Do I Need a License to Landlord?

Becoming a Landlord:

Do I Need a License?

Many Real Estate Investors are choosing to rent investment properties during this soft market.  And despite the fact owners see these properties as investments, the government generally views property renting as a business.  This bears the question: does one need a license to be a landlord?

Need I have a Real Estate License to rent my property?

In most states, one does not need to be a licensed Realtor to be a Landlord, so long as the property you are renting is your own.  All you need is authority to negotiate a lease, which you most certainly have if you own the property.  If you own the property in partnership, it is best to have a written agreement with your co-owners, giving you authority to execute leases on behalf of the group.  But so long as you have an ownership stake in the property, you do not need a Real Estate License. Many states do require a Real Estate License if you are going to manage property you do not personally own though.

Need I Have a Business License to Rent My Property?

In many jurisdictions, you WILL need a business license to rent property. Depending on where the property is located, you may need a State license, a local license, or both.  This is especially true for transient housing, or any type of property rented on a short-term basis.  In most jurisdictions, this means property that is rented for a lease period of six months or fewer.  Some States require just the business registration and license, while others require both a business license and a rental license.

How Do I Find Out What my Jurisdiction Requires?

If you have retained a Real Estate Attorney, s/he will be able to advise you on licensing and registration requirements for your area.  Your attorney will also be able to advise you of the requirements for a short-term (weekly or monthly) rental vs. a long-term (annual) rental.

If you are not working with an attorney, the first place to check is your local municipality's Housing Office.  If your district does not have a housing department, check with the Building Department. Most localities will also list landlord requirements on their local websites.  Often times, the applicable forms will be available on the website too.

Will I Need a Certificate of Occupancy?

In most cases, you will need to have the Certificate of Occupancy (also called a CO) BEFORE you can apply for a business license or a housing license.  Simply put, a Certificate of Occupancy is a document issued by a local building or Zoning authority confirming that the premises have been built and maintained according to the provisions of the building or zoning ordinances, and that the premises is fit for occupation.  In practical terms, it means a unit is safe to live in and meets the local definition of habitability.

In most cases, a CO is issued when a building is first completed or when a building's use changes.  In many localities, converting a unit to rental property requires a new CO, as it is considered a change of use.  In order to get one, you will need to have the property inspected by the municipality to ensure it complies with rental codes.  This is usually done by a representative from the local Building Department.  The Inspector will either issue the CO or a list of violations that need to be addressed. Should violations be found, they will need to be repaired before the final Certificate of Occupancy is issued. Once you have the CO in hand, you may apply for the business or housing license.

What Happens if I Do NOT Get a Business License?

If you rent without obtaining the proper license, you will be the landlord of an illegal apartment. There may be many consequences associated with this.  Your city/state can fine you or even issue a "cease and desist."  Your tenants may withhold rent.  There may be insurance and tax consequences.  And should you end up in litigation, you'll be coming to court with "unclean hands," something that can cause negative decisions.  In addition, you may be charged with tax evasion.  Obviously, we recommend you obtain the proper licenses to become a landlord BEFORE you rent your property.

Do I Need a Separate License for Each Property?

Again, that depends on your specific area's requirements.  Generally, you will need a CO for each individual property.  If there are registration requirements, each parcel will need to be registered. Some jurisdictions will issue a blanket business license for property rentals, while others will require a separate license for each unit.  Most jurisdictions will require a hotel license for any type of short-term rental.

What Steps do I Follow to Become a Landlord?

First, consult with your attorney and/or local officials to determine the exact licensing and registration obligations for your area.  Next schedule an inspection and obtain your Certificate of Occupancy.  Then, if your state requires it, register the property with the with the appropriate division.  Obtain any required State Licenses before you apply for any required local ones.  We suggest you consult with a skilled Real Estate Attorney to help ensure you have followed every step appropriately and you have complied with all State and Local requirements.

Summary:

This week, we discussed licensing requirements for potential landlords.  Although you do not need a Real Estate License to rent property, most jurisdictions require some sort of business license and/or registration before you can legally rent a unit.  Most jurisdictions also require a Certificate of Occupancy (CO.)  Since converting a property from owner-occupied to a tenancy is considered a change of use, you will most likely need to obtain a new CO before applying for any type of housing license.Depending on where the property is located, you may need a State license, a local license, or both.

Here at the Law Offices of Heath D Harte, we believe that real estate is a good investment.  We also believe renting properties that are part of an investment portfolio can be an effective strategy, especially in a soft real estate market.  Becoming a landlord is one way to help your investment property pay for itself while your equity in that property grows.  

However, many investors become landlords without investigating the requirements, leading to negative financial impacts when an issue arises.  Investors must obtain the proper licenses before renting out a property, so that their investment may grow with no negative impacts.  And while they are investigating the legalities of renting, investors need to become familiar with their local landlord-tenant laws as well.  We truly believe this is an area where skilled attorney help is a must.  You really need to develop a relationship with an attorney you can trust before entering the property rental field. Your attorney can be the key to making your rental business a success. Not only can your attorney navigate the licensing process effectively, but s/he can also negotiate leases, hold security deposits, and help when tenant issues turn sour.

If you live in the New York-Connecticut area especially, The Law Offices of Heath D Harte are here to help you with all of your landlord-tenant needs.  We invite you to contact us so we may help you with all of your real estate law issues.

Condos vs. Co-Ops. vs. HOAs: Pros and Cons

Shared Ownership Housing: What's the Difference?

Condos, HOAs, and Co-Ops

Part II

Last week, we defined the differences between a Cooperative (Co-Op), a Condominium (Condo), and a Homeowner's Association (HOA).  This week, we'll compare and contrast each housing model, as well as discuss the pros and cons.

Condo vs. HOA

Similarities:

• Both are real estate purchases;
• Both can be a part of a Land Trust;
• Both are financed through Traditional Mortgages;
• Owners are responsible for paying property tax;
• Both are run by an elected Board of Directors, comprised of members of the Association;
• Both involve monthly fees to pay for insurance, maintenance, and upkeep of common areas.
• Both generally utilize "special assessments" to charge owners for unanticipated expenses.
• Both often include amenities not commonly found in single unit communities, such as pools, playgrounds, tennis courts, etc.
• Both are administered according to "the documents," which contain covenants, restrictions, rules, and guidelines for unit use.
• Both generally regulate the outer appearance of a unit.
• Both generally allow the Board to levy fines for noncompliance with any aspect of the documents.

Differences:

• With a condo, one generally owns "from the drywall in."  With an HOA, one typically owns the building, utility hook ups, land beneath the building, and the air space above.
• Generally, owner maintenance responsibilities are greater in an HOA than in a condo.
• Generally, monthly fees are lower in an HOA than in a condo;
• In an HOA, the unit owner is responsible for insuring the building itself, as well as the content, structure, etc.  In a condo, owners are generally only responsible for insuring the unit itself and its contents, rather than any structural elements.  Condo policies are usually cheaper than homeowner's policies, but the difference in cost is generally offset by the difference in fees.
• In an HOA, you generally own your parking space(s), regardless of whether they are attached to the actual building.  In a condo, parking spaces are generally defined as "limited common elements," whose use is exclusive to an individual unit.  However, in a condo, the Board generally has the power to reassign or change parking assignments, whereas in an HOA, they generally do not..  
• Both are generally subject to State Statute.  However, most States have more stringent statutes for HOAs than they do for condominiums.  
• With an HOA, any "yard" area generally is part of the owned land.  In a condo, all green space is considered part of the common elements.  (Although most HOAs regulate how the green space may be used, and what type of fixtures or amenities are allowed in a yard.)
• HOAs generally give an owner greater flexibility about what can be done to a particular unit.
• In an HOA, owners have no vested interest in common grounds; in a condo, all owners also have a vested interest in all common grounds and common elements.

Condo vs. Co-Op

Similarities:

• The Association owns the land, buildings, air space, common elements, structural elements, and generally, the utility hook ups;
• Maintenance of anything outside the unit is generally the responsibility of The association, and is managed by the Board of Directors.
• Owners are not responsible for insuring anything outside of their individual unit.
• Both are administered by elected Boards, comprised of members of the Association.

 Differences:

• With a co-op, you are not buying a piece of real estate; you are buying a share in a corporation.  It is considered "intangible personal property" for tax purposes.  With a condo, you are buying a piece of real estate.
• Condos are financed with traditional mortgages; co-ops must be financed through other forms of loan.
• Although both are administered by Boards, Co-op owners have a greater say in how things are done.  Almost everything that is done in a co-op requires a membership vote, while this is not true in a condo.  Because of this, Co-op Association Meetings are more widely attended than Condo Association Meetings, and co-ops generally have a more active membership.
• Statistically, co-ops have the highest percentage of owner-occupied units across all forms of shared ownership housing.
• Condos may me residential, commercial, or even mixed-use; traditionally, co-ops are residential only.
• In a co-op, you are purchasing a right to lease a particular unit, whereas in a condo, you are purchasing an actual unit.
• Co-ops generally consist of one or more apartment buildings, or they consist of land for pre-fabricated homes.  There is a wider variety of home type available in condominium complexes (garden style apartments, townhomes, apartment buildings, pre-fab units, etc.) than there is in co-op complexes.
• Monthly fees are generally highest in a co-op, as they include monthly rent as well as insurance, maintenance, upkeep, and taxes.
• Owners are responsible for paying for their own property taxes in a condo, whereas co-op fees include all property taxes.
• A condo unit may be a part of a land trust; because a co-op is not considered real estate, it cannot be placed into a land trust.  It may be a part of other types of trust arrangements.
• Condos often include more amenities than do co-ops.

Pros and Cons of Condos

Pros:

• Condominiums are good for people on fixed incomes, as the monthly fees are generally set; it is rare for a condominium to need to levy a large special assessment to cover costs of operation.
• Condos are fantastic for folks who do not want to be responsible for maintenance and upkeep.
• Application processes are governed by State Statute, and although one needs to apply to purchase a condo, there is little its Board can reject you for, other than financial issues.
• Condos are great vehicles for investors.  Most Boards do not require tenant screening, and are usually easy to operate as rentals.
• Condos generally make great vacation homes, as the Association monitors things while the unit is unoccupied, and handles any maintenance issues that may arise.
• Condos usually include all necessary services, such as trash pick-up, landscaping, etc.

Cons:

• The Board of Directors has the power to make a lot of changes without input from the membership.
• Insurance costs may be higher, as you are paying for both the overall condo plans, as well as a plan for your individual unit.
• Condos tend to fine owners for rules violations more than other forms of shared housing.
• An owner has less input as to outer appearance of his/her home and grounds.
• If a Condominium Association decides to disband, an owner may suffer an extreme financial loss.  Often, it only requires an 80% membership vote to dissolve the condominium.  Developers have been known to buy up units in order to swing a vote.  If the condo dissolves, you will generally receive below market value for your unit and share of common grounds.

Pros and Cons of Homeowner's Associations

Pros:

• Owning a building within an HOA is considered owning a piece of real estate.  The owner owns both the building and the land, as well as the air space and grounds.
• HOAs offer greater flexibility with what can be done to green space.  Although many prescribe guidelines for plantings, the owner has greater choice of what s/he can install.
• HOAs more often include a yard that is yours, as opposed to belonging to everyone in the Association.
• HOAs often provide amenities not found in typical single-family communities.
• HOAs are governed by an elected Board of Directors.  However, this Board has the least power amongst the three types of shared ownership housing.
• HOAs are good investment properties.  The monthly fees can be passed on to the tenants, and the Board will apprise the owner of any irregularities happening within the unit.  Boards usually have few screening requirements for tenants.
• If an HOA decides to disband, the owner will still be left with a valuable piece of land, as well as any improvements s/he has made.

Cons:

• HOAs have the highest maintenance and insurance obligations of the three types of shared ownership housing.
• HOA owners have no vested interest in any common elements or community amenities.
• HOAs often offer more rules and restrictions than they do owner support.
• Legally, HOAs are allowed to do little screening of potential members.  Because of this, their budgets may not be sound as those in condos and co-ops.  Statistically, HOAs employ special assessments to fund things more often than do co-ops or condos.
• HOAs are often described as having all the disadvantages of living in a single family unit, while having all the disadvantages of living in a condo.  Rules as to property use and appearance are very stringent.
• HOAs often utilize fines for minor rules infractions.

Pros and Cons of Cooperatives

Pros:

• Co-ops generally have the lowest buy-in obligations of any of the forms of shared ownership housing.
• Although owners do not build equity in a traditional sense, shares in a co-op may appreciate at greater rates than will a condo or HOA unit.
• Co-ops have the highest amount of owner input of the three shared housing types.  Co-op owners generally know their neighbors and have a sense of community not necessarily found in other forms of housing.
• Co-op Boards are allowed to do more stringent screening of both owners and tenants than are HOAs or Condo Boards.
• Co-ops are great for people on fixed incomes, as the monthly fees include everything, including tax and insurance.  A co-op resident only needs to insure the contents of their unit, similar to buying a renter's policy.  The co-op itself insures everything else.
• Co-ops handle all maintenance, insurance, and tax obligations.

Cons:

• You are buying shares in a corporation, rather than an actual piece of real property.  
• Co-ops have the highest monthly fees of all types of shared ownership housing.
• You cannot finance a co-op with a traditional mortgage, nor may you get an equity loan on the appreciated value of your shares.
• Co-ops require stringent background checks for both members and tenants.  They may deny ownership or tenancy for just about anything not specifically prohibited in the Fair Housing Act.
• Co-op shares do not pass to heirs like other forms of property.  Instead, they are treated similar to shares of stock.  They are subject to securities regulations. It can be more difficult for estate planning purposes.  Joint ownership of shares is also harder to set up than joint ownership of traditional properties.
• Co-ops are not the best vehicles for investments.  Because of the screening processes, they are harder to rent.  The Association pretty much has free reign to reject potential tenants.  
• A land trust and a co-op are not compatible.  Like with other forms of stock, they can be placed in certain types of trusts.  But because they are not considered real property, the Land Trust model cannot apply.

Which Type of Property is Best for Investors?

There is no clear-cut answer as to which type of shared ownership housing is best for investors.  The most important distinction here is that a co-op is not considered an investment in Real Estate.  If you are building an investment portfolio that includes stocks, bonds, and lands, a co-op, condo, or HOA can be a good investment.  All will appreciate at different rates, and according to different variables.  Years ago, co-op shares generally appreciated more quickly than an investment in a condo or HOA, but since the "Real Estate Boom," that is no longer true.  Many infill developments are appreciating very quickly.  And units in an HOA or Condo Association are easier to "flip." Generally, buying a co-op as an investment property is less desirable than purchasing in a condo or HOA for this reason.

Again, when you buy a co-op unit, you are buying a piece of intangible personal property, rather than a piece of real estate.  Thus, the tax ramifications are different, and should be thoroughly discussed with an accountant or attorney.  A co-op may help balance your tax obligations, or it may increase them.

We believe strongly in the Land Trust model for Real Estate Investors.  A co-op is incompatible with this model.  If you are building a portfolio based on the Land Trust model, you may want to stick to condos and HOAs.

Which Type of Housing is Best for Owner-Occupiers?

If you are looking for property to live in, either as your primary home or as a vacation property, any of the three types can be best, depending on your individual needs and desires.  We have provided the pros and cons of each housing model.  You will need to weigh these against your own considerations. This will also depend on where you are looking to purchase.  The New York City area has a higher percentage of co-op units than anywhere else in the US.  Co-ops in New York are generally cheaper than condos or co-ops, and they often appreciate faster.  Often, their rents are more reasonable than rental housing, but the ongoing costs are about the same. That is not necessarily true in other parts of the country.

If you are looking to buy into a shared housing community, but you have little available to put down, a co-op might be the best choice for you.  If you are looking to finance through traditional mortgages, an HOA or condo will be a better choice.  

Summary

In this two-part article, we examined three different types of shared ownership housing: condominiums, Homeowner's Associations, and Cooperatives.  We defined each model, looked at the similarities and differences, and discussed the pros and cons.  We also discussed considerations for property investors.

Here at the Law Offices of Heath D Harte, we believe the most important consideration is how an individual property will meet your individual needs.  And in order to determine that, you need to know the ins and outs of each model.  All three models have benefits and drawbacks.

Our own real estate portfolio tends to rely on condos and HOAs, rather than co-ops.  This is because we are property investors, we use the Land Trust model whenever possible, and we like to renovate and flip.  We tend to focus on real property rather than shares in a corporation when building our own investment portfolio.  We also focus on properties in more suburban areas, where co-ops are not as common.  However, your own investments may differ, and a co-op may be a valuable addition.

The most important consideration here may be what is contained in the community's documents. These documents need to be reviewed with a fine-tooth comb before any purchase is finalized, as they dictate how you may renovate, use, and sell your property.  Having these documents review by your attorney is beneficial.  Your attorney can advise you as to how the purchase will fit into your overall estate plan.

As always, we are here to help.  We have an extensive real estate law practice, and we understand the nuances of both the models and the documents.    Whether you are looking for an investment or a home for yourself, we are here to advise and help.

Shared Ownership Housing: Condos, HOAs, and Co-Ops

Shared Ownership Housing: What's the Difference?

Condos, HOAs, and Co-Ops
Part I

Condominiums, Homeowners Associations, and Cooperatives are all forms of shared real estate ownership.  From a living standpoint, these three entities may appear to be the same.  But from a legal standpoint, there are significant differences between condos, co-ops, and HOAs.  Today, we're continuing our series on Real Estate Law by discussing these differences.  It is important to understand the differences BEFORE investing in any one of these forms of property ownership.

What is Shared Ownership Housing?

There are many types of real property available today.  There are apartments, single family detached houses, townhouses, duplexes, condominiums, cooperatives, cabins, mobile homes, and prefabricated units.  With the exception of the single family detached house, many forms of housing today involve some form of shared ownership. And today, you'll find many detached houses are also a part of an association, especially in newer developments. As you enter many subdivisions, you will see signs that say "a deed restricted community,"  indicating some form of shared ownership housing is in effect.  

In a typical subdivision, there are streets and sidewalks.  There may also be parks or other types of green space, playgrounds, pools, trails, or tennis courts.  These may be open to the general public, or their use may be restricted to those that live in that community.  If the use is restricted at all, chances are, the subdivision employs some sort of shared ownership.  Those elements are owned, paid for, and maintained by those who share in their use.

Conversely, if amenities are for public use, chances are they are owned and maintained by the local government, funded through local taxes.  Even though they might require a "resident pass," they are publicly owned.  If the City oversees the amenities, chances are they are NOT a part of a shared ownership community.

Shared ownership housing is typically controlled by a Board of Directors.  There are documents that define who owns what, and there are bylaws and regulations by which all owners must abide.  There are generally monthly or quarterly fees that all owners must pay.  These fees pay for maintenance and insurance of the shared areas.

Currently, in the United States there are three common types of shared ownership housing: Cooperatives (commonly called co-ops), Condominiums (commonly called condos), and Homeowner Associations (referred to as HOAs).  All three can be made up of a wide variety of property types. They may be residential or commercial in nature.  But there are some significant legal differences amongst the three types of property.  It is important to know the differences BEFORE you buy in.

What is a Homeowners Association (HOA)?

A Homeowners Association (HOA) is an entity made up of homeowners within a defined area.  This area is defined within the Homeowners Association Documents.  These documents also contain the bylaws, covenants, restrictions, and rules by which all members must abide.  The Association itself is generally a Non-Profit Corporation.  

Each owner buys a lot (or lots) within the defined area.  That lot may or may not include building(s). If the lot is unimproved, all improvements must follow the guidelines and restrictions set in the Association documents. The individual owns, maintains, and insures everything on that lot.  And when the person buys into the Association, he pledges to uphold all guidelines and restrictions contained within the HOA documents.

The Association itself is governed by a Board of Directors, elected by the members of the Association.  This Board is responsible for upholding all of the covenants, restrictions, and regulations contained in the documents.  

Most HOAs also contain some common elements.  Those elements are owned in their entirety by the HOA.  Lot owners own no shared interest in those common elements.  They just have a right to enjoy their use, as dictated by the HOA itself, and as defined in the HOA documents.  Depending on the development, common elements may be restricted to things like roadways, sidewalks, and mailbox stations, or they may include things like swimming pools, playgrounds, and barbecues.  

All owners are responsible for paying monthly fees to the Association.  Those fees cover maintaining, improving, and insuring the common elements.  Individuals are responsible for paying to maintain, insure, and improve their own lots in addition to paying the HOA Fees.  Some HOAs include general landscaping maintenance on the individual lots; in others, lot owners are responsible for maintaining their own yards, including cutting any grass.

Although many HOAs consist only of single-family detached homes, others consist of a variety of structures.  Some townhouse communities are a part of a Homeowner's Association.  In addition, many office parks have adapted an HOA model, where an individual owns both the office building and the land on which it sits.  

Owners in an HOA own individual parcels of real property, each with its own individual parcel number.  They are responsible for individually paying all property taxes on their lots, as well as paying their share of taxes for common elements.  (Taxes on common elements are figured into the monthly HOA fees, rather than being individually assessed.)  And although they are governed according to the documents, those documents do not get recorded.

With an HOA, the Association owns all common elements in their entirety; lot owners do NOT own a share of common grounds.  And the HOA Board may restrict the usage of these common elements. If a member is derelict in paying any fees or fines, his rights to common elements may be suspended. 

HOAs are generally governed by State Statute, and the statute supersedes what is written in the HOA Documents.  An HOA is subject to all provisions of the Fair Housing Act.  Your purchase application may need to be approved by the Board of Directors, but generally can only be rejected for financial reasons, (i.e. you do not appear to have the financial resources to pay the Association fees.)

What is a Condominium (Condo)?

With a condominium, an individual owns a particular unit within a larger complex.  That unit may be a townhouse, a half duplex, an apartment, or even a mobile home.  However, one does not own the land underneath the building, or even the building itself.  (There are some exceptions to this, which will be discussed later.)  Typically in a condo, one owns "from the drywall in."  The land itself and all improvements typically are owned by the Condo Association.  The unit owner is responsible for insuring and maintaining everything within the walls of the unit; the Condo Association is responsible for insuring and maintaining everything it owns.

The specifics of what a unit owner owns and maintains, versus what the Association owns and maintains, is outlined in the Condominium Documents.  Like with an HOA, these documents also contain the Covenants, Restrictions, and Bylaws for using your property, as well as the common elements.

In some states, a condo may be platted as a "Land Condo."  In those instances, the Association only owns the land; the parcel owner owns the actual building and all improvements.  In these cases, the parcel owner has a higher maintenance and insurance obligation.  In other cases, the Condo documents push maintenance responsibility on to the owner.  It is important to read the Condo documents BEFORE finalizing a purchase, so that you understand how much of a maintenance obligation your condo requires.  

In a Condo Association, each owner actually owns a share of the common elements, including the actual building, the grounds, any shared utility connections, and any amenities, such as a pool, a playground, or green space.  All of these are actually administered by the Board of Directors.  The Association also handles maintenance of the grounds, including landscaping and mowing grass.  

With a condo, although you may not own an actual building, you DO own a piece of Real Property.  You are able to build equity, just as you are with non-shared ownership housing. Each parcel in the condominium has an individual parcel number, recorded in the property database.  Every individual owner is responsible for paying property taxes on their parcel(s).  Each also pays his/her share of the taxes on the common grounds.  The Condo Documents define each owner's share.  Some condos define shares according to unit size, with larger units having a larger share and a larger financial burden.  Others split the common grounds into equal shares, regardless of the individual unit size.  In this case, all owners have an equivalent share of all common grounds and amenities, and all pay equally.

Like with an HOA, Condos are governed by a Board of Directors, elected by the members of the Association.  Most states also have statutes specific to condos, and those statutes supersede anything contained in the Condo Documents.  

Condo Associations usually maintain all roadways, sidewalks, etc. within the community.  Many also cover things like trash collection and recycling.  And of course, Association Members are responsible for paying monthly fees to cover all of these costs.  Should unexpected issues arise, the Board may impose a "special assessment" to pay for these issues.  These are in addition to the regular fees, also called "assessments: in condo lingo.  Each parcel owner is responsible for paying his share, as outlined in the Condo documents.

Condominiums often have two types of common elements: General Common Elements (GCEs) and Limited Common Elements (LCEs.)  Limited common elements are only available to a selected group of owners, while General common elements are equally available for use by any of the members of the Association.  Things such as parking spaces, balconies, patios, and car ports are generally Limited Common Elements.  Often, the financial burden for limited common elements falls to an individual owner, rather than to the Association as a whole.  The Board may demand you maintain a limited common element, and if you fail to do so, they can perform the work themselves and bill it to the parcel owner.  If the parcel owner fails to pay, the Association may put a lien on the unit.

Condos are governed by what is in their documents.  And unlike with an HOA, these documents are recorded in the property database.  They become public record.Statutes are generally more stringent as to what these documents may restrict.  These documents also outline dispute resolution procedures for when an owner disagrees with the Board's interpretation of the documents.

Condos generally have some sort of screening process for prospective owners.  This process is usually more rigorous than with an HOA, and prospective owners may be rejected for a broader number of reasons.  Many Associations perform background and credit checks on prospective owners.  State statute and the Fair Housing Act define what a condo may or may not consider.  

What is a Cooperative (Co-Op)?

A Cooperative differs significantly from an HOA or a Condominium. Rather than owning a piece of "real property," an individual owns a share in a corporation or LLC.  This share gives the owner the right to lease a certain space in the building.  Legally, this is considered a piece of "intangible personal property," rather than an actual piece of real estate.  With a co-op, all buildings, improvements, and amenities are owned by the corporation, and you are buying shares in a corporation.  Usually larger shares mean the right to lease a larger unit, while smaller shares give you the right to lease a smaller unit.

Because you are not buying real estate in the eyes of the law, you do not build equity like you do in an HOA or Condo.  Co-op purchases generally cannot be financed with traditional mortgages either, but must be financed through other types of loans.  And because you own shares, rather than physical property, they pass to heirs a little differently as well.  Heirs inherit shares, just as if you left them 100 shares of Microsoft Corporation.  Legal structures such as "joint tenants with right of survivorship" are more difficult to set up.  And because you do not own actual property, you may not put your co-op shares into a Land Trust.  However, you can make them a part of a different type of trust arrangement.

Like with an HOA or Condo, the Co-Op is administered by an elected Board of Directors.  However, most co-ops have active membership meetings, and the individual shareholders have a far greater say in how the co-op is run.  More actions require a group vote, and generally more members are active in a Co-Op than in any other form of shared ownership housing.

Co-Ops are also governed according to the documents.  Ownership requires a pledge to abide by all of the covenants, rules, restrictions, and bylaws.  But unlike with Condos and HOAs, most states do NOT have statutes specific to Co-Ops.  Co-Op members are freer to apply rules and restrictions to any area the majority of owners agrees.  They have more flexibility as to what they can allow and prohibit.

Co-ops generally have a smaller buy-in commitment than do Condos or HOAs.  This is because you are only buying a share in the building, rather than buying an actual piece of the building.  However, they also have higher monthly obligations.  In a co-op, your monthly payment must include rent for your unit, in addition to monthly costs associated with maintenance and improvement.  .  Your monthly fee also covers your share of mortgage payments and taxes.  (Many co-ops do not own the building they are sharing outright; instead, each share also includes a share of the mortgage on the actual building.)

And although Co-op ownership is subject to the Fair Housing Act, co-ops have the most rigorous screening process of the three types of shared ownership housing.  Purchasing a co-op share almost always involves a background and credit check, as well as an interview in front of the Board and/or a Member Committee.  Because the co-ops have the most leeway, they reject far more applications than do HOAs or Condos.  Again, this is because you are buying into a partnership, rather than just buying a place to live.

Because of this, co-ops have fewer investors and more owner-occupied units than a typical HOA or Condo.  Many Co-Ops have leasing restrictions, and may require a tenant pass the same rigorous screening as an owner.  This can be highly beneficial when you are looking for a place to call home. However, this can be a huge drawback to an investor looking to diversify or expand his housing portfolio.

Co-ops are more often found in urban type areas, and can be great alternatives to renting an apartment.  However, owning a Co-Op unit greatly differs from owning a piece of real property.  But a co-op is great for a person looking for a small community in a large area,  Co-Op dwellers generally know their neighbors.  Many co-ops have amenities and social aspects not found in other communities.  And they probably involve the most "sharing" of any of the three types of shared-ownership housing.

Pros and Cons of Condos vs. Co-Ops vs. HOAs

This week, we looked at three types of shared-ownership housing: Condominiums, Homeowner's Associations, and Cooperatives.  We discussed the basics of each type of housing, as well as their legal definitions.  Part II of this article will discuss the pros and cons of each type.  We'll also discuss how co-ops, condos, and HOA units may fit into a Real Estate Investment strategy.

Here at the Law Offices of Heath D Harte, we believe that a property should fit its owner.  There are some wonderful elements of shared ownership housing, as well as some limitations.  We want all of our clients to be informed, and to find the best match for their needs.  As well as handling purchases and closings, we have helped individuals with issues that arise AFTER they are settled into their property.  We've seen people buy into shared ownership housing that was a poor fit from the start. This is why we want everyone to be informed BEFORE they buy.

We'd love to hear our readers' experiences with co-ops, condos, and HOA.  We'd love to hear the good stories and the bad.  We invite you to share via Facebook, Twitter, Google+, or by the comment section of this post.  You can also contact us with your stories through our website.  And of course, we hope you'll be back for the second part of this article.  (Subscribe to this blog using the link in the sidebar, or join us on Facebook, Google+, or Twitter to receive notifications for Part II of this post.)

Land Trusts: Final Thoughts

Land Trusts:
Final Thoughts

We hope you have enjoyed this series on Land Trusts.  But alas; all good things must come to an end. We are wrapping up this series.  Then, we are going to take a couple of weeks off to compile this information into an ebook.  (Subscribe to this blog and/or follow us on Facebook or Twitter to be advised as to when this book is available.)  When we return, we'll be highlighting other  important Real Estate Law and Real Estate Investing subjects.  

Land Trusts: Summary of Advantages

Throughout this series, we have focused on all the advantages of putting properties into a Land Trust. To sum up, these advantages include:

1. Privacy: Using a Land Trust keeps property ownership private, and it keeps your name out of the public records.
2. Liability Protection: Using a Land Trust can help shield you from many frivolous lawsuits.
3. Protection from Judgements: A Land Trust helps protect your personal assets from being subject to a judgement.
4. Protection from Liens: IRS and other government judgements do NOT attach to property held in a Land Trust.
5. Avoiding Probate: Land Trusts help your assets pass DIRECTLY upon your death, rather than having to pass through probate.
6. Eases Transferability and Control: Property held in a Land Trust is much easier to sell, transfer, and manage.  This is especially true of "distressed properties," "under-water properties," and those in danger of foreclosure.
7. Minimizes Fees: Minimizes fees related to deed recording, transferring properties, title insurance, etc.
8. Eases Multiple Ownership: A Trust can have many beneficiaries.
9. Asset Protection: A Land Trust can help shield assets in case of ownership issues, such as bankruptcy or divorce.
10. Keeps Pricing Information Private:  A Land Trust helps protect your privacy regarding what individual parcels of land are worth.

Land Trusts: Summary of Concerns

1. You will need a Skilled Attorney: Few lawyers are experts when it comes to Land Trusts. You will need to find an attorney with skills and training in this area to receive the maximum benefits.
2. There are ongoing fees: A Land Trust will always have nominal ongoing fees associated with it.  After all, few Trustees are willing to do the job for free.
3. Privacy May Be Revealed with a Court Order: Although a Land Trust makes it more difficult to determine ownership, a Court can order ownership information be disclosed.
4. May Only Hold Real Property as Assets: Other forms of trusts allow multiple types of assets to be held by the trust.  A Land Trust, however, may ONLY hold real estate as assets.
5. Statutes Vary by State: Only a few States have their own, specific statutes regarding Land Trusts.  Their validity in other States relies on Case Law.  However, in those states that HAVE specific laws, you must ensure you follow them to the tee, or the Land Trust may not be valid.  Again, this is where engaging a skilled attorney is of supreme importance.

Land Trusts: Should I use One?

The choice to use a Land Trust is very individual.  No one can say definitively whether a Land Trust is the investment vehicle for you.  In writing this series, we hope we have equipped you with the tools and information you need to make this decision for yourself.  If you are leaning towards "yes," we suggest you gather your own information and documentation, and you meet with a skilled Land Trust Attorney in your area.  (If you live in the New York-Connecticut area, we'd be happy to meet with you to discuss your individual circumstances.  We offer free consultations for these purposes.)  

Again, we believe in Land Trusts.  We use them ourselves.  And as we branch out into property investments to enhance our own personal portfolio, we have begun using Land Trusts even more.  We want to invest in our own community, and we know that using Land Trusts are our most effective way of doing so.  And we live in a State that is using Land Trusts to revitalize neighborhoods and to provide affordable housing to our local workforce.  We have seen how effective Land Trusts can be, both on an individual and an organizational level.

Whether you already own real property, or there is property you have your eye on, we suggest you identify an attorney to help you now.  Having an attorney you know and trust will ease the process as you begin to accumulate property.  And you will need to interview this attorney to ensure s/he has the skills and knowledge you need.  Pick a few items from this series and use them as the basis for your interview questions.  If your prospective attorney cannot answer them to your satisfaction, move on to a lawyer who can.  

Final Thoughts

Again, we welcome your comments and feedback, whether you have been with us from the start or you are just finding this series now.  You can always find us through our website, hartelawoffice.com. We are also active on Facebook and Twitter.  We are also interested in what you would like to see in upcoming blog posts.  Do you have a burning question in the area of Real Estate Law?  Is there any topic you'd just like to learn a little more about?

Stay tuned for details on our Land Trusts e-book!

Land Trusts: Case Studies

Land Trusts: Case Studies

We’ve been looking at Community and Conservation Land Trusts for the last couple of weeks.Today, we’re going back to the Traditional Land Trust. This week, we're going to look at 5 specific examples of when a Land Trust was particularly helpful.

Case Study #1

Mike owns rental property in a suburb of Chicago.  In January, one of his tenants has visitors during a snowstorm.  One of these visitors, Mr Jones,  falls on his way out, and needs to be rushed to the hospital.  Mike thinks he is covered by his Landlord's Insurance.  However, Mr Jones's medical bills exceed the amount Mike is covered for, and Mr. Jones wants to be paid for his pain and suffering. Mr. Jones claims negligence and files suit against Mike, listing Mike's other rental properties as assets.

Mike learns an expensive lesson, and settles with Mr. Jones.  Mike goes to get an equity loan on his own mansion to pay off the victim and is denied.  Mike checks his credit report and finds his score has gone down significantly because of the personal judgement. He is unable to obtain a loan on his property and must begin liquidating personal assets.

Mike then learns about Land Trusts.  Mike forms an LLC called "Suburban Chicago Rental Apartments, LLC."  Mike places his rental properties into a Land Trust with the LLC as beneficiary.

The next winter, Mike has another slip and fall accident on his property.  Instead of being sued personally, the victim sees the property is held in trust, with an LLC instead of an individual as beneficiary.  The victim hires an "ambulance chaser" to represent him.  The attorney searches for assets, and sees the LLC has little to go after.  He advises his client to settle with the insurance company.  The victim wants to sue Mike personally, citing his lakefront mansion as an asset.  The lawyer informs the victim that Mike's personal property is off limits, as the apartments are held in trust, with the LLC as the beneficiary.  Mike knows his own home and property are safe, and that any judgement will be limited to the assets held by the trust.

Case Study #2

Lisa owns an single family house as an investment property.  She leases the property annually.  Her lease stipulates "No Pets."  Despite this, Peter the Meter Reader gets bitten by a dog on Lisa's property.  Peter hires a lawyer.

Peter's lawyer performs a property search.  He finds the property is owned by "Our House in the Woods" Land Trust.  The lawyer has to file suit against the Trustee, who is out of state.  The Lawyer cannot find someone to depose.  He is unable to easily find out who is the beneficiary of the trust, who in this case, is an LLC in a third state.  He does find out who holds the mortgage: a loan company in a fourth state.

Peter asks his lawyer about using "service by publication" to get a judgement.  The lawyer tells Peter that this case is too involved, and is not worth pursuing on a contingency basis.  He tells Peter he can pay a large retainer, but the costs would most likely outweigh any financial benefits Peter would see.  

Case Study #3

Bob and Linda both live in a very small town, where everyone knows everyone else.  Bob and Linda both make their living as landlords, renting a variety of different types of housing.  Linda, however, uses Land Trusts for her real estate holdings; Bob does not.

Both Bob and Linda have the misfortune of hitting runaway dogs, Bob on the South-side, and Linda in the West End.  Both dog owners want to sue, so they see their small town lawyer, Mr. Lincoln.  Mr. Lincoln starts by running their names.  When Mr. Lincoln enters Bob's name into the database, he gets over 50 matches.  His eyes widen, and he says "I think we have a VERY good case here!"  I'll take your case on a contingency basis.  I think we can BOTH make a little money here.  Conversely, when Mr. Lincoln runs Linda's name, he gets zero results.  Linda's investment properties are all held in a Land Trust.  Mr. Lincoln says "I'm not really seeing any assets we can attach here.  I'm not sure we really have a case."

Case Study #4

Twins Harry and Larry's Aunt passes and leaves each twin a large sum of money. Each decides to use his share for a down-payment on a new house.  Both intend to finance the remainder with a typical mortgage.  Larry decides to go the traditional route, while Harry decides to use a Land Trust for his property.  Harry ensures the Trustee signs all of the financing documents.  Larry decides finance in his own name, and he signs all the loan documents himself.  The documents are recorded, and each brother moves into his own house.

Six months later, Larry calls Harry in a panic.  He needs to borrow some money from Harry, as all his own accounts have been frozen.  Larry confesses he has been the victim of Identity Theft, and because of this, his finances are a mess.  He needs Harry to cover him while he tries to straighten his financial mess out.  A year later, Larry is really lucky, as the police have actually managed to track down the identity thief. It's a disgruntled former lover of the Aunt's, bound for revenge, as he feels Harry and Larry inherited what should be rightfully his. The thief confesses that the twins' new houses angered him so much, he vowed to take them away.

The thief confesses he stole Larry's information from his public record mortgage documents.  Once he had Larry's address and personal information, it was easy to use social engineering to get what else he needed.  Obtaining a financial document with Larry's signature allowed him to practice his forging skills until it was easy to send letters in Larry's name, with a perfectly matching forged signature. He even used this information to file "Change of Address" notifications on several of Larry's existing credit cards. 

The thief confesses he wanted to steal Harry's information as well, but found it much harder to do. Despite knowing Harry's new address, the thief couldn't find Harry's information in the property database.  He could not find mortgage documents in Harry's name, nor easily find anything with his signature.  Because of this, he got frustrated and left Harry alone. When Larry discovers the Land Trust protected Harry from identity theft, he asks his brother to help him develop his own Land Trust.  

Case Study #5

Marie is a single lady who just happens to earn her living as a Landlord.  She owns multiple properties, each held in a Land Trust.  Marie buys a new apartment building, puts it into trust, then makes arrangements to not renew tenant leases so that she can renovate the building.  She appoints her attorney as Trustee.

Arthur is a tenant in Marie's new building.  He has lived there for several years and does not want to move.  Arthur decides to find the owner of the building to express his contempt at the prospect of eviction.  He finds the trustee's name in the courthouse records, stomps down to his office, and demands to speak with the owner of the property.  The lawyer responds "It's owned by a trust."  When the angry tenant demands the owner's name and address, the trustee replies "We are not allowed to give out that information."  When Arthur throws a tantrum, the trustee calls the Police and has him trespassed off the property.

Marie learned the hard way to put her properties into Land Trusts.  When Marie was just starting out, she was set up on a blind date.  She declined a second date with the individual, and the individual started stalking her.  This man looked Marie up in the property database and found she owned 5 rental properties.  Mike began hanging out at the rental properties, harassing her tenants for her personal information, trying to get to Marie through her tenants.  Marie sought the help and advice of a lawyer, originally to perhaps obtain a restraining order.  The lawyer suggested Marie start using Land Trusts, so that future stalkers could not try to terrorize her through her properties.  Today, running Marie's name in the property database returns zero results.  Marie managed to protect herself from harassment simply by the use of a Land Trust.

Summary

This week, we examined five different situations where using a Land Trust was extremely beneficial. These case studies highlighted the privacy and asset protections a Land Trust can endow.  We also saw how the use of a Land Trust can enhance personal security.

Thus far, we have focused on the use of Land Trusts for property investors.  We also discussed how Land Trusts are also being used for conservation, neighborhood enhancement, and affordable housing.  We’ve also looked at specific examples of how all types of Land Trusts are being used.

As always, we invite you to submit comment and feedback.  You may use the comment form below, or contact us on our Social Networks by using the Facebook, Twitter, and G+ links in the sidebar.  We also invite you to reach out to us through our websites, www.hartelawoffice.com or harterealestatelaw.com.   We welcome questions and comments about this series, about Land Trusts, or any other area in which we practice.  We want all of OUR readers, clients, and friends to be Harrys, NOT Larrys!

The Community Land Trust

The Community Land Trust

Thus far, we have been discussing the traditional Land Trust, built on the Illinois model.  However, there is a second type of Land Trust, and any discussion of Land Trusts would be remiss without a mention.  Today, we'll be looking at the Community Land Trust.

What is a Community Land Trust?

A community Land Trust is is a non-profit organization that focuses on preserving community amenities for the locals.  Some Community Land Trusts focus on conserving land, open space, or other natural resources, while others focus on maintaining and developing community assets like affordable housing, gardens, parks, or playgrounds.  Other trusts focus on preserving farm land, and protecting it from being converted to housing developments.  The trust acquires land on behalf of the community and retains it, in trust, for perpetuity.  It then can lease the land, develop the land, or protect the land from ever being developed in any way.

In 1992, the US Federal Government codified the Community Land Trust in The Housing and Community Development Act.  (https://en.wikisource.org/wiki/Housing_and_Community_Development_Act_of_1992/Title_II#Sec._213._Housing_Education_and_Organizational_Support_for_Community_Land_Trusts.) This Act says “The term ``community land trust´´ means a community housing development organization that is not sponsored by a for-profit organization; that: acquires parcels of land, held in perpetuity, primarily for conveyance under long-term ground leases; transfers ownership of any structural improvements located on such leased parcels to the lessees; and retains a preemptive option to purchase any such structural improvement at a price determined by formula that is designed to ensure that the improvement remains affordable to low- and moderate-income families in perpetuity.”

In 2011, there were approximately 242 Community Land Trusts, containing over 10,000 housing units.  82% of their residents had incomes over 50% below the local average.  (http://community-wealth.org/strategies/panel/clts/index.html)

What is a Conservation Land Trust?

A conservation Land Trust operates similarly to a Community Land Trust, but it's sole purpose is to protect land in its natural state, to protect land from development and urbanization, and to protect natural resources.  These may be small, local organizations or huge, International conglomerates. 

Perhaps the best known Conservation Land Trust is The Nature Conservancy. Often times, Conservation Trusts acquire land through donation.  The land owner will deed the land to the Conservation Trust in exchange for a large tax break.  In some jurisdictions, developers may donate land to a Conservation Trust in order to receive “credits” that allow them to develop other land in the same locality.

How Do These Trusts Benefit a Land Owner?

There are many reasons a land owner may choose to participate in a Community Land Trust.  Some of these are outlined below.

Financial Incentives

Many people choose to join these types of trusts for financial reasons.  First, there are huge tax incentives that come with donating land to a trust.  Second, there may be financial reasons to sell part of ones land to a trust.  Often, that serves the purpose of buffering ones land from development while still being able to enjoy the use of ones land.  This is especially true of farm land in rapidly urbanizing areas.

Sometimes, land is purchased with the intent of rezoning.  If the rezoning fails, especially if it fails due to public uproar, selling the land to a Community or Conservation Trust allows an investor to recoup the money outlaid.  It is often the best way to avoid having a perceived “useless property” in ones portfolio.  

Many times, a Trust will make an offer on a property just to protect its future use. In these cases, the Trust may pay above what one could get for the parcel on “the open market.”

Many localities are now offering developer incentives for donating land to trusts.  In many locales, a developer may receive incentives in another area for donating a parcel to a trust.  The developer may donate parcel A in order to receive concessions on Parcel B.  In some areas, that may mean increased density.  In others, developers receive permission to clear land for conserving different land.  

Finally, donating part of ones land to a trust may result in lower property taxes for years to come. Your donation may include an agreement that allows you to still “use” the land.  However, since you no longer own it, you will no longer be taxed on that portion of the land.  

Protection of Future Land Use

Many land owners choose to protect their land through a conservation easement. This is a legal agreement between the owner and a Land Trust that permanently limits uses of the land in order to protect its conservation values.  In most cases, the owner retains his ability to own, use, and sell this land, as well as pass it down to heirs.  

The terms of each conservation easement are individually negotiated.  However, they must include some sort of public benefit.   Benefits are simple, and include such things as preserving views, preserving access to waterfront, protecting wild life and/or its habitat, historic preservation, or even something as simple as protecting public space.  

Conservation easements can include provisions for future use.  For example, you may negotiate the future right to subdivide the parcel, or even to convert a portion to housing.  However, if you want to ensure your future heirs don't cut down all the trees on the Southwest corner, you can protect the future life of those trees with a conservation easement.  You can use a Conservation Easement to prevent your heirs from paving paradise to put up a parking lot.

Protect a Community

Many people are lamenting the affluenza epidemic that is attacking America.  Cities are rapidly gentrifying, and the middle class is rapidly being squeezed out of many places.  Many of our service workers can no longer afford to live in the areas they serve.  A lot of folks want to protect their communities from over-gentrification. The Community Land Trust is a fantastic way to do so. Community members can form trusts to buy up land and prevent it from being sold to the highest bidder.  

Habitat for Humanity is one of the largest organizations built on this model. However, Local Community Trusts are being established across the country every day.  These trusts benefit the community in many ways.  They offer opportunities for first time home-buyers, and allow young people to establish themselves in communities they could not otherwise afford.  In addition to protecting areas, trusts can help revitalize them.  Trusts often buy up properties in blighted neighborhoods with the goal of making that area vital again.  They provide housing for teachers, firefighters, and veterans.  And in many cases, they allow people to stay in the area in which they grew up.

Philanthropy

Many people like leaving some sort of legacy.  Establishing a community trust is one of the more affordable ways to do so.  While an individual might not be able to afford to have their name on the wing of a hospital, they may be able to leave the community a park.  While the Carnegies may have left a legacy of libraries, Mr. Jones may choose to donate a small pocket park to his community. Future generations will remember him when they play under the trees in Jones Park.  And though the donation may be made for vanity purposes, the donor will still reap a myriad of financial benefits from the donation.

Summary

This week, we learned about Community and Conservation Land Trusts.  These are a specific type of Land Trust, set up to promote the public good.  But although charitable in nature, these types of trusts still financially benefit the donors in many ways.

Next week, we'll continue to examine the Community Land Trust.  Future posts will talk about how these land trusts are being used across the US, and about how you go about setting up or contributing to one.

Here at the Law Offices of Heath D Harte, we truly believe in building communities.  Real estate is an important component of community building and revitalization.  Effective real estate investors know how to build their own net worth while investing in the local community.  We believe ALL types of Land Trusts can help an individual become successful with Real Estate.  As your portfolio grows, you will need to balance your tax liabilities.  Using Community Land Trusts, you may increase your own bottom line while growing your community.  

Many Land Trust courses only focus on using the Illinois Model to grow your own net worth. However, the judicious use of Land Trusts can balance your investment properties with investments in the community itself.  That, in turn, will help your other community investments to grow in value. One type of Land Trust can grow your investment in another.  This is why it is important to be aware of both types.

As always, we invite your comments, questions, and general feedback.  Please use the comment form below, or connect with us on Facebook, Twitter, and Google+ using the links in the sidebar.  And as always, we are here to help you with all of your Land Trust  and Real Estate Law needs.  Please visit us at HarteRealEstateLaw.com or HarteLawOffice.com, or contact us and let us know how we can help.

Drawbacks to Land Trusts

Drawbacks to Land Trusts

In previous posts, we've learned all about Land Trusts and how to form them. By now, you may be thinking that Land Trusts are the greatest thing to come along since sliced bread. And Land Trusts offer many benefits. But nothing in this world is all good. Land Trusts have some disadvantages too.

This week, we're going to review some of these drawbacks.  Next week, we'll go back to the positives.  But there are limitations to Land Trusts that are important to consider.

There is no such thing as “100%” Protection for Any Asset

No asset can be completely protected, and of course, this applies to real estate in a trust as well.  Let's face it.  We live in a litigious society where anyone can sue for anything they want.  People often go so far as to hire investigators to uncover hidden assets they can possibly attach for judgments.  While Land Trusts make it more difficult to find the assets, and protect them from being found in a cursory search, a skilled investigator will work to find the beneficiaries of the trust.  

Again, this is why many people choose to put their assets, including real estate, into an LLC. However, if the LLC is sued, real estate  WILL be considered a part of that LLC's assets.  Likewise, if an individual is listed as beneficiary, the properties in a trust can be considered to be amongst that person's assets.  While putting real estate into a trust makes it more difficult to find the beneficiary, Federal Regulations ensure it is not impossible.  This is especially true for assets in a revocable trust, which is why Land Trusts should be formed as irrevocable, whenever practical.

Assets Held in Trust are NOT Exempt from Financial Disclosure Requirements

Oftentimes, an individual is deposed, under oath, during the course of legal actions. You may be deposed as part of a lawsuit or during a legal separation.  You may be asked for a list of ALL assets during the deposition process.  If so, you MUST disclose assets held in trust, Land Trusts included. Failure to disclose your Land Trust assets can be considered perjury.  

Timing Can Be Important

The timing related to developing the trust can matter too.  If you have pending litigation or are contemplating separation from a spouse, it is not a good time to be putting assets into trust.  You must avoid the appearance of impropriety.  Should your spouse file for divorce close to the time the trust is formed, you could be charged with hiding assets.  Similarly, if you form a trust while legal or financial action is pending, you could be accused of fraud for attempting to hide assets. Thus, it is important to plan proactively, and to form the trust before you are in the middle of such issues.

Insurance and Financing Can Be More Difficult

Many insurers, lenders, and mortgage companies are reluctant to get involved with Land Trusts.  It can also be harder to refinance real estate held in a trust.  Some mortgagers will require you to take the real estate out of the trust before they will consider refinancing.  This will require additional fees and paperwork.  Of course, you can always put the property back into trust after refinancing, but again, there will be additional fees and paperwork.  It may also be more difficult, or even impossible to get a traditional equity loan on property held in a Land Trust.

Requirements Can Be Different in Different States

Because few states have their own Land Trust Statutes, mistakes can be made when forming the trust that do not become apparent for years.  Additionally, because trusts are often formed in a different state than where the real estate property is held, multiple state statutes may apply.  This is especially true if the trustee and beneficiary live in different states.  Great care must be taken when forming the trust to avoid such mistakes.  And case law from the applicable states must be carefully considered.  

For example, the State of California requires the Trustee to have specific duties and obligations.  It requires a more active role than the traditional Illinois model usually includes.  The State of Texas requires a trustee to be licensed and bonded for the trust to be considered valid.  

This is where working with a skilled attorney is especially important.  You do not want to go through the work and expense of creating a Land Trust, only for the courts to find it invalid.  (Here at the Law Offices of Heath D. Harte, we carefully research the requirements and precedents set in EVERY STATE involved with the Land Trust to avoid these types of issues. However, not all so-called Real Estate Attorneys have this type of expertise.  If your Land Trust involves multiple States, your choice of attorney is even more crucial.)

It May Impact Homesteading

Many States have Homestead Exemptions for a primary residence to reduce your tax obligations.  If you have such an exemption, it is important to investigate if putting your property into a Land Trust will effect that exemption.  Again, this differs according to locality.  In some states, you are able to put your primary residence into trust and maintain your homestead exemption.  In others, this is not true.  

Again, your lawyer will be able to advise you if this will impact your situation.  But this is an important point to research if you are considering putting your home into a trust.  It is not a concern for real estate investment properties that do not qualify for homesteading.

Likewise, the US Government still has a homesteading program.  Most of us think of “Little House on the Prairie” when it comes to homesteading.  Today's homesteading program usually applies to derelict properties in urban areas.  Many real estate investors look at this homesteading program as an avenue to acquire housing.  Since homesteading requires BOTH residency and renovation to acquire title to the property, homes acquired through this program cannot be put into trust.  

There are Costs and Fees Associated With Land Trusts

There will always be annual costs and fees for any Land Trust.  And these costs apply throughout its life.  Most trustees receive compensation for their services.  In states that require Trustees take a more active role, the fees will be higher.  Of course, we strongly believe that the benefits outweigh the costs.  But there will always be ongoing costs and fees associated with maintaining the trust.  

Summary

This week, we discussed some of the drawbacks of Land Trusts, as well as things to consider before putting real estate property in to a Land Trust.  Although a Land Trust enhances your privacy, ownership can be determined through comprehensive investigation.  A Land Trust can help to protect your assets, but in certain circumstances, these assets can still be attached.  Insurance, financing, and refinancing can be more onerous, and it may involve taking the property out of trust. Putting your primary residence into trust may effect homesteading, in certain states, and state requirements for trusts may be confusing.  Finally, there are ongoing costs involved with running the trust.

However, as we've discussed in previous posts, the benefits outweigh the drawbacks in many cases. We will continue to highlight these benefits in our next post.

We truly believe in the utility of land trusts at The Law Offices of Heath D Harte.  We are real estate property investors ourselves, and we have found our Land Trusts to be helpful in many ways.  If you are considering your own Land Trust, you do not have to wait until this series is over to contact us. We are here to help you with all of your Real Estate Law needs, Land Trusts included.

We invite you to send your questions to us by visiting www.HarteRealEstateLaw.com and using the contact us form.  You may also follow our Land Trust series on Facebook, Twitter, & G+ by selecting the respective icons on the bottom of our web page.  www.HarteRealEstateLaw.com

Setting up a Land Trust, Part 2

Setting Up a Land Trust, Part 2

Our last post detailed the steps you need to take to set up a Land Trust.  As promised, we are continuing this week with some specific examples.

Land Trust Agreement Samples

Now you know what a Land Trust is, as well as what goes into forming one, it's time to see some samples.  Land Trust Agreements are filled with legal boilerplate, as are most legal documents.  However, their contents boil down to what we've discussed already.  Again, we cannot stress the importance of consulting with an attorney when drawing up your own trust.  These samples are not meant to be "do it yourself forms" in any way, but rather, are provided as concrete examples of what goes into a Land Trust.  They are provided for informational purposes only.  They may also be helpful for organizing your information so you will be prepared when you meet with your own lawyer.

ATG Trust Sample Trust Agreement Sample

ATG Trust Trustee Deed Sample

Emarquette Bank Trust Outline Sample

Emarquette Bank Trust Agreement Sample

First Midwest Trust Agreement Sample

Investor Insights Trust Agreement Sample

Sample Trustee Deed

Chicago Land Trust Company Trust Agreement Sample

Again, these samples are being provided for reference purposes only.  They are NOT supposed to represent any type of "Do-it-Yourself" type kit.  We strongly suggest you consult with a skilled attorney when trying to create your own trust documents.  

We have provided a zipped folder with copies of these samples, if you prefer to download them to read.  This file is stored on our Google Drive.  

Summary:

This post was a continuation of last week's post.  Last week, we discussed all of the steps in developing your own Land Trust, including how and when to consult with your lawyer along the way.  This week, we examined some specific Land Trust Samples, to help make this topic a little more concrete for our readers.  These included sample Trust Agreements, as well as sample Deed Agreements.  Most of these samples were full of legal boilerplate type language.  Your attorney will probably have similar boilerplate forms to be used when developing your own trust.  However, these samples can be valuable in helping you organize your information so that you can be prepared during your own consultation with your attorney.  

Next week, we will continue our series on Land Trusts.  Future posts will delve into the pros and cons a little further, as well as discuss some "real life examples" in which Land Trusts are being used.

As always, The Law Offices of Heath D Harte is here to help you with all of your trust-related and real estate legal needs.  Feel free to contact us at any time to discuss your own trust needs.

Setting Up a Land Trust: Steps and Samples

Setting Up a Land Trust: Steps and Samples

Now that we understand the concept of Land Trusts, it's time to make things a little more concrete. Today we'll discuss the specific steps you need to take to develop your trust.  We'll also look at some sample templates that you can use to develop the trust.  As always, you really should consult with a qualified attorney when taking these steps.  

How To Set Up a Land Trust: Steps

Step 1: Draft A Trust Agreement

The second part of this post contains some sample trust agreements so you can see what a typical agreement looks like.  Although these samples are being provided to give you an idea of what a trust agreement contains, it is extremely important that you work with an attorney on this step.  Your attorney will know the specific verbiage needed in the state you want to establish the trust.  In fact, your attorney will help you to complete all of the steps described hereafter.  But it is important to know what the steps are so that you can bring the proper information and paperwork to your attorney. The next couple of steps talk about what you need to help your lawyer "fill in the blanks."

Step Two: Designate the Grantor and the Trustee

This is important: who is putting the land into the trust, and who will be the trustee? Now you may ask, aren't I the grantor?  Possibly.  However, investors often ask the seller to put a piece of real estate in trust when they contract to purchase.  When the property closes, the investor just amends the trust, naming himself/herself as beneficiary.  You personally may never take title to a property.  Rather, the property is moved into a trust pre-purchase, and the trust is amended upon closing.  In this case, the grantor is the current deed holder, rather than you.

The trustee is a very important decision.  Many entities can act as Trustee.  And the fees differ significantly according to who you appoint.  There are companies whose entire business revolves around being paid trustees for a Land Trust.  Banks, property managers, lawyers, and Investment Managers are other possible choices.    One of the biggest choices is will you use an institutional or a private trustee.  Institutional trustees usually have set fee structures, and these are usually higher than those charged by private trustees.  Costs are more negotiable with private trustees as well.

When meeting with your attorney to discuss developing the trust, you may want to inquire if s/he ever acts as a Trustee.  If the answer is yes, ask about his/her fee structures for doing so.  If the answer is no, ask who the attorney recommends you appoint as trustee.  If your attorney can neither suggest possible trustees nor personally acts as a Trustee, you may NOT have selected the appropriate attorney to develop your trust.  In this case, you may want to interview other attorneys before proceeding further.  (You can always contact us, The Law Offices of Heath D Harte.  We can help you with all your Land Trust needs.)

Remember, the trustee is the administrator or manager of your trust.  The trustee needs to be someone you can trust yourself, hence the name.  In addition, if you appoint a private Trustee, it should be a person with a different last name.  Your attorney will advise you whether the place you are setting up the trust requires that the Trustee be in the same State.  We cannot emphasize the importance of selecting the RIGHT Trustee enough.

Step Three: Name The Trust

Again, consult with an attorney while completing this step.  Ideally, you want to keep your name out of the trust.  However, in some jurisdictions, it is easier/preferable to use the beneficiaries' name(s) in the name of the trust.  If you are trying to keep ownership private, it is best to leave your name out of the trust's name.  A "classic" Illinois Land Trust generally uses a generic trust name.

Step Four: Determine Type: Revocable or Irrevocable

This is another crucial step, and will depend on your intents and purposes.  Most trusts are set up as irrevocable.  However, an irrevocable trust cannot be amended in any way.  You cannot change any of the terms until the trust expires or all its assets have been removed.

You may amend a revocable trust.  You may change beneficiaries, trustees, etc.  So if you think you're going to want to change anything at all, the trust must be set up to be revocable.  

We previously discussed the example of an investor asking a seller to put a property into trust before going to closing.  In this case, you would need a revocable trust.  However, in most cases, Land Trusts are set up as irrevocable.  Your attorney will advise you on what is appropriate for your specific situation.

Step 5: Name the Beneficiary

Again, this may not be as straightforward as it seems.  Depending on your intents and purposes, you may be the beneficiary, a corporation or LLC may be a beneficiary, or the beneficiary may be a number of people.   

The Chicago Land Trust Company has put together a sample list of "Beneficial Interest Designations" that show the types of beneficiaries a Land Trust may have.  It is embedded below:

As you can see, naming a beneficiary can be quite complex.  But a skilled attorney can help you match your named beneficiaries to your overall intents.

Step Six: Name the Director

Think of the Director as the CEO of the trust.  The Director is the person who dictates how the trusts' assets are handled.  Typically, the beneficiary is named as Director.  If the beneficiary is an LLC, typically the director of the LLC would act as the Director for the trust.  This is probably the most straightforward step in the process, and the one that requires the least amount of consideration.

Step Seven: Name Successor Beneficiaries

As we saw in step 5, naming beneficiaries can be quite complex.  Adding to the confusion is the question of successor beneficiaries.  Successor beneficiaries can be thought of contingencies, should a "main" beneficiary die.  For example, an aging parent might name a child as a beneficiary, to help that child avoid paying Estate Taxes and probate costs.  That child's child may be named as a successor beneficiary, should something happen to the original beneficiary before the trust expires.

With a revocable trust, successor beneficiaries may be changed at any time.  However with an irrevocable trust, successor beneficiaries must stay the same throughout the period the trust runs.  Thus, this is another area requiring careful thought and consideration.  And it is another area that warrants thorough discussion with your attorney, particularly if you are using a Land Trust to help structure your estate.

Step Eight: Name Successor Trustees

Just as with the beneficiaries, you want a "Plan B" in place, just in case something happens to the trustee.  A primary trustee might become ill, retire, or just up and quit.  You need a plan in place should that happen.  This is especially crucial if you choose a Private (rather than Institutional) trustee.

Again, with a revocable trust, things can be changed later.  It is much easier to replace a trustee after a trust has been formed.  But things are more set in stone with irrevocable trusts.  You cannot amend the trustee once the trust has been established.  Even with an institutional trustee, you need a sucessor named.  Companies go bankrupt or out of business; you do not want your trust to go up in smoke just because the trustee does.

An attorney can be especially helpful when it comes to finding and naming successor trustees.  This is absolutely a step in the process that cannot be overlooked.

Step Nine: Designate the State

Your particular needs will dictate in which state the trust is formed.  It is not necessary in all cases to establish the trust in the state the property is located.  In many cases, it is advantageous to set up your trust in a different state.  And of course, the state in which the trust is established will form the basis for the statutes upon which it is based.

If all the land in the trust is in one state, it may be best to establish the Land Trust in that state.  If there are properties from different states in the trust, the issue becomes more complex.  Many investors choose to set up trusts in Illinois with institutional trustees.  Investors also prefer to set up their trusts in states with clear statutes.  Some states require the trust be established in the state where the land is physically located.  This is another area in which your attorney is key.  A skilled Land Trust Attorney should make the recommendation to you, once you have presented him/her with the parcels to be included in the trust.

Step Ten: List the Trust Assets

Finally, it's time to list the real estate that will form the Land Trust.  Some people prefer to set up individual Land Trusts for each parcel of real property.  Others include multiple properties in their trust.  The decision to set up one vs. many Land Trusts will, of course, depend on your purposes.  If your primary purpose is tax management, you will want to confer with both an accountant and an attorney before finalizing any trust agreements.  If it is more for estate management reasons, consulting with an attorney will suffice.

Step Eleven: Finalize the Paperwork

The process is finally reaching its end.  Once you have drawn up the agreement, named the Trust, appointed a Trustee, named successors, designated beneficiaries, named successors, designated a Director, listed the supporting state statutes, and listed all the assets, you should have the Trust Agreement in hand, ready to be executed, as well as the Deed of Trust.  (The Trust Agreement should be dated BEFORE the Deed of Trust.)  Now it is time to get everything signed and notarized. (Of course, always read the documents through thoroughly BEFORE signing the final papers.)

Now that the paperwork is signed, it's time to record the documents.  ONLY the Deed of Trust gets recorded.  The Trust Agreement remains private, locked up in the file cabinets of you, your attorney, and the Trustee.

Step Twelve: Insure the Properties

This is the final step in the Land Trust process, and a step that many people overlook: insure the properties.  Placing a property in a trust does not negate insurance obligations.  You have done this much to protect yourself and your assets; don't forget this important final step.

Land Trust Agreement Samples

Next week, we will continue this post.  Check back to see several examples of Land Trust Deeds and Agreements.  Again, we cannot stress the importance of consulting with an attorney when drawing up your own trust.  And remember, here at the Law Offices of Heath D Harte we are Land Trust Experts.  Contact us if you want to discuss your Land Trust plans.

As always, please use the comments section below to ask any questions.  You may also contact us through Twitter or Facebook.

The Illinois Land Trust

This week, we continue our series on Land Trusts. Today, we are focusing on the Illinois Land Trust, the trust agreement that forms the basis for all modern American Land Trusts.

The Illinois Land Trust

Any discussion of Land Trusts would be incomplete without a discussion of The Illinois Land Trust. Now, as we learned last week, Land Trusts date back to Roman times. However, Illinois was the first US state to formalize land trusts, and all Land Trusts in the US are based on the Illinois Land Trust. They have influenced US Land Trust development so much that ALL land trusts in states without specific statutes to support them refer to any land trust as an Illinois Land Trust.

The Illinois Land Trust Model

The mid-1800s were notable for the development of railroads across the US. Railroad Magnates were some of the first American businessmen to begin utilizing land trusts for property acquisition. The land the companies needed to lay the actual tracks was very often put into a land trust.

In the late 1800s, the city of Chicago began expanding. This period saw the first skyscrapers being built in the city, and the local aldermen had to consider numerous building project proposals. Many of these aldermen wanted to grab their own piece of the proverbial pie and invest in the burgeoning city. Unfortunately, aldermen were banned from voting on any project in which they held any type of financial interest. Additionally, they couldn't vote on any project if they owned land nearby. In order to skirt this rule, the aldermen began using Land Trusts to hide these financial interests.

Of course, this led to the validity of such trusts being questioned. Litigation ensued, and the Supreme Court of Illinois upheld the trusts' validity. However, the court decreed that in order for these trusts to be valid, the trustee must have an active, rather than a passive role. The trustee must have some sort of duties, however minor, for the set up to be valid. Thus, the trustees doing what the beneficiaries direct them to do is considered enough of a “duty” to constitute an active role.

The Illinois Land Trust is based on common law, originally English, but widely followed in the US in the 1800s. It has been further refined and validated by case law over the last century. The Illinois Model is a revocable trust, with its primary purpose being to hold title to property. Its primary purpose is NOT to operate a business or to make money under the law. Thus, it is not eligible for things like Chapter 11 Bankruptcy Reorganization. The Illinois model differs from the common law model in that in an Illinois land trust, the trustee has both legal and equitable title. (In the common law model, the trustee has legal title, while the beneficiary has equitable title.) In the Illinois Land Trust, the beneficiary has a personal property interest only.

The Illinois Model was the first to define a Land Trust, as well as state it consists of a Trust Agreement and a Deed in Trust. Typically, the Illinois Land Trust is for a 20 year period. Historically, banks acted as trustees, but few do this any more. In Illinois, there is a title company whose sole business is to act as trustee. In many cases, a lawyer may act as trustee. It is appropriate for an entity to receive a nominal fee for acting as the trustee.

Over the last 100+ years, the Courts in Illinois have continued to uphold the validity of land trusts. Some notable cases are: Robinson vs. The Chicago National Bank (1961), Chicago Federal Savings and Loan Association vs. Cacciatore (1962) and BA Mortgage vs. Aerican National Bank and Trust (1989.)

The Illinois Model in Other States

Of course, the Illinois Land Trust is the basis of statutes in the State of Illinois. But Illinois is not the only state to have statutes relating to Land Trusts. Now, Illinois, Florida, Georgia, Hawaii, Indiana, North Dakota, and Virginia all have state statutes relating to Land Trusts. Arizona, California, and Ohio have upheld Land Trusts through case law. (In California, Land Trusts are referred to as “Title Holding Trusts.”) Montana, Kansas, and Massachusetts have also upheld Land Trusts in court cases. In most states, the validity of Land Trusts is supported by common law. Only Tennessee and Louisiana specifically do not recognize Land Trusts.

Whether you live in a state that has a specific statute or not, it is ALWAYS best to speak with a qualified attorney when contemplating a Land Trust. And this attorney needs to have a specific expertise in Land Trusts, as opposed to just trusts in general. This attorney should know about how local courts have ruled in Land Trust cases, as well as how courts across the country have treated Land Trusts. Again, the Illinois Land Trust forms the basis of case law in all states, but especially in states without their own specific statutes. In states with specific statutes, it is imperative your lawyer is familiar with all the nuances of the state-specific laws as well as court precedents.

The Illinois Land Trust and Real Estate Investors

Despite the fact its stated purpose is “to hold title to property,” there is nothing that precludes an investor from using a Land Trust. In fact, many Real Estate Investment Clubs (REICs) form trusts with the members being the beneficiaries. Florida does place some different restrictions on corporate owned Land Trusts, but these exist only to clarify legal responsibilities for different land-associated liabilities. They are not designed to deter the use of a land trust in any way, shape, or form. Walt Disney would never have acquired the land needed for Disney World without the use of a Land Trust. In fact, we specifically recommend Real Estate Investors consider using Land Trusts in conjunction with real estate investments. Later posts will elaborate on why Land Trusts for investors are a very good thing.

Summary

In this article, we reviewed the Illinois Land Trust model, its history, and its applicability to Land Trusts in other states. We discussed how the Illinois Model provides the basis for Land Trusts in most other states.

We will continue to delve into Land Trusts in the coming weeks, and we will elaborate on the use of Land Trusts with investment properties. We will also focus a little more on the pros and cons, and what a Land Trust can and cannot do for you. As always, we recommend you consult an attorney when trying to implement anything you have learned here. This series can only cover generalities; nothing here should be construed as legal advice, and by reading this, you have not initiated an attorney-client relationship. We would be happy to discuss such a relationship, and should you wish to have one, you may contact our offices.

And again, please use the comment form below to ask us any general questions you may have about Land Trusts or anything contained in our blog posts. You may also reach out to us through G+, Twitter, or Facebook (links in the sidebar.) We look forward to continuing this journey with you in the coming weeks.