Piercing the Veil in Real Estate

[Oshow740]

Jurisdiction

Texas

So here's an interesting question. When someone sets up a Development or Property Group, they often set up subsidiaries for each property or sets of properties for liability protection but my curiosity is how that protection could be pierced and make the parent company liable.

Example:

Parent: XYZ Real Estate Group, LLC

Rental Property One, LLC

Rental Property Two, LLC

Wholly owned boutique hotel, LLC

So obviously, these subsidiaries would all have separate bank accounts, transact with tenants & vendors in their name, etc.

But what about commonality in employees? Let's say XYZ Real Estate Group, LLC employs an accountant who does the books for ALL the rental properties (subsidiaries) and a head of marketing who collaborates with leasing agents and does the branding for ALL of them as well.

What if the XYZ Real Estate Group, LLC did their own property management and paid the salary of a general manager of Rental Property One, LLC

I'd think that last one could be the murkiest. Would the salary of any general manager or front desk employee or staff at a property (let's say it's a wholly owned boutique hotel) have to be employed by the subsidiary LLC vs. the parent? Even if that was the case, what about a regional property manager who "manages" the other managers in more of a corporate capacity.

The theme here is do you pierce the veil if the parent company employs more senior level people who do the marketing, accounting, or property management supervision of subsidiary-paid staff across MULTIPLE properties.

It just would seem crazy to have to hire one marketing person or accountant for EACH property when one person could handle the work across multiple properties.

This question really pertains to the real estate groups who develop and own their own properties, so they're the ones who'd logically want to do the books, marketing, and management across all of them.

I appreciate any answers. Thanks!

 

[flyingron]

If you're involved in a civil suit where you're dealing with such interlocked LLCs, you'd best be advised to have an attorney. If the businesses are indeed not operated as separate entities even though on paper they are, that can be pierced. If a person is indistinguishable from the LLCs, that can be pierced as well.

Use of the same accountant or property manager doesn't necessarily mean anything.

Your question about the manager/front desk employee is garbled. Salaries are not "employed." Do you mean paid? The person PAYING the employee is the employer regardless of where they are sitting when they are working.

If you are the property owner in all this, I'd also get legal assistance. Whle a lot of the "make $100 in real estate" seminars tell you to make lots of LLCs, usually, that doesn't do anything useful.

 

[hrforme]

this was very much how the last property management company I worked for was setup.. Luckily we were not sued to the point of trying to pierce the corporate veil in the 12 1/2 years I was there as their HR Director for corporate and all LLCs. The CEO however was an attorney and had outside legal counsel help with the drawing up of each LLC. Even he knew better than to do it himself. We did keep separate books/payrolls/etc but there were times where the "controlled group" mattered and times where it did not, so I suspect it is going to be very very dependent on the details.

 

[zddoodah]

I didn't read through your whole post, but it sounds like you're either looking for a generalized discussion about the law for "piercing the corporate veil" or are asking us to come up with hypotheticals about how it might happen in a particular situation. That's well beyond the scope of an internet message board. The persons running these businesses should be conferring with legal counsel to ensure that they are appropriately protected and are complying with all applicable formalities.

 

[Oshow740]

If you're involved in a civil suit where you're dealing with such interlocked LLCs, you'd best be advised to have an attorney. If the businesses are indeed not operated as separate entities even though on paper they are, that can be pierced. If a person is indistinguishable from the LLCs, that can be pierced as well.

Use of the same accountant or property manager doesn't necessarily mean anything.

Your question about the manager/front desk employee is garbled. Salaries are not "employed." Do you mean paid? The person PAYING the employee is the employer regardless of where they are sitting when they are working.

If you are the property owner in all this, I'd also get legal assistance. Whle a lot of the "make $100 in real estate" seminars tell you to make lots of LLCs, usually, that doesn't do anything useful.

Thanks! This was purely hypothetical. I'm interested in property development and keeps tabs on the local scene. I often read about deals involving massive full-service real estate groups. Their business units seem so intertwined when you think about the cross-functional activity involved in any real estate deal, and I was just curious if anyone on here had a more concrete example of how they would structure themselves from a liability standpoint.

 

[Oshow740]

I didn't read through your whole post, but it sounds like you're either looking for a generalized discussion about the law for "piercing the corporate veil" or are asking us to come up with hypotheticals about how it might happen in a particular situation. That's well beyond the scope of an internet message board. The persons running these businesses should be conferring with legal counsel to ensure that they are appropriately protected and are complying with all applicable formalities.

This was just hypothetical. I just signed up for this forum. I was under the impression that that was the purpose of this site, to have generalized discussions or post questions that people with real legal knowledge could answer, using their own experiences in the space to back up their response. I just find the parent-subsidiary concept fascinating and wondered how it would apply to a Real Estate company. My bad if questions on here are meant to be more specific.

 

[Michael Wechsler]

No need to get upset. Your question is too general to answer. Piercing the corporate veil deals with specific facts. Simply because there are employees doing work for several companies doesn't mean that these individual property limited liability companies are employing them, e.g. the parent company might be billing the individual LLC properties for hourly work. In addition, there needs to be a reason for piercing the corporate veil. I haven't heard of the specific wrong for which there would be a need for this legal remedy.

 

[Oshow740]

No need to get upset. Your question is too general to answer. Piercing the corporate veil deals with specific facts. Simply because there are employees doing work for several companies doesn't mean that these individual property limited liability companies are employing them, e.g. the parent company might be billing the individual LLC properties for hourly work. In addition, there needs to be a reason for piercing the corporate veil. I haven't heard of the specific wrong for which there would be a need for this legal remedy.

Thanks Michael! Sometimes tone is hard to decipher on the internet. I really wasn't upset at all in my reply to the above responder, but it may have come off that way. Yes, this is all a hypotehtical question. The Parent-Subsidiary structure is used in many industries, but whenever I think about how it would be used in Real Estate, I run into some of the complications I posted above and wonder how you could ever insulate yourself. So my question was more regarding how groups structure their businesses. I thought there might be someone on here who had experience setting one up for a developer and could provide some insight. I might bounce around some real estate forums or just speak with people in the industry. I'm not pursuing any of these projects, I just have a general interest in the space, so wanted to build some knowledge and online literature hasn't really explained this aspect of the business.