Expert: Mike Fortunato - 2/9/2011

Question
Hello,

I currently own two 2-family houses with a partner, as an LLC.  We bought these eight years ago as investment properties with the agreement that we would contribute equal amounts of capital and labor. Early on we did considerable rehabilitation of these houses together, but in the last 3 years my partner has essentially shirked her responsibility toward these properties.  I've carried all responsibility for management of them, and now I want to get her out of the picture by buying her out.

I am wanting to refinance to get better rates, and extract some  equity to buy her out.  My plan has been for us to refinance with the LLC intact for now, and when we have a refinance package ready to go, revise the LLC to reflect buyout and my taking the properties over myself.

An attorney advising her told me she has requested I be the only party on the refinance application documents, that she doesn't want her name on these documents.  This in spite of the fact that we'll take title as an LLC, not as ourselves, just as we hold the properties now.  

I think not including her now on the refinance documents is a liability in terms of getting the best rates, or even a refinance package at all.

Would a lender not be as likely to lend if they are only considering my financial picture rather than ours together?  Obviously if they ask for all our financial documents they want to know who they're lending to, even though the LLC takes title.

I don't feel there's any liability to her if we act together for the refinance, then revise the LLC.

What do you think?

Thanks,
Peter

Answer
Quite frankly, I see her point. If she's planning on an exit strategy where you will buy her out, then there's little incentive for her to remain as a responsible party on the loan. True -- the LLC will be the borrower, but you (and her) would be the guarantors. And once she's on that note, there's little chance the lender would release her even if you buy her out of the LLC. So, although I understand your predicament, I doubt you'll be able to come up with a good enough argument to change her position. Depending on the strength of your credit, the loan-to-value ratio of the properties, and other factors, you may be able to get the same loan rates without her involvement. If not, then you may have to pay the premium to get rid of her, or maybe get someone else involved in the investment.