Q: I’m one of ten middle-aged kids in a family. We inherited three residential properties in Seattle this year. The properties are in a limited liability company. All of us now own a part of the company.
We’re facing a lot of decisions as to what to do with the properties. One of them is our old family home, but all of the properties are currently rented. My brothers are handling management and maintenance.
At first I wanted to keep the properties, but now I’m having second thoughts. Since the rental income from the houses gets divided ten ways, it doesn’t amount to much each year. The real question is do I want to be in the rental business with all my siblings for that amount?
We’re all approaching retirement age and all I can think about is who will care for the properties? Will it be a management company? How will decisions be made if we keep the houses? And, why keep them at all? Why not sell and invest or use the money on our own while we’re at an age with kids in college, we can still travel and get around easily.
We will be meeting soon to discuss the options and what each sibling wants to do. I’m afraid this is going to be a logistical nightmare. We all get along well now, but I’m concerned there are going to be major differences of opinion and don’t want this to break up the family!
Can you steer me in a direction where I might become informed on this specific topic so that I can make a good decision?
A: The best property owner is the best informed property owner. While some of your siblings are managing the properties, it would be wise for all of you to know exactly what each property is worth.
You can hire one or more real estate agents to give you a comparative market analysis to determine the value of the properties. If you decide to sell the properties, one of these brokers will be delighted to sell the properties for you.
But if you don’t know what the properties are worth, you can’t make an informed decision. For example, individually, the properties might be worth $1 million. But, if the properties are all next to each other, and the area has become a haven for fancy condo buildings, the value of the land may be worth much more.
The properties are held in a limited liability company. The operating agreement of the company should have provisions for the payment of fees to the manager of the company as well as the division of earnings from the rental of the homes.
You need to have a good understanding as to the workings of the company to determine how your parents set up the LLC and how decisions should or needed to be made. Decisions may have been left to one or more managers or by majority vote of all of the members of the company. I’m pretty sure the documents for the LLC provided for what to do if a conflict arises between you and your siblings.
But before anyone needs to “strong arm” a sibling, consider the possibility that you might be able to sell your share to someone else.
If some of the family members want to keep all of the properties, some members want only one or two and others want none of them, the company structure may allow all of you to refinance some or all of the properties, take cash out and pay off the siblings that want to have nothing to do with the properties.
The payout could be handled on the basis of the real estate agent’s comparative market analysis and everybody’s agreement as to the value of each property.
Upon refinancing the properties, those that want out get paid their share of what would be the proceeds from the sale of each of the homes. Keep in mind that if a home is worth $500,000, the party that wants out would not get $50,000, but rather $50,000 less a share of the broker’s commission and other closing costs that would have occurred had the sale actually occurred.
That would take care of the siblings that want out totally. As for the siblings that want out in part, the same process could occur as if they wanted to be out totally except that their interest in the company would be diluted by the amount of their payment.
In other words if all of you are equal owners and the properties are all of equal value, if one sibling wants two of the properties sold and gets paid for those two, his interest would be reduced by approximately two-thirds. By setting up this mechanism, you all should be able to get what you want.
As you’ve probably guessed by now, the process of cashing out is simpler said than done. If you can’t refinance the properties, you will have to collectively decide how to handle the situation.
The sale of one property may satisfy the financial needs of some or all of the siblings that want money now. Obviously, with ten competing interests nothing is easy, but with some conversations you should be able to work it out.
While an attorney that deals in corporate and company issues might help, you might want to see how everybody feels about these issues first. Keep in mind that an attorney that could come in to advise you all as to the various options could be beneficial.
The risk is that some battles might brew as a result of having an attorney in the equation. Ten people in a business can raise ten different issues.
Add ten – or an exponential – number of family issues on top of that and you could find yourselves in a real mess. Good luck.