Re: 2 tier , 3 tier PACTrusts - whats the distinction? - Posted by Bill Gatten
Posted by Bill Gatten on December 17, 1999 at 22:04:43:
A “two-tiered PACTrust” is an arrangement some call a “Sandwich” PACTrust. Here’s what happens in a regular old (one tier) PACTrust:
Seller places property into his own land trust and conveys a beneficiary interest to a would-be buyer. That party then leases the property from the trust and lives in it (thereby obtaining all the benefits of fee-simple real estate ownership, including tax write-off) without loan qualifying or down payment (unless the seller were to insist on some cash up front). This, we typically promote to Realtors and people who want to own their own homes the easy way.
A two-tiered PACTrust (promoted to investors) works this way:
The seller agrees to put the property into his own land trust (you do it for him, of course when you exercise your option to acquire the property); then he appoints you as the 2nd co-beneficiary. You then advertise for a 3rd beneficiary who will live in the property and make all of “your” payments and handle all of “your” management and maintenance, in exchange for some or all of “your” future appreciation, tax write-off, equity build up by principal reduction, and all other incidents and benefits of home ownership (use, occupancy, possession, etc.).
In your position as the 2nd co-beneficiary of the two-tiered PACTrust, you merely sit back and wait for the trust to terminate, at which time the property is sold (or refi’d by the resident beneficiary). At that point you receive your portion of the net profit. In my own transactions I always share the profit with the resident beneficiary, contingent upon prompt payments and strict adherence to the contract. Although such “equity sharing” isn’t always necessary (…they might only be after the tax write off…of just a place to live or operate their horse shoeing business).
As an investor in a two-tiered PACTrust, your profit centers are: 1) The equity you create when you raise the Mutually Agreed Value to more than your acquisition cost; 2) the cash you charge up front that is more than you had to pay up front; 3) the difference between the payment you are charging the resident beneficiary and your actual monthly obligation; 4) the equity that builds up as the loan is being paid down, and, 5) whatever appreciation there may be by the time the land trust and lease trust terminate…when the property is sold, refinanced, or given back to you.
By the way, thanks for attending the telementoring session. We had about 100 folks on board this time (though I had the date so screwed up that we did it again the next day for those whom I had totally confused…its supposed to be every 1st and 3rd Thursday).