3-Tier Cash Flow Model: Holding, RE and PM Companies

[Nir]

Hi,
I recently learned about a RE structure that I wanted to share here and ask what you think.

It`s called a Three-Tier Cash Flow Model and it includes:

1. Holding Company - owns both PM and RE companies below. created to separate cash holdings from ownership and management of properties.
2. Property Management Company - separates the managements function from ownership.
3. RE Company - owns the properties and allows separation of ownership and management. Also it allows for co-ownership with third parties.

A second opinion I got is that at least initially a PM company is not required ("too sophisticated") and the holding company can collect management fees from JVs. In case of JVs the holding company will be the one holding say 50% of the property purchased with a partner (whether the property purchased is under a corporation or just under the name of other person/partner). Therefore, the feedback I got is that for the purpose of getting into JVs, a holding company should definitely be created in addition to any corporation you already have owning your own properties.
(however, whether or not a PM company should be created, is more questionable as mentioned)

I`m sure some of you already operate somewhat similar to the above model. Any feedback or improvement suggestion would be highly appreciated.

Regards,
Neil

 

[Thomas Beyer]

yes, your structure makes sense - after a certain size is reached, i.e. separate each JV .. and separate a PM company once it is large enough !



A holding corp is a company you own 100% and that is used to flow fees and/or equity into .. and then money out via dividends ..



Keep in mind

a) annual filing and accounting costs of $2000-$3000 per company .. so it makes sense only given a certain size .. not usually for a house or 3 .. but maybe 6 and beyond !

b) personal guarantees by you and/or 2 add'l companies that banks may require !



Hence a personal JV or 3 at the beginning might be easiest from a mortgaging point of view .. and to keep annual costs low !



Related post on Pro`s and Con`s of creating a company for real estate holding:

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10292-54272-To_create_a_company_or_not.html#54272

 

[Nir]

Thank you Thomas.

You raised some good points. However, doesn`t it complicate things when one starts with a simple structure at the beginning (to save money as you mentioned) and then when business is growing start changing the structure?

In other words, isn`t it better to be proactive and do it right from the start thinking long term, or are you saying it is not that expensive to move properties from one company to another later when business is growing?

Regards,
Neil

 

[DanieLL]

So is anybody else with larger PM operations is following this 3-Tier approach?

My accountant suggested this strategy the other day, given my participation in other restoration businesses.