Posted by Bill Gatten on November 17, 1998 at 12:15:24:
Thank you for the note. I feel favored. Along with Keno on Trusts, your book (Get that Property out of Your Name) is our ?Bible.?
With regard to the ?Due-on-Sale? issue (as innocuous a threat as it may be), we felt the way you apparently do at first as well; but after emerging victorious in hundreds of arguments and dozens of run-ins with lawyers, accountants and lenders on the issue, we?ve settled comfortably into our position. We have so far completed in excess of 1,000 of these transactions (mostly Ca. & Hawaii, but a few in other states), and have met with just about every adversary, obstacle, objection, rejection and nay-sayer you can imagine.
Of course, you are correct in stating that the Garn-St. Germain Act infers that a transfer [of title to a trustee in an inter vivos trust] that does not relate to a transfer of the rights of occupancy, may not be construed by a lender as a Due-on-Sale violation. However, in terms of whether or not a ?subsequent? transfer of occupancy rights has any affect on the DOS is wholly another issue. Obviously, any property held in a living trust can be leased out without a DOS violation (assuming, of course, that the lease is for no more than 3 years, and that it does not contain an Option to Purchase). Bill, the key here (in our opinion) appears to be whether the trust itself relates to a transfer of occupancy rights, or not? NOT whether the property is leased or rented out following the establishment of the trust.
Note that when a party wishes to effect a 3rd party land trust transfer utilizing, say, the PACTrust (our name for the documentation process), here?s all we (or they) do: 1) First, we set up the trust, which is a document involving only the owner of the property and his/her trustee (no one else). 2) Next, after the trust is executed and the title is vested in the trustee, a co-beneficiary (or from 1 to 9 other beneficiaries) is appointed. Note, at this point, that neither the Trust itself, nor the Beneficiary Agreement relate to a transfer of occupancy rights. 3) Finally comes the decision to (perhaps) allow one of the beneficiaries to live in the property under a Lease with the Trust (this lease document is, of course, only between the tenant and the property owner, the trust, as directed by its beneficiaries).
Now? Which step violated the due-on-sale clause? 1) Creating a trust? 2) Leasing the property out? 3) Naming someone as a co-beneficiary (or remainderman, remainder agent, successor trustee, etc.)? And bear in mind that whether a rental rentals tenant claims (rightly or wrongly) that his/her rent is tax deductible has nothing to do with the mortgage lender. Likewise, as we point out in all our DRE training, books, courses, etc.: whether or not the trust?s beneficiaries agree to share the proceeds, or relinquish them to the other beneficiary, in a future sale of the property (say, 4-5 years down the road), has nothing to do with the lender either.
The key word here is ?buyer.? In the system we work with, there is no ?buyer? until the trust terminates and the property is sold (e.g., for FMV to anyone who wants it? should the tenant want it, he/she pays FMV too, minus, of course, any equity promised to him/her by the other beneficiary). The appointed co-beneficiary holding a personal (not real) property beneficiary interest in the trust, is merely a tenant in the property under a lease agreement (albeit, with essentially the same benefits that a ?buyer? might have) and remains so throughout the term of the agreement. A purchase of the property doesn?t take place until the scheduled termination of trust (4-5 years later).
After all, don?t thousands of people put their rental-income properties into inter vivos trusts (family trusts, land trusts, etc.) every day and transfer occupancy rights to their tenants? If I hold my single-family rental properties in separate land trusts,and give occupancy rights to my lessee’s, have I somehow violated the Due-on-Sale Clause? If I chose to make any one of my tenants a co-beneficiary in one of my land trusts, have I violated the Due-on-Sale clause?
THE KEY: 12 U.S.C. Code 1701(j)(8): “a transfer into an inter vivos trust in which the borrower is and remains [a] beneficiary and which [trust itself] does not relate to a transfer of rights of occupancy in the property”