Rental Property Investor · Enterprise, AL · Member since 2018 · 19 posts · 2 votes
I have an LLC that owns three rental properties. I also have my personal residence that I am house hacking. I bought it with a VA loan, have lived in it 18 months, and am planning to move in a few months. I cannot move my property into the LLC without risking a due on sale clause, and I cannot refinance into the LLC because I don't have enough equity to refi to a commercial loan yet.
I am wondering if my LLC can still "manage" the property - i.e. the leases are in the name of the LLC, the rents go to the LLC, and the expenses/mortgage are paid out of the LLC account. I realize that I do not gain liability protection by doing this, but it simplifies my finances and gives a good marketing front by using my LLC name.
Here are the only issues I see: 1. Since my LLC does not have a broker's license, does it gaining financial compensation in a real estate deal create legal issues? 2. Does using the money from the LLC account to pay a mortgage in my personal name create issues with mixing funds?
I would be open to any recommendations for me in this situations with regards to simplifying my accounts, gaining liability protections, and/or getting this property into my LLC without risking a Due on Sale.
You can transfer the title to a land trust where you would be the initial beneficiary. The Garn St Germain Act would protect you against a due on sale clause. Then you can quietly change the beneficial ownership to your LLC.
@Austin Montgomery, the loan servicer doesn't matter, they just collect the checks. Who actually owns the mortgage?
I guess I don't know who owns the loan at this point. I got the loan through USAA. I looked up to info on the Fannie Mae website, but they didn't own it. Do you know how I would find that info?
@Austin Montgomery Transferring the property into a trust, particularly an anonymous land trust within a Series LLC, would be a way to avoid the Due on Sale clause while also allowing you to utilize your LLC strictly for paying rents, contractors and doing business. You would need to keep your accounting clean and have the correct arms-length clauses to also use this structure as a way to mitigate litigation risks as well.
Even though obtaining loans through a trust or LLC is possible, it's difficult and it's much more costly than using your own name. Most underwriters just don't want to deal with it when it's a trust. Transferring though is a common practice.
Let's say you were the rarest of rare exceptions and somehow a Due on Sale was triggered, the remedy is just to transfer the ownership back into your name. The reason the Due on Sale is not triggered when you transfer it into a trust is that you are still the beneficial owner of the property through the trust as a trustee. In the case of anonymity there is a Nominee Trustee on the face of the deed, but it still never triggers.
The reason the Due on Sale is not triggered when you transfer it into a trust is that you are still the beneficial owner of the property through the trust as a trustee. In the case of anonymity there is a Nominee Trustee on the face of the deed, but it still never triggers.
Hope this helps :)
No exactly. You should be the initial beneficiary of the trust. The trustee does not matter.
The Garn St Germain Act applies to “an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.”
Because you are still the initial beneficiary, this protection from the Act will void any due on sale clause.
The assignment of beneficial interest to your LLC will be a private document that is not recorded. That what will put your LLC in play.
If at any time your lender wants to have proof that you are still the beneficiary, you can reassign the beneficiary to yourself in just the time it takes to print the form that you will sign yourself. Once satisfied, you can reassign the beneficiary to your LLC again in a minute.
The beauty of the Land Trust is that a change of beneficial interest is a private transaction with yourself that is not recorded anywhere. You may be want to keep one notarized in case later on you would need to prove it to a court.
Also, in some state you may have to report to your property appraiser when the ultimate beneficial ownership of the property changes more than 50% so they could bump up the assessed value. But if you are also the beneficial owner of the LLC, the assignment of beneficial interest of the Land Trust from yourself to the LLC is not a change of ultimate beneficial ownership of the property, so no recording with the county is needed also (except for the initial [special] warranty deed transfer to the Land Trust).
I believe Mike, we're saying the same thing here. Your assertion on the Garn St Germain Act is correct.
However, although no trustee is required to be named, users of anonymity trusts should anticipate objections from a future title company based on the proposition that a trust is not a legal entity—which it technically is not, even though trusts often act as if they are in fact legal entities. A trust is actually a contractual relationship, not an entity. Accordingly, one should be prepared to re-execute and re-record a deed which properly includes the name of the trustee.
In the case of anonymity, it is preferable to have a trustee as the public face as the trustee searchable and it provides an extra layer of protection. However, the existence of trustee does not change the beneficial ownership so long as the owner is named as the beneficiary of the trust. The beneficiary is not required to be named in a public recording. The private documentation of the beneficial interest in the Series LLC (which is the instrument to which I'm referring) is recorded as such. As far as reporting to the state, this also depends on if you are using a house of cards LLC system along with a Land Trust, in which you set up separate bank accounts and LLC's for each asset to be protected, or you are using a layered anonymous land trust combined with a Series LLC, and it depends on which of the 18 states you have chosen to do that in as only 18 states allow for a Series structure. I prefer Texas because of the business-friendly taxation and environment for owners in that State.
The truth is that a land trust on its own does not defeat due-on-sale because a land trust invariably contemplates a transfer of rights of occupancy—so due-on-sale provisions remain effective and enforceable. However, with careful planning, the due-on-sale clause is not triggered.
The truth is that a land trust on its own does not defeat due-on-sale because a land trust invariably contemplates a transfer of rights of occupancy—so due-on-sale provisions remain effective and enforceable.
I disagree with that last statement. If you are still the beneficiary, I don't believe that a right of occupancy has changed unless you add such a limiting clause in your land trust. And as such the protection of the Garn St Germain Act should apply.
@Mike S. That last bit was our response from one of our lawyers when I showed him my last reply to your post just to make sure that I wasn't missing something. It's very important to me to give the most factual and correct responses I can here on BP and so I often will ask my team if they have anything to add as well. He is very versed in this and has his advanced masters (L.LM in this field (Real Property Development).
@Mike S. That last bit was our response from one of our lawyers when I showed him my last reply to your post just to make sure that I wasn't missing something. It's very important to me to give the most factual and correct responses I can here on BP and so I often will ask my team if they have anything to add as well. He is very versed in this and has his advanced masters (L.LM in this field (Real Property Development).
I am not a lawyer and I am not playing one on TV, but what you wrote goes against what I learned from my study of the subject and what I understood from my conversation with my lawyer who set up my first land trusts. I'll be interested if you can develop more as I am now getting extremely confused.
The "Illinois type" land trust, to the contrary of most other trust, convey the legal AND equitable title to the trustee and transform the beneficiary ownership into a personal property. However, the beneficiary retains total control and duties of the property. So my understanding is if the beneficiary was the grantor, there is no change of right of occupancy, unless as I wrote earlier, that you decide to add such limitation in the land trust agreement itself.
The “Illinois type” land trusts will be recognized in all States, but Illinois was the first state to implement this kind of trust, so it kept its name.
Some state went even further like Florida that has specific state statutes on Land Trust that even add liability protection to the beneficiary.
Regarding your other question regarding having your LLC managing your property without a real estate license, many states have exemption to the licensure when managing your own property.
In the case of a single member LLC one could argue that as the sole member you could manage your properties.
If however you create a c Corp, that would be a different person and would probably need a license even if you are the sole shareholder.