series LLC f ling fees involve a higher upfront cost of $750, there is only a nomi- nal registration fee to form each additional series by f ling a certif cate of designation for $50 and amending the master LLC oper- ating agreement. Savings may also be rec- ognized in the form of reduced legal costs associated with the formation of a series LLC if only a single operating agreement is required. Risks While the series LLC may be an attractive investment vehicle, it does not come without risks. A number of legal and tax implica- tions have never been litigated and there is 18 Generally, in the states that recognize them, series LLCs are segregated entities that have separate managers and members, dis- tinct assets, and individual operating agree- ments. T ey also incur separate liabilities. However, those states also consider them a single entity for organizational f ling and reporting purposes. T e IRS has not issued of cial federal tax regulations governing series LLCs. However, it has issued proposed regulations (Prop. Treas. Regs. Secs. 301.6011-6; 301.6071-2; and 301.7701.7701-1(a)(5)), which provide that each series within a series LLC • will be treated as a separate entity for federal income purposes; a Series LLCs Utilizing this structure partitions risk . A series limited liability company is an entity structure that allows for the formation of multiple segregated LLCs, known as "series," under the umbrella of a single "master" or traditional LLC. In 1996, Delaware became the fi rst state to enact a series LLC statute. Since then, a handful of states have amended their LLC statutes to allow for the formation of series LLCs. by Jeffrey M. Friedman an elly M. Greco MirageC/Getty Images