More questions on land trusts for Mr. Butler - Posted by multitasker

import · June 8, 2010, 3:18pm

Posted by David Butler on June 29, 2010 at 23:37:38:

Hello Again multitasker,

There are a lot of variables presented in your question here. Unlike a simple trust (family or estate planning Settlor only trust), a lease-option will typically involve at least two sets of beneficiaries - the property owner (Settlor), and a Co-Beneficiary (who at some point would become a tenant of the trust property under a lease agreement). The use of a trust as an alternative to a lease-option, or similar risky financial models, necessitates a multiple-beneficiary trust.

Such a trust presents several more complicated issues in the mix as a result. In addition, it usually involves transactional consulting to some degree, at a minimum, depending on the objectives of the parties in relation to overall transaction, and the desired outcomes in relation to both the primary goals, and any secondary benefits related to estate planning, tax planning, or investment planning being integrated to the maximum extent possible. Other trust costs are related to various requirements in the individual states, and any consultation related to working with the title company, when necessary.

Obviously, these costs will vary by what is actually done, and who is providing what services. There are different services in the mix, different fees for different services, and generally, different providers for those services. These services may consist of:

transaction consulting services (elective);
document preparation services;
legal review services for validating sufficiency of trust;
clients independent legal and estate planning services when necessary
trustee services, which are a function of the trust documents and duties imposed on the trustee; which will vary for:
a) simple trusts;
b) multiple-beneficiary trusts, and
c) related ancillary services listed in a given trustee’s cafeteria-plan fee schedules.

In some cases, there are providers (usually attorneys) who offer overlapping services. Also, not all services are necessary for all transactions. So far as the trustee fees side of the equation, we rely on the comparisons of trustee fees and services as illustrated in the survey/schedule offered by David J. Lanciotti, Vice President & Trust Counsel, Chicago Title Land Trust Co., in his publication “Land Trust Administration” (2009), as a benchmark.

I can give some recent examples illustrating the disparities that may come into play.

Example 1# - alternative to lease-option

Professional working couple both had job transfers taking them to another state. A self-employed individual, obtained through a job related contact was looking to control a home for his personal residence. He liked their home. He liked it better once he learned there was a fixed-rate loan with $310k balance at 6%, with 27 years remaining. The challenge was structuring a trust transaction that would deliver the benefits of a lease-option, land contract, or wrap… without the substantial legal challenges in the mix. At the same time, both parties also wanted to avoid the equally risky challenge of inadvertently triggering the DOS clause in the existing loan. The trust was structured for permissible estate planning purposes. Based on the preliminary consultation, we anticipated trust set-up costs to be approximately $3,000. This cost included estimated time of approximately 14 hours consultation (and providing the knowledge necessary during that time), toward:

managing escrow and assuring proper title insurance - being put in place for transfer into trust,
assisting in preparing properly drafted documentation and legal review of same,
account set-up with trustee and cost related thereto;
assisting preparation of assignment of Co-Beneficiary interest and related Beneficiary Agreement between the parties,
subsequent attorney preparing lease agreement, and - coordinating second escrow through trustee.

Along the way, as is often the case in transactions, the parties neglected to give full information on factors that may effect the transaction. They also did some things between them that would cause problems on the other end. One example was the fact that the property was listed with a Realtor, and the listing included protection from property owner leasing the property to a third-party during the listing period?!! Another was that the property owner had to be moved out of state by the 15th of June… and the proposed tenant was already set to move in. They had home listed for $400k, on market three months, no offers. Because of time frame concerns, they negotiated with listing broker to cancel the listing and pay $3k commission for cancellation, in order to allow lease up of property. There were also a couple of other snafus that each of the principals made despite being advised not to, resulting in changes to paperwork and delays in completing necessary notices and escrow work. Additional costs included half escrow costs that would have occurred in sales transaction, 90% reduction in title costs. Additional costs include trustee fee of $142 per month, which includes collection of rents and making mortgage payments.

Outcome - Additional $400 in consultation charges ($3,400 total consulting fee with included costs outlined above). Reduced title costs, paying only $217 for required endorsement to trustee, as opposed to $2,017 in new policy charges. A $21,000 savings in real estate commissions in this instance. Subsequent lease generating full PITI on mortgage, plus $200 monthly rental income over five year life of trust.

Example #2 - simple Settlor-only trust for family estate planning

Real estate investor has nine LLC’s. Wants to buy future properties into trust primarily for anonymity, secondarily for additional ownership structure, operational, and estate planning advantages. He is in contract now for $300k tri-plex he wants to put into land trust. Settlor only beneficiary in trust. Holding property for rental income into LLC. Total estimated consultation cost $650. This cost included estimated time of approximately three hours consultation (and providing the knowledge necessary during that time), toward:

managing trust portion of escrow and assuring proper title insurance being put in place for transfer into trust,
assisting in preparing properly drafted documentation and legal review of same,
account set-up with trustee and cost related thereto;

Additional costs will include $12 monthly trustee fees, for just being the trustee and supporting the minimal recordkeeping necessary to maintain a valid trust from the trustee side.

Other costs that may or may not be the mix are driven by whatever state laws effecting real estate fees and taxes are, and variations in different states’ title company charges

Outcome - Investor will go into property title in complete anonymity, his primary objective in this instance. He has also put himself in a more flexible position to do some additional creative maneuvers in the future, for the purpose of taking advantage of what other structural, operational, estate planning, or investment planning objectives he may want to avail himself of at that time. Does the end justify the $650 he invested to put himself in this position, at this point in time? Only he can answer that.

As you can see, there are two widely different scenarios, and cost situations in play in the above two examples. Obviously, there is a huge variety of additional scenarios that could be in the mix in other examples.

But this should give you relative “birds-eye view” of what can be in play relative to the cost perspective.

Hope that helps.

David P. Butler
Nascent Equity &
Hotspur Investment Group

import · June 8, 2010, 3:18pm

More questions on land trusts for Mr. Butler - Posted by multitasker

Posted by multitasker on June 08, 2010 at 15:18:17:

Hello David,

I’ve read through your extensive previous discussions regarding the land trust model. It is a lot to absorb, no question about that! You have shared an amazing amount of time and insight in providing highly educational responses, and I personally want to thank you for that dedication. At the same time, I would like to ask you for more information!

I know you covered a lot of this ground in a response to Bob Smith in your reply to his post in the thread “Land Trust Questions For Mr. Butler”. But I’m not certain if you responded specifically to his question, "How do you use a land trust in place of a lease-option? My apologies if this is being redundant, but I would really like to get a handle on the deal-making part of this, so I am hopeful that you can give an example of what’s in the mix. Also, what kind of costs might factor in to a typical land trust scenario?

Finally, what might your role be in these transactions? Do you offer some kind of assistance in putting these transactions together, and if so, on what basis?

Thank you for your time.

import · June 9, 2010, 3:00pm

Re: Down & Dirty? - Posted by David Butler

Posted by David Butler on June 09, 2010 at 15:00:44:

Hello Multitasker,

Thank you for comments, and glad it helped. And you are correct. Though Bob presented some good questions, the nature of his inquiry was problematic in that it was couched in several presuppositions that had implications I felt more compelled to deal with, both for his sake, and for the sake of illumination for anyone else who happened to go into those several strings of the thread. So I’ll try to handle some specifics as best as I can here.

Q(1) How do you use a land trust in place of a lease-option?

A(1) To the first part… How you do it is very similar in many respects. There are two scenarios where both questions come into play. First, a seller who is looking for a way to get out from under his property, and is looking at some form of seller-financing technique as the possible solution. Here, the end-game can be one of working directly with a person who is looking for a place to live, and wants something more out of the deal at the end of the day. At the same time, the property owner is looking for more protections than a lease-option scenario can provide.

The second scenario is a possible solution to the first, though it also stands alone as an investor strategy in its own right - in the case where an investor likes to use the lease-option method as a form of taking control of the benefits of ownership, without actually purchasing the property.

The basics follow along these lines:

In each case, the structure involves first having the current property owner set-up his own title-holding land trust, whereby he becomes the Settlor, and the Trustee becomes the owner of both the legal and equitable title of the property (an important legal “fiction” by the way, that is not available for other trusts, nor ownership structures such as LLC’s, Corps., etc.).
Upon the completion of the above step, the Settlor then assigns a Co-Beneficiary interest to a third party investor.
After that step, the Trust then leases the property to the Co-Beneficiary, under an occupancy agreement,. or a possessory agreement, dependent upon whether the Co-Beneficiary is occupying the property as a personal residence, or subleasing the property to a fourth party as a pure function of generating rental income).

3a) A close variation, similar to flipping a lease-option contract, would be that where the Co-Beneficiary assigns a part of his beneficial interest to yet another Co-Beneficiary, who in turn leases the property from the Trust.

Why you might choose the land trust route is the more critical question. This goes to objectives of the deal, and the particular benefits sought. In either case, their will be some additional benefits that occur by natural consequence. Much of that ground is already covered in the several lengthy discussion threads we’ve had in play here since early March of this year. But a quick recap here:

Lease-options present risks to both property-owners, and the Optionee, with regard to bankruptcy, liens, and judgments. Correctly done land trusts can almost completely eliminate the potential risks, and significantly enhance the overall objectives of both parties in the process.
In the event of residential properties of less than five units, where existing financing is in play, and the loans include a DOS clause, a correctly done land trust provides significant protection against a possible call by the lender. Unfortunately, most folks don’t do them correctly enough. Nevertheless, the strategy is significantly more advantageous over every single other seller-financing option in the face
Operationally, the trust arrangement can present several advantages in managing the property over time, and more importantly in relation to default scenarios.
In a general sense, the title-holding trust presents significant advantages to investors in a tax planning, estate building and estate unwinding mode, only some of which are matched by other ownership structures. And in many cases, the THT mechanism will create a synergistic enhancement of the

For us, each decision is first based on what are the objectives, and the priority of each of these objectives in the given transaction, and how might they be best achieved, given the circumstances of the transaction. Then work from there. A critical part of the circumstances will also include various state property laws, which may or may not present challenges for or against, using the title-holding trust.

Q(2) What kind of costs might factor in to a typical land trust scenario?
A(2) Costs can include the costs of typical transactions such as title insurance (though generally at discounted rates), escrow costs when appropriate; property tax changes that may or may not be in play, depending on the state laws where the property is located (in some instances these costs may actually be lower, or at least deferred); and when necessary, monthly account servicing fees (these last are similar to the fees that would normally be in play with well-designed seller-financing models related to use of Sub2’s, wraps, land contracts, and lease-options). Additional costs in trust transactions include trust set-up fees, and trust maintenance fees.

An additional cost that may or may not be in the mix is attorney fees related to the legal aspects (a function of deal complexity and principals objectives), and/or transactional consulting fees from the real estate side of the mix. Both of these latter costs are similar to costs that would normally occur in more complicated transaction arrangements including Exchanging (and Exchange Accommodator fees in the case of forward or reverse exchanges), correct wrap construction, and various sale-leaseback transactions. These costs are highly variable, depending on necessity of work performed, and what the individual providers charge for their services.

In general, the direct costs related to using the trust vehicle - all by itself - range from about $350 to $750 for set-up, and anywhere from $12 per month to perhaps $150 per month, for monthly maintenance fees. In many respects, these are somewhat comparable to typical fees related to set-up and management of LLC’s, Corps, LP’s and similar devices, and like all of these, can vary depending on what activities the principals can take on for themselves, while still preserving the legal requirements necessary to maintain the viability/integrity of the ownership structure.

Q(3) What might your role be in these transactions?
A(3) Nascent Equity, through our Trust Exchange Services subsidiary, does provide both documentation services and transaction consulting services, primarily to investors, and generally on a referral basis. Through referrals, we occasionally provide services to principals in what ordinarily would be considered “retail” transactions. We expect to do more of those in the next few years, due to the current liquidity issues in the real estate marketplace, and the fact of growing legal restrictions coming into play related to various federal and/or state laws that have gone on the books over the past several years.

Q(4) Do you offer some kind of assistance in putting these transactions together, and if so, on what basis?
A(4) Outside of the response in Q(3) above, the various other specific items of discussion would be the function of personal private inquiry, due to the policies of this Forum.

Hopefully this covers the ground you wanted, and best wishes for your success.

David P. Butler
Nascent Equity and
Hotspur Investment Group

import · June 12, 2010, 12:30pm

Re: Down & Dirty? - Posted by bailiff.

Posted by bailiff. on June 12, 2010 at 12:30:22:

So what’s the basis of using land trusts? Seems like everything I hear about them is mostly bad news, or ridiculous claims. And even the lawyers don’t seem to conflict with each other a lot of the web articles I run across, regarding about every form of creative real estate technique. What’s the system you use and what makes it better? Also, you never did answer the last question I asked regarding bankruptcy in the thread down below discussing “Privity… Penurious… Prepayment = Peril!”. Can you clear that up here? Thanks.

import · June 10, 2010, 4:15pm

Re: Down & Dirty? - Posted by multitasker

Posted by multitasker on June 10, 2010 at 16:15:19:

Thanks again for taking the time to provide pointed answers. This is invaluable.

Can I ask you to provide more clarification on your statement “Lease-options present risks to both property-owners, and the Optionee, with regard to bankruptcy, liens, and judgments. Correctly done land trusts can almost completely eliminate the potential risks, and significantly enhance the overall objectives of both parties in the process.”? From all my reading, and in looking through a lot of discussions in several of the forums here at Creonline, it seems that lease-options have been an integral part of creative real estate investing for many, many years. You seem to indicate such is not the case. Has something changed? If so, what? Can you elaborate on what problems might be encountered, what the real risks might be, and how the land trust solves those issues? Also, can you give some more clarification regarding the latter part of your comment above, where you state that the land trust can “… significantly enhance the overall objectives of both parties in the process.”? How does it do that, and in what ways? Thank you in advance.

import · June 14, 2010, 1:02pm

Mr. Clean - Posted by David Butler

Posted by David Butler on June 14, 2010 at 13:02:19:

Hello Again multitasker,

You are welcome, and thanks again to you as well.

Yes… lease-options have been a very popular, and very valuable creative real estate device over the decades, and continue to be so. However, at the same time, several water-shed events have occurred over the past 28 years that have constrained their usefulness, and in some cases have led to their usage being flat-out dangerous in some states. These same issues can, and do, come into play in other states as well, albeit to a lesser degree (though the outcome may very well have - and HAS had, somewhat similar deleterious effect when/if challenged in court):

the effects of The Garn-St. Germain Act, as stipulated in the Preemption of Due-On-Sale Prohibitions at 12 U.S.C. §1701j-3
the growth of equitable conversions being granted to lease-options - by statute in some states, and by case law in a number of others

In general, a careful review of the statutory changes in the states where such have occurred, would appear to be a direct consequence of “unscrupulous” (as quoted directly from Texas’s lease-option statute) investor activities that have a direct relationship to DOS issues coming into play to the detriment of the other parties to the transaction. This seems to be an outcome of CREI ignoring the dangers they are exposing the seller and/or end buyers to with regard to their role in flipping properties by purchase and then lease-optioning out to a prospective end-buyer; or alternatively lease-optioning a property and subsequently subleasing it out to prospective end-buyers.

At the same time, courts have more recently (last seven to ten years) begun to award optionees (particularly in default cases), equitable rights in the properties they have under lease, and subsequently forcing property owners to go through the more expensive and cumbersome foreclosure process, rather much simpler and less costly eviction process.

These are very real dangers that for some strange reason have been approached relatively cavalierly by a number of devotees, including some instructors - though a growing number of attorneys have joined the increasing crescendo in pointing out these dangers.

For example, changes to the Texas Property Code (Sec. 5.061 et seq.) made in 2005 define lease-options for longer than 6 months as ?executory contracts?, which are subject to strict regulation under the Code, in much the same manner as land contracts are treated in the Lonestar state. Numerous initial and ongoing requirements must be observed (including a specific 7-day notice to any existing lender), and the burden is on the landlord/seller to meet these requirements. Failure to do so incurs not only penalties under the Property Code, but also potential liability for the landlord/seller under the Deceptive Trade Practices ? Consumer Protection Act.

What happens if the foregoing requirements are not met? Firstly, failure to do so is defined as ?false, misleading, or deceptive act or practice? under the DTPA (Sec. 17.46, Texas Business & Commerce Code); secondly, the lessee-optionee is entitled under Sec. 5.069(d)(2) to ?cancel and rescind the executory contract AND RECEIVE A FULL REFUND OF ALL PAYMENTS MADE made to the seller.? That would include any down payment plus any monthly payments that have been made. In addition to stiff penalties contained in the Property Code, certain violations are defined to be DTPA violations, WHICH CAN RESULT IN TREBLE DAMAGES, plus attorney?s fees.

Landlords and sellers should generally avoid lease-options in Texas because of the numerous requirements and potential liability for doing them improperly. Such contracts are no longer advisable or even feasible for property in Texas unless the property is paid for or used exclusively for commercial purposes.

Another risk of lease/option transactions (in Colorado in this instances) to the Optionor (property owner) at least if the lease portion lasts longer than 180 days, is the consequences of failing to comply with a little-known Colorado statute which requires the optionor to designate the public trustee as the escrow agent for taxes (which compliance might result in taxes being escrowed twice, if the seller’s lender is also already doing so). This statute also calls for notification to the county assessor of the “transfer.” Non-compliance with this statute may allow the buyer to “void” the contract AND RECEIVE A RETURN OF ALL PAYMENTS MADE, interest, attorneys fees and costs!

Other general risks we have previously alluded to that are created during the pendency of an unrecorded lease - the seller’s title could become compromised by a lien (either consensual, like a new deed of trust, or non-consensual, like a tax, judgment or mechanics lien), making it difficult or impossible for the seller to eventually perform. Another risk is that the seller could stop paying his own mortgage which still attaches to the property, with little or no leverage to require him to do so.

Yet another are bankruptcy issues, which I’ve touched on in several of the prior discussions below, and will address a bit more in Bailiff’s inquiry in this thread (when I can get to it). Also, a lease/option doesn’t provide the optionee with obvious cure or redemption rights (to protect what might be a substantial amount paid up front), which rights the optionee would have had with third party financing. (In reality, the optionee does have those rights, and others discussed below, but may need to expend substantial sums in attorneys fees to convince a court that the seller cannot simply evict him/her).

A well-drafted land trust provides an alternative to lease-option transactions that at this juncture that - if also operated correctly during the term of its life - should hold up to judicial scrutiny even in the Texas and Colorado jurisdictions, according to trust attorneys we have consulted with (which includes our company counsel).

Such trusts have the benefits we have previously described in the various recent threads you have already seen, but a quick recap here:

can legally avoid triggering any DOS clause when constructed correctly, and operated for the right reasons;
enables the investor to easily get the property back in the event of default by terminating the trust, declaring the resident to be a tenant-at-sufferance, and giving 3 days notice to vacate before filing a forcible entry and detainer (eviction) action in justice court;
provides the co-beneficiary with a form of controlled (and “stipulated”) equity relief that works to the benefit of all parties to the transaction;
can protect the property from liens and judgments of either party;
can insulate the individual beneficiaries from each other in a wide range of potential legal issues

Part of the “enhancement process” I alluded to in the original comment you have cited to can be found in items 1, 4, 5 above, in addition is to generating a very similar advantageous L/O outcome for the parties, without the attendant problems posed by the typical lease option, or the more negative impact of L/O transactions such as those described in Texas and Colorado.

Hope the above provides the clarification you are seeking, and best wishes for your success.

David P. Butler
Nascent Equity &
Hotspur Investment Group

import · June 28, 2010, 12:44pm

Re: Transaction Costs - Posted by multitasker

Posted by multitasker on June 28, 2010 at 12:44:14:

Can you give some specific guidance as to what I might expect in transaction costs for setting up a land trust instead of using a lease-option transaction? I am trying to get a better handle on that part of the equation. Thanks again for the detailed answers to my questions.