Maricopa County Sheriff Joe Arpaio and his wife formed an Arizona limited liability company in December of 2010 called “Ava Investments, LLC.”  In June of 2011 they transferred eight parcels of land into Ava Investments, LLC.

Apparently Joe and Ava were not concerned about confidentiality because their home address is listed in the Articles of Organization and on the Arizona Corporation Commission’s website as well as their names.  I can’t fault Sheriff Joe, however because he didn’t have a chance to read my article called “The Confidential LLC – How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s)” because the article was written after the Arpaios formed Ava Investments, LLC.

Lesson 1:  If you want to keep your ownership of an Arizona limited liability company confidential and not on public display, do not be a member or manager of an Arizona LLC or use your home address for any purpose in the LLC’s Articles of Organization.

Apparently the purpose of Ava Investments, LLC, is to hold the Arpaio’s investment real estate.  I searched the Maricopa County Recorder’s website for Ava Investments, LLC, and found the following deeds:

  • June 6, 2011, Special Warranty Deed recorded on June 14, 2011, was signed by Joe and Ava as grantors conveying two parcels of land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investments Corporation, not Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio who acknowledged that she was “duly sworn on oath . . . that the foregoing statement is a true and correct of the facts pertaining to the transfer of the above described property.”  These two parcels are located at 10635 & 10637 North 71st Place, Scottsdale, Arizona.  Problems:  The price listed is $75,00, but the deed transferred two parcels.  What is the price of each parcel?  Is $75,000 the total price?  Who was the seller?  The deed was signed by the Arpaios, not Ava Investment Corporation.  The Affidavit of Value states that the seller was the corporation.  If the property is/was owned by the corporation then the deed signed by the Arpaios did not transfer the title to the LLC.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10614 North 71st Place, Scottsdale, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10610 North 71st Place, Scottsdale, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 16733 East Palisades Blvd., Fountain Hills, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10632 North 71st Place, Scottsdale, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is a single family residence and used for commercial or industrial use.”  Note:  The Affidavit says to check only one box to indicate the type of property, but two boxes were checked.  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 16743 East Palisades Blvd., Fountain Hills, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10630 North 71st Place, Scottsdale, Arizona.

Lesson 2:  Diversity – do not put all of your eggs or assets in one basket.  We all know what happens when you drop your basket, you lose all of your eggs or real estate if you have all of your real estate eggs in one basket.  The Arpaios have 8 parcels of real property in one LLC.  If somebody gets killed or injured on one property and there is a large lawsuit against the LLC, all the properties could be lost.  For maximum asset protection, put each parcel of real estate in a separate LLC so in the worst case scenario, you only lose the equity you have in that one LLC.  Do not put multiple parcels of valuable real estate in the same limited liability company because you could lose everything if something goes wrong with one of the properties.  For more on this topic see my article called “How Many LLCs Should I Form for My Properties?“

The paper trail raises some interesting issues that everybody who transfers land into an LLC should consider before making the transfer.

Lesson 3.  Always Consider Income Tax Consequences When Transferring Property.  The total purchase price of all the properties stated on the Affidavits of Value is $995,000.  The Affidavits of Value indicate that all the transfers involved an exchange or trade to satisfy the purchase price.  Therefore the newly formed Ava Investments, LLC, must have been funded with property valued at $995,000 that was used to exchange or trade with the sellers of the properties.  Did the Arpaios fund their LLC with a loan of property or make capital contributions of property valued at $995,000.  If the latter, the LLC’s basis in the property would be a carry over basis.  Would the exchange / trade be a taxable transaction?  Income tax law (Internal Revenue Code Section 1031) does provide for tax-free exchanges of real estate for real estate, but not real estate for personal property or money.  It is possible that one or more of the transactions could have created taxable events for buyer and seller.  Hopefully the Arpaio’s consulted with an experienced tax advisor before they consummated the transfers and taken steps to eliminate or mimimize any adverse income tax consequences.

Lesson 4.  Document & Track the Tax Basis of the Property Going into the LLC.  The LLC should document the income tax basis of property it acquires so it can deduct the basis from any amount realized on a later sale of the property.  If the LLC buys the property from the seller for its fair market value then the tax basis of the purchased property is the amount paid to acquire the property.  If the property is contributed to the LLC by a member, the LLC takes the same tax basis in the property that the member had in the property.

Lesson 5.  Document the Affect the Contribution of the Property to an LLC Has with respect to the Contributing Member’s Capital Account.  This is especially important when the LLC is a multi-member LLC other than a two member husband and wife LLC.  If a member contributes money or property to a multi-member LLC, the member’s capital account should be increased by the amount of money contributed or the value of the property contributed.  This is an important concept for multi-member LLCs.  Documenting or failing to document the value of members’ contributions added or not added to a their capital account has real economic consequences to the all the members.  All of the members should sign a document in which they agree to the value of contributed property and the amount that will be added to the contributing member’s capital account.  Think of a member’s capital account as similar to a bank account.  If you contribute real estate to a multi-member LLC that has $50,000 of equity, you want your capital account to increase by $50,000 because for every dollar that does not get credited to your capital account you will lose $1 or real money at some time in the future.

Lesson 6.  How Do You Determine Property Values?  It is unusual for two parcels of real estate to have the same value.  The purchase price of two of the parcels was $60,000, three parcels were priced at $75,000 and two were $325,000.  What a co-inky-dink!  How did the Arpaios determine the values of the properties?

See “Sheriff Joe Arpaio and His Fiesta Bowl Freebie.”