Legal Corner Q & A

Could LLCs Work For You?

by Various Authors

Q. Should I hold all my properties under separate Limited Liability Companies (LLC)?

A. It may not be a bad idea, depending on the type of properties that you own and the nature of the risks that you may be exposed to. Holding each property in a separate LLC should limit your personal exposure to any losses attributable to that property. As a rule, any creditor holding a debt or judgment against one of your LLCs could not seek to levy or place a lien against your personal assets or against any assets held by any of your other LLCs. In fact, some lenders—particularly HUD-backed lenders—will require that a property must be acquired by or transferred to a single-asset LLC in order to limit exposure to risks arising from other properties.

Certainly, to establish or administer LLCs is not difficult, time-consuming or expensive, although the process will complicate your tax reporting somewhat. Generally speaking, all tax attributes (for example ordinary income, capital gains and deductions) will be passed through to you and reported on your own tax returns, without any separate tax bite. However, in order to preserve the separate identity of the LLC, and thereby to prevent any creditor from piercing the corporate veil, you must observe the formalities and assure that there is no merging of your own business activities with the activities conducted by the LLC. For example, the LLC should be both the borrower in a mortgage agreement and the insured under the insurance policy.

Of course, most risks may be covered by insurance. Consequently, in an individual case, the added complexity of separate LLCs may not be worth the trouble. However, most lawsuits include claims that may not be covered by insurance, like claims for injunctive relief, breach of contract and tort punitive damages. Insurance companies are aggressive in denying coverage for such causes of action even though other causes of action in the same lawsuit would fall under the insurance coverage.

Particularly in San Francisco, evictions often generate wrongful eviction claims. The typical wrongful eviction lawsuit includes claims that are covered and not covered. If you are contemplating an investment that will entail evictions, under the Ellis Act for example, you might be prudent to contain the risk within an LLC. Recent LLC-backed Ellis Act/TIC ventures have generated lawsuits and local headlines. On the other hand, if you intend to evict based on the ground of owner-occupancy, you may not own the property through an LLC. The LLC, as a separate entity, may not owner-occupy.
– Michael C. Hall

Q. If a tenant does not remove her combustible items stored in her parking space within a reasonable period of time, what legal recourse does the landlord have?

A. The landlord’s recourse depends on what the rental agreement states. A good residential lease, such as the 2004 PPMA Residential Tenancy Agreement, specifically mandates that nothing may be stored in the parking areas other than the tenant’s car: “Absolutely NO automotive cleaning, washing, maintenance or repair work of any kind and NO storage of any kind shall be permitted in or about the parking space(s).”

If your rental agreement is not clear about storage, you may change the terms of the tenancy by serving a 30-Day Notice to Change the Terms of Tenancy under the Civil Code. This legal notice should clearly inform the tenant in writing that, effective 30 days after it is served, the landlord-tenant relationship will be changed to prohibit the storage of combustible materials in the parking space. If the objectionable items are not removed after the 30-day period expires, then you may serve a Three-Day Notice to Perform Conditions or Quit, which is an eviction notice that gives the tenant three days to remove the dangerous items or to surrender possession of the rental unit. If the tenant does neither, then an eviction action can be filed with the court. Please note that a change in terms of tenancy often prompts the tenant to seek a rent reduction at the Rent Board. In this instance, however, the Rent Board may be hard pressed to order a rent reduction when the implemented change is done for the health and safety of all tenants in the building.

If the storage of the combustible materials poses a fire risk, the landlord may also call the Fire Department and/or the Department of Building Inspection and have the tenant cited for an illegal use of the rental premises. The city will, if the use is in fact unlawful, issue an abatement order that requires the owner to remove the offending materials. At this juncture, the owner can immediately serve an illegal-use notice on the tenant. This notice gives the tenant three days to remove the stored items or face eviction.

Owners must always ensure that the parking and storage areas are used correctly. There should be proper ventilation and required fire, life and safety mechanisms in place at all times. Make sure the lease agreement allows you the flexibility to enforce rules that are necessary to protect the safety of all residents in the building. Last, do not hesitate to contact an attorney if you believe that a tenant is using the unit or any part of the building in an improper or unsafe manner.
– David Wasserman

Q. Can a landlord apply for a capital improvement passthrough for replacing old carpet in a tenant’s unit?

A. Yes, a landlord can apply to the San Francisco Rent Board for a capital improvement passthrough for replacing old carpet in a tenant’s unit. Section 37.7 of the Rent Ordinance specifically addresses this issue. The entire amount of the cost of the carpeting is passed through to the tenants and amortized over a ten-year time period. However, rent increases under Section 37.7(c)(3) are not to exceed, in a 12-month period, a total of 10 percent of the tenant’s base rent or $30, whichever is greater.

Landlords who seek to pass through the costs of new carpeting must file an application on a Rent Board-prescribed form. The application is accompanied by supporting materials and submitted to the board with a filing fee. The application, of course, precedes any rent increase based on the capital improvement costs. The Rent Board first schedules a hearing before an administrative law judge, in which the landlord and the tenant have the right to submit evidence in support of or against the passthrough increase. The hearing is held within 45 days of the filing of the application. The burden of proof is on the landlord.

In the real world, a landlord would probably not submit to this tedious procedure unless he or she had other more expensive items to try and pass through and, at the same time, had a lot of free time and a tenant who would unlikely move out as a result of a small passthrough rent increase.
– Gregory E. Ebstein

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Michael C. Hall can be reached at 415-512-9865. David Wasserman is with Wasserman-Taxman, 415-567-9600. Gregory Ebstein is with Colombatto, Klimenko & Rosse, 415-391-6182. Copyright © 2004 by the San Francisco Apartment Magazine. All rights reserved.