Popularity skyrocketed in 1988 when the Internal Revenue Service ruled that they could be taxed like partnerships, meaning that owners would not be double-taxed, as corporations are, for both corporate and personal income.
Nationally, the rise of LLCs has helped enable "property milking" by landlords who no longer have to worry about personal reputation or lawsuits but can treat a rental home as a stream of cash, said Adam Travis, a Harvard University sociology doctoral student who published a paper on the subject in the American Sociological Review.
"A different kind of logic takes over, where you're extracting as much from the property as possible while putting as little as possible into it," Travis said.
Landlords were drawn by the limited liability, which prevents lawsuits against owners' other assets, as landlords were increasingly sued over conditions on their property, Travis said. LLCs came to be seen as a "firewall" to protect landlords from personal lawsuits.
According to U.S. Census Bureau figures cited by Travis, the proportion of rental properties owned by unincorporated individual landlords has declined from more than 90% in 1991 to around 75% in 2015, as LLCs became more popular. About 15% of rental properties are now owned by LLCs.
Travis studied building complaints in Milwaukee and found an association between conversion to LLC ownership and disrepair serious enough to generate complaints to the city. He compared the city's property database of more than 134,000 rental units with owner information by year to more than 2,000 complaints reported to the city's Neighborhood Services System between 2000 and 2015.
He said Newburgh and the Hudson Valley of New York are less subject to such abuse because prices are going up, so investors have more incentive to protect their investments and plan for a profitable resale. Many Newburgh residents said the city is on the upswing despite some remaining blight.
"You've got these people moving in who really care about the neighborhood and the conditions, but it's tough when you've got this degradation next door," said Ali Muhammad, a 31-year-old community activist and former Democratic Beacon City Council member who moved here several years ago and is running for mayor against Torrance Harvey.
New Haven has a law requiring landlords to provide owner contact information, but it hasn't been enforced, and the city would like the state to enact a law similar to New York's, said Frank D'Amore, the city's deputy director of neighborhood and property services.
"There's a mandate that you name a member or owner of the LLC, but sometimes the member is another LLC and it goes on and on, it's like this web of LLCs," D'Amore said. The city recently held a public hearing about a concentration of anonymous landlords in the affordable housing market.
Property milking may be behind a wave of LLC ownership in another Hudson Valley town, Ramapo, according to a retired emergency services chief, Gordon Wren, who testified in the state investigation.
"What these slumlords do is they have a different LLC for every property, then they rent a house to one person for $5,000 or $6,000 a month, and that person then breaks it up into illegal sleeping areas and charges $600 a month," Wren told Stateline. "Nobody knows who the owner is or how to get something repaired."
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