I believe a PAC Trust does NOT get around due on sale legally... - Posted by Daniel Lubell

import · May 22, 1999, 9:00pm

Posted by Rick Vesole on May 24, 1999 at 24:57:54:

Bill,

I think that the occupancy provision in Garn St Germain and the CFRs are ludicrous if they really mean that a person who transfers their property into a land trust and then moves out and rents it is in violation of the due on sale clause, when it is perfectly o.k. for that person to keep the property in their own name and to then move out and rent it. But from a strict reading of the law, that is what it seems to say.

On the other hand, I think that a lender may be estopped from asserting the due on sale clause where the property was originally financed through that lender as an non-owner occupied property, where they subsequently transfered it into a trust. But who knows for sure? Interesting discussion.

import · May 22, 1999, 9:00pm

I believe a PAC Trust does NOT get around due on sale legally… - Posted by Daniel Lubell

Posted by Daniel Lubell on May 22, 1999 at 21:00:00:

First, let me say that this is not meant as a slap at Bill Gatten. I am interested in his PAC Trust ideas, but I do not think they quite fit the bill as a legal means to get around due on sale clauses for investors. Having said that, I think Bill’s ideas are just as good as anybody else’s trust assumption ideas. In general, a trust assumption is a great way to avoid due on sale clauses. It just is not an iron clad in stone method, and I wanted to point this out in case anybody had any other understanding.

While Mr. Gatten’s ideas do have some merrit, I am not sure they are any better than Bill Bronchick’s original land trust arrangement. Certainly, Bill Bronchick’s arrangement is much simpler. Both get around the due on sale, but Bill Bronchick does not claim that he does so in a legal sense, just that it helps protect the transaction from being seen by a lender. Actually, that is good enough for me.

On the other hand, Mr. Gatten seems to think he has gotten around the due on sale clause when he transfers a property out of the current owner’s name into a trust and then has the trust creator remain part of the trust with a beneficial interest.

The problem comes when the trust creator moves out of the property. As soon as that happens, any trust, including Mr. Gatten’s trust, immediately violates the U.S. Code of Federal Regulations. Specifically, it violates [Code of Federal Regulations][Title 12, Volume 5, Parts 500 to 599, b (vi][Revised as of January 1, 1999]. In this section, the Code specifically spells out when a due on sale clause is NOT triggered. Under the section on transfer of a property into a trust, the Code tells us that the only time a transfer of a property into a trust would exempt a loan from being called, would be in the case of the original creator of the trust staying in the home. Thus, as soon as the original person that qualified on the mortgage loan moves out of the home and the new person moves in, the due on sale clause is triggered.

Here is a direct quote from the Code…
Sec. 591.5 Limitation on exercise of due-on-sale clauses.

(vi) “A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and OCCUPANT of the property…”

So, if the trust creator moves out of the home, the PAC Trust officially violates the due on sale clause.

I still say, big deal, I really don’t care. I just want it to be clarified that there is no perfect solution to getting around the due on sale clause. If anybody wants to view the Code of Federal Regulations, here is the web site:
http://squid.law.cornell.edu/cgi-bin/get-cfr.cgi?TITLE=12&PART=591&SECTION=5&TYPE=TEXT

Daniel Lubell

import · May 23, 1999, 1:34am

Re: I believe a PAC Trust does NOT get around due on sale legally… - Posted by Bill Gatten

Posted by Bill Gatten on May 23, 1999 at 01:34:08:

Dan,

I take it then that you are suggesting that people with more than one piece of property are not allowed to place them into living trusts, unless they are going to occupy all of them. Or are you suggesting that these folks would be prohibited from living in one and holding the other as a rental. Or is it that someone who own a duplex, tri-plex or four-plex couldn’t place it in a land trust unless they were going to occupy all the units themselves.

And think about it… is there any regulation you know of that says a co-beneficiary (or remainder agent) in someone’s living trust can’t be a tenant in the trust’s real property should they so choose?

Dan, I too (as you apparently are) am surrounded by excellent Real Estate attorneys who have done extensive research into such matters, and who are well versed in the codes and cites you mention.

Once again…please…pick out which step below triggers the Due-on-Sale Clause (re. the U.S. Code of Federal Regulations) on a PACTrust™ property.

Bob Smith has six rental properties in six separate land trusts.
Bob’s attorney suggests that his appointing a co-beneficiary for each of his trusts would best protect his estate planning interests.
Box appoints his friend Fred Jones as his co-beneficiary in each of the trusts.
Later Fred looses the lease on his apartment and asks Bob if he can lease property number five.
Bob says, “no problem,” and Fred moves in under a contract with the trustee to cover all payments and property taxes, and to handle all repairs and upkeep (burden of possession), and begins writing off the interest portion of his [triple net] lease payments.
None of the above.

Dan, please understand that prior to my first post on CRE (I was lurker for a while) I noted that your ‘causes’ can become very determined, and I sincerely pray that I haven’t become one of them. Honestly…I truly have no axes to grind and couldn’t care less if someone who has no mice doesn’t need a better mousetrap.

Our program is not in any manner in competition with what Bill Bronchik does, promotes or espouses relative to land trusts. You should be one of the first to have noticed the large number of times I have suggested that people inquiring about land trusts buy Bill’s courses and books before considering ours (I have Bill’s excellent book on my desk and refer to it almost daily).

Just remember that the first stage of the PACTrust™ is exactly the same thing Bill teaches. We merely suggest that if you want your deal to be as water tight as you can get it, go a little further (be a little more meticulous). In other words, leave the borrower on the trust. Leave the trust in the borrower’s name. Leave the borrower with the right to terminate the trust for cause. Leave the borrower with voting rights. Vest the title with a bona fide corporate trustee (or a legal entity that can’t die). Avoid creating an Option to Purchase: i.e., in a PACTrust™ it is agreed that at termination, no matter who buys it, the property will be sold for FMV, and the buyer, whomever it is, will pay full Fair Market Value–should the Resident Beneficiary choose to be that buyer, then he/she pays the same amount as anyone else would, but less any moneys due him from the trust, such as his equity (this means that to acquire the property outright, one need merely pay off the remaining loan balance and pay the non-resident beneficiary/ies anything owed to him/them). Make certain that the IRS couldn’t deem the transaction a Partnership, Corporation, Joint Venture or Association (taxed as a Corporation).

Our stepping beyond the simple land trust is the reason we have never been sued (in 15 years of business); why our clients have never been sued; why we nor our clients have ever failed a tax audit; and why some the country’s largest lenders know our checks on a first name basis…with nary a complaint.

Dan… please don’t hate me because I’m beautiful.

Respectfully,

Bill

import · May 22, 1999, 10:20pm

Re: I believe a PAC Trust does NOT get around due on sale legally… - Posted by David Alexander

Posted by David Alexander on May 22, 1999 at 22:20:22:

Dan, you startin trouble again. LOL.

David Alexander

import · May 23, 1999, 12:42pm

Re: Brilliant Dan Lubell not hating beautiful Bill Gatten - Posted by Daniel Lubell

Posted by Daniel Lubell on May 23, 1999 at 12:42:54:

Bill,

I won’t hate you cause your beautiful if you won’t hate me because I am brilliant! (Only kidding. I am far from brilliant, my business partner will attest to that!)

Ok, here goes. I am not targeting you, I just wanted to have a discussion about this particular subject. In fact, I think your ideas do have some merit, and are rather well reasoned. The point of a discussion group such as this one, however is to intelligently discuss such ideas, so I hope no offense will be taken.
Certainly none is meant. In that spirit, I am answering your post.

The due on sale clause is NEVER triggered when Harry homeseller rents out his property. No issue there.
However, when Harry transfers his property into a trust, the Code of Federal Regulations kicks in.
Now, if Harry wants to rent out the property, he legaly has to place it back into his own name.
I think the code is quite clear on this. It says that
the due on sale clause would not be triggered IF and ONLY IF the original borrower remains in the property.
Here, again, is the wording:
“A transfer into an inter vivos trust in which the borrower IS AND REMAINS the beneficiary and OCCUPANT of the property…”

So, there you have it. If the borrower is now, and remains in the future, the occupant of the property, you are fine. But, if the borrower wants to rent out the property to anybody, (even a co-beneficiary in a trust with the borrower), that borrower must take the property out of the trust to do so.

Now, let me be clear. I DON’T THINK THIS WILL EVER COME UP! I was simply making the point that it is not something that would be gauranteed to get around a lender who is out to get you in court. Unfortunately, the CFRs are very clear on this, and there is no wiggle room. The key, in my opinion, is to keep a low profile.

Also, Bill, please do not think that I am setting this up as a Gatten vs. Bronchick squabble. I respect both of you gentlemen very much. I was just pointing out the differences in the approaches.

Where I do favor the Bronchick approach to all of this is in the event that the tenant does not pay.

For my own money, I would prefer to be in front of a judge explaining a simple lease option eviction in the event the renter does not pay. In that case, I am telling the judge “Here is a renter that did not pay”.

The judge ought to understand that one, he comes accross it every day of the week.

In a PAC Trust, by contrast you are telling the judge that you have an occupant that did not pay under the following situation:

"It is agreed that at termination, no matter who buys it, the property will be sold for FMV, and the buyer, whomever it is, will pay full Fair Market Value–should the Resident Beneficiary choose to be that buyer, then he/she pays the same amount as anyone else would, but less any moneys due him from the trust, such as his equity (this means that to acquire the property outright, one need merely pay off the remaining loan balance and pay the non-resident beneficiary/ies anything owed to him/them).

Wow, that was a mouthful! (Thank God for cut and paste in Windows). Anyway, there is no telling how the judge may rule under that one. I can imagine that a Court sitting in Equity would bend over backwards to protect the non-paying occupant.

Just my .02 cents.

Daniel Lubell

import · May 23, 1999, 4:19pm

Re: Brilliant Dan Lubell not hating beautiful Bill Gatten - Posted by Bill Gatten

Posted by Bill Gatten on May 23, 1999 at 16:19:13:

Dan,

Burnish the following indelibly into your subconscious if you will:

“When the finger is pointed toward a star, it is the slow of wit who looks at the finger” [Chinese Proverb]

(This is no manner an allusion to your brilliance, which I indeed acknowledge and respect: but rather it is a pointed reference to my own extraordinary beauty).

Now (speaking of pasting and poking):

YOU SAID: “The due on sale clause is NEVER triggered when Harry homeseller rents out his property.”

I SAY: First fallacy… the DOS is always subject to being triggered if that rental or lease agreement is for more than three years or contains an option to purchase (GSG USCA 1701-j-3, item 8).

YOU SAID: “A transfer into an inter vivos trust in which the borrower IS AND REMAINS the beneficiary and OCCUPANT of the property…[is excluded]”

I SAY: Correctomundo! Except that I think the verbiage refers to “resident” rather than “occupant” and remember…it is the “interpretation,” not the “law.”). The U.S. Code Annotated (1701-j-3) does NOT refer to such occupancy provision. Though I do agree that a lender could jump on this interpretation, and would no doubt to so, in an attempt to prove me wrong…if they chose to: that does no however, make them right.

I’ve cited other cases wherein transfer of a partial or co-beneficial interest in a trust did not entitle the lender to a DOS call despite their clinging to the FHLMB interpretation, however, here are a couple “reasonably related” others:

Gasparre v. 88-36 Elmhurst Ave. Realty Corp., 119 Misc.2d 628, 464 NYSE2d 106 (1983) (See also U.S. Med O. Farm, Inc., 701 F2d 88 (9th Cir. 1983). In this case the property was vested with a corporation, and transfer of the borrower’s stock did not trigger the DOS. Note, however, that, in residential property, stock ownership to a resident would not convey tax deductibility as it does when beneficiary interest in a land trust is similarly conveyed.

Also see Hodge v. DMNS, Co. 652 SW2d 761 (Tenn.App Ct., 1982). In this case it was a partnership, wherein two of three partners withdrew in order to convey full interest to the third partner who didn’t qualify for the loan (no DOS viol).

Now…

YOU SAID: “…let me be clear. I DON’T THINK THIS WILL EVER COME UP! I was simply making the point…”

I SAY: Hey, Man, throw a subordinating conjunction in there between “clear” and “I don’t” (e.g., but, albeit, however, none-the-less, etc.). It will make the difference (i.e., thereby acknowledging an adjustment in the subjective element of your compound sentence… and your original thought process).

YOU SAID: “Unfortunately, the CFRs are very clear on this…”

I SAY: Read (for example) Real Estate Law…10th Ed. Werner and Kratovil (1992) - 21:01 “The MOST CONTROVERSIAL clause in mortgage law today is the so-called Due-on-Sale Clause…” I agree. The regulations are NOT AT ALL CLEAR.

YOU SAID: “…let me be clear. I DON’T THINK THIS WILL EVER COME UP!”

I SAY: With all deference and adulation (not to exclude fawning), I don’t think it’s at all clear that you mean that. It appears to me and probably to your other readers that the possibility frightens the dickens out of you. Albeit, I don’t understand (for the life of me…as they say) how lease option proponents can declare to the world that the Due on Sale Clause is NEVER triggered, and is nothing to worry about: then turn right around and show such concern over the interpretation of GSG by the FHLMB and/or the “Code of Federal Regulations.”

Regarding your comments about a potential for a Gatten versus Bronchick squabble… it won’t happen. Bill and I don’t seem to disagree on one single point, until it comes to something wholly outside the land trust issue, and that is whether the inherent disadvantages of lease options can be overcome by a 3rd party co-beneficiary land trust conveyance without losing a single element, benefit or advantage of the former.

Now… where do YOU AND I agree? It is in that no system can be said to be absolutely perfect… I only say that the PACTrust™ is closer to it than anything seller-assisted financing arrangement that has been promulgated heretofore.

And let me close by amending your scenario before the Unlawful Detainer judge… I don’t refer to the “buy-out” provision to assert my position: I refer to the fact the co-beneficiary’s interest in the trust and the lease of the property are completely separate issues…and that as a tenant, he as no equitable interest claim in the property: and that he is not only the defaulting party, he is also the very drafter of the document which issues and delineates the direction for, and the conditions of, the tenant’s (his own) eviction. Please understand Dan, that I’ve been there (down that road) a few times, and do indeed know of which I speak on that particular issue.

Another point on which we fully agree:

YOU SAY: “I think your ideas do have some merit, and are rather well reasoned.”

I SAY: You are truly a master at understatement.

Mirror, mirror on the wall…,

Bill Gatten

import · May 23, 1999, 3:37pm

Mr. Lubell, Not to be contradictory, but… - Posted by FJW

Posted by FJW on May 23, 1999 at 15:37:44:

here it is and how I comprende.

CHAPTER V–OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY

PART 591–PREEMPTION OF STATE DUE-ON-SALE LAWS–Table of Contents

Sec. 591.5 Limitation on exercise of due-on-sale clauses.

(b) Specific limitations. With respect to any loan on the security of a home occupied or to be occupied by the borrower,

(1) A lender shall not (except with regard to a reverse mortgage) exercise its option pursuant to a due-on-sale clause upon:

(vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.

Key phrases to me:
(b)“occupied or to be occupied”
(vi)“refuses to provide the lender”

This is my interpretation of it, but this reg. to me indicates that only upon refusal would the lender be allowed its option to call. I could be wrong obviously, but I believe PACTrust does notify lender and even if it didn’t the lender wouldn’t be able to exercise it’s option if it’s request for notification was satisfied. Even if beneficial interest or occupancy were transferred temporarily, they couldn’t call DOS if their request for notification regarding such was complied with. Looks like to me that if they ask, and you tell them, and nothing else violates, no problem. That’s my equivolation on that legaleze mumbo-jumbo.

>The due on sale clause is NEVER triggered when Harry >homeseller rents out his property. No issue there.

Isn’t it triggered when there’s an option and/or leased for over 3 years?

>In a PAC Trust, by contrast you are telling the judge >that you have an occupant that did not pay under the >following situation:

In the PACTrust, isn’t it the trustee(landlord) proving the defaulted occupant is also a beneficiary and that as a beneficiary he is also entitled to a percentage of other benefits such as potential appreciation regardless of who purchases the property and that the occupant/resident-beneficiary is now trying to tell the judge he didn’t understand his own lease agreement?

I’m glad you brought this up. I await Mr. Gatten’s reply.

Have a good one.

FJW

import · May 24, 1999, 3:06am

Bill the Beauty… - Posted by Daniel Lubell

Posted by Daniel Lubell on May 24, 1999 at 03:06:13:

Bill, You said that you made a pointed reference to your own “extraordinary beauty”. I have no comment on this one. Perhaps I should just call you “Bill the Beauty”
(oops, I couldn’t resist).

You said “the DOS is always subject to being triggered if that rental or lease agreement is for more than three years or contains an option to purchase”

No disagreement there. Of course, I never said I did leases for more than three years. In fact, I have said in the past that I never go out more than two years. Most lease option experts agree, the shorter, the better.

By the way, many things can trigger DOS, including late payments on a loan. I just wanted to make it clear that ther is no absolute way around DOS.

With regard to the code of Federal Regulations, you said: I think the verbiage refers to “resident” rather than “occupant”.

I do not know why the CFR would say “occupant” when it meant “resident”. If you are going to say a resident would not violate the CFRs (maybe because he still recieved mail at the address) but an occupant would violate the CFRs, I think the judge would toss you out on your A S S for splitting hairs because the intent of the CFR is clear. None the less, it is all acedemic because the wording IS “occupant”, not “resident”.

You said with regard to the CFR saying that the borrower on the loan must remain the occupant (if a property is placed in a trust): “I do agree that a lender could jump on this interpretation, and would no doubt to so, in an attempt to prove me wrong.”

You and I finally agree on something! This is exactly what I have been saying all along.

You said, with regard to my feelings about a lender calling a loan due that was placed in a trust “the possibility frightens the dickens out of you…”

Not at all, Bill. In fact I have 12 such loans in trusts now. This whole discussion is rather intellectual in nature, because I was only making the point that there was no LEGAL gaurantee against the DOS being called. I believe the actual risk of a due on sale clause being called is slim to none, if handled with discression. I am a collector of sorts, and I hope to collect many more great loans on propertys inside of trusts in the future!

You said “Regarding your comments about a potential for a Gatten versus Bronchick squabble… it won’t happen.” That is great, you both seem like nice guys and I was making the point that it was NOT a squabble.
So, it appears we agree again.

Finally, and this is where I think your PAC Trust falls on its face; the eviction court. Remember, we live in an age where judges are increasingly taking the side of the poor victim tenant against the sophisticated professional landlord. This is not a place where you want to be on weak ground.

Let us say we each have a difficult tenant to evict.

I have a lease option. First, I try and evict on my lease. No problem. Maybe the option comes up. Still, a judge has seen these before. I will get my eviction every time.

By contrast, here comes Bill the Beauty. He has an arrangement to explain to the judge, and it is also a “beauty”. Bill says, "Your Honor, I have a co-beneficiary of a trust that owns this property and I want to evict him. He may be the owner, but as a tenant, he as no equitable interest claim in the property. (I can just hear the Judge slam down his gavel and say "Make up your mind, Mr. Gatten, is he the tenant or the owner?)

You would continue “He is not only the defaulting party, he is also the very drafter of the document which issues and delineates the direction for, and the conditions of, the tenant’s (his own) eviction”.

At which point the tenant says “Drafting? I missed that class in high school. I don’t know what he is talking about and I sure as hel l don’t know what I signed”. And God help you if this guy has a legal aid attorney!

If you have not had trouble with this one in court yet,
you are either very lucky, you have easier judges than we do in Iowa or you have bribed your tenants out of the property.

Daniel Lubell

import · May 24, 1999, 1:23am

Contradictory? No. Confused? Maybe… - Posted by Daniel Lubell

Posted by Daniel Lubell on May 24, 1999 at 01:23:54:

FJW,

You are not contradictory, just a little misguided in your interpretation. The reg reads as follows:

A lender shall not (except with regard to a reverse mortgage) exercise its option pursuant to a due-on-sale clause upon:

(vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, UNLESS
(Unless means here comes another part where they CAN call the loan)
as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.

So, what the reg is clearly saying is:

If the property is in a trust and you change the beneficial interest so that the beneficiary is not the original borrower or (unfortunately) the occupancy, then the lender can call the loan.
If the lender should request some system to notify them about a change in beneficial interest or occupancy and you refuse to cooperate, then the lender can also call the loan.

The second question revolves around eviction. Remember, there is a tendancy in the court system to favor the poor ignorant tenant vs the seasoned investor, where there is room for doubt.

I can just here the tenant now. "I don’t know what I signed, your honnor, but they are trying to kick me out like a tenant and yet they say I am also the owner.

And you say, "Well Your Honor, it is really simple. You see, the tenant signed an agreement wherein he is
also a beneficiary. As a beneficiary, he is also entitled to a percentage of other benefits such as potential appreciation regardless of who purchases the property so, as occupant/resident-beneficiary, he needs to hit the street and forget all this… Oh, and by the way, he knew all about trusts and understood everything he was signing.

Yeah, right!

Daniel Lubell

import · May 23, 1999, 5:11pm

Re: Mr. Lubell, Not to be contradictory, but… - Posted by Bill Gatten

Posted by Bill Gatten on May 23, 1999 at 17:11:39:

Dear “F” thanks for KNOWING and being sure of it (refreshing)

Hi. Hey! How ya doin’? How’s the wife and kids? That new car runnin’ OK? 'That pesky mole ever dry up? Great! Great!

Only one amendment here to your excellent post (VERY nice job, by the way), regarding the eviction process. What Dan apparently didn’t glean from my explanation about the buy-out provision, is that the tenant beneficiary in a PACTrust? has NO right to buy the property at all?other than for the same price, as would anyone else. The fact that the trust may owe him money at the termination date by virtue of his beneficiary interest in the trust has nothing to do with a right to purchase at Fair Market Value (just like anyone else would). The effect here is, however, that even without such Bargain Buyout or Option Agreement (either of which would likely nullify the tax effect of a land trust), if the non-resident forfeits its interest at term, all the resident beneficiary (or co-non resident beneficiary in the case of an investor) has to do, is just pay off the existing loan. If the non-resident hasn’t agreed to forfeit, then the resident merely pays off the loan and pays the non-resident/s what he/she/they are due?then owns the rest.

Do understand though, that Dan is right is stating that “technically,” under the specific regulations cited, an owner would be required to remove his property from the trust in order to rent it out. The reality is, however, that no court is going to enforce that for anyone who owns income property that is held in a legitimate living trust (1 house, 10 houses, 3 condos or an apartment building). Can you imagine an apartment building owner having to take his building out of his trust every time a tenant moves in or out… or being forced to live in his own apartment building or fourplex?

The “Occupant (OK I was wrong, Dan, it is ‘Occupant’ not ‘Resident’ OK? Sheez! I’m old? I get a free one now and then)” idea is thrown in to prevent someone from relinquishing ALL of their interest to someone else, thereby losing complete association with, and control over, the lender’s security… THAT’S WHY we require that in a PACTrust™ only a partial beneficiary interest be relinquished, and that control not be parted with. Although the right to revoke and mutual Power of Direction is retained by the non-resident, the resident beneficiary has full protection via the third party (unrelated corporate) trusteeship and a “Mutual” Power of Direction against untoward actions, or any attempt by the other beneficiary/ies to cheat, deceive or terminate the trust without cause. That is to say that the trustee may not deal with any issue of title or the property which is not express and constructively delivered by both (all) parties being in full accord.

It’s important, because of the kinds of regulations we are discussing here that the right to revocation for cause never be taken away from the borrower. In a PACTrust™ the non-resident beneficiary can revoke the trust anytime for abandonment, vacation gross misconduct, or anytime the resident beneficiary would abrogate any responsibility, or violate any tenet of the Beneficiary Agreement, the Assignment or the Use and Possession Agreement.

Do you suppose we’re making any headway here?

Bill

import · May 24, 1999, 12:34pm

May this one rest in pece - Posted by Bill Gatten

Posted by Bill Gatten on May 24, 1999 at 12:34:45:

Dan,

Sorry, but since you haven’t had the experience, I do understand how it is that you might not know what happens in a PACTRust™ eviction. I, however, have had the experience, and do know first hand what happens, and am more than willing to share my information with you.

Here’s a point you may be missing (and I’m not putting down lease options…as a matter of fact Steve Love, an occasional poster here, and I may do one on a property we picked up last week in a PACTrust™. If I am your tenant under a Lease Option, I am in financial trouble or I wouldn’t have defaulted–I can’t afford to move (yet), so I’m going to ignore, forestall and thwart your eviction efforts as long as I can (if I can). The first thing my brother-in-law or the guy at the grocery store is going to tell me to do is get a lawyer. I’m then going to take your Option Agreement to a sharp fanged, spittle dripping pro who’s been around the Pike a few times. He(she) will know all the tricks and, whether its true or not, would be remiss in not claiming that the Option effectively conveys (or was supposed to have conveyed) an equitable interest to me (by virtue of my option fee); thereupon (hopefully) forcing you to spend money and time proving that it doesn’t.

I agree in the above scenario that you will win every single time…unless our Option arrangement can be deemed a Lease Purchase with a stipulated mandatory buyout…then you lose… and we are forced into a Judicial Foreclosure, Ejectment Action, etc.). In either event, however, I will, have bought three or four months (or more) of free rent at your expense. I will likely have save enough to pay the attorney and have some left over for my next landlord’s deposit. And when the smoke finally clears you may (and likely will) have to go through the time and expense of a Quiet Title Action to remove the resultant clouds on title–the vestigial remnants of our squabble).

The above is a made-up, worse case story; but, as you know better than I, it could and does happen all too often. The idea is to protect oneself as well as possible from such an occurrence.

Now. In the PACTrust™ eviction, understand that the eviction itself is taking place relative only to our Occupancy Agreement (a straight lease agreement with the Trust). Any business relationship relative to the trust, or to the property, between you and me is in a separate document and part of a separate transaction, and is another issue. The only issue at hand at the moment is that our trust has a tenant (me) under a simple 3-year Lease with our trustee who is not paying. We gotta get me out. The Trustee’s action is purely and simply an eviction of an errant tenant who has no option to purchase, no buy-out provision, no conditional sale, no contingent sale, no special deals. The issue of you removing me as a co-beneficiary in the trust is wholly another issue, and when it comes up, that’s exactly what the judge says. "…you folks can handle that matter in another court at another time: for now let me get on with whether or not Mr. Gatten is in default of this ordinary, everyday, run of the mill, nearly drugstore-form (albeit triple net) Lease Agreement with no conveyance of equitable title.

Remember Dan, the Eviction is of a tenant (me, in this case) under a Lease Agreement… which document stands on its own in the court: it is only a Lease. There is no option to purchase; there is no mandatory buyout; there is no predetermined purchase (option) price; there is no interest consideration from one beneficiary (or tenant) to the other; there is no rent credit; there is no option fee; etc…

Following my removal from the property, should I choose to, I can contest my voluntary forfeiture of my beneficiary interest in the trust, and demand my share of any equity in the property having accrued to the trust property (following adjustments for my missed payments, penalties, default fee, MAI appraisal, etc.). If you want to know how that is automatically structured as well, buy my book…No! No Just kidding! Just let me know. I’m happy to share.

Respectfully,

Bill

PS, Once again, Dan, I don’t think you mean to be rude or confrontational; but if you could avoid the “fighting words”: words like “Here is how the PACTrust™ falls on its face,” I’d truly appreciate it. Irrespective of its perhaps not being perfect in every sense, there is no point at which it falls on its face, though there may be areas you’re not clear on yet. The comment is a little like me suggesting that your first born looks like a monkey, and that it ought’a look more like one of mine…the PACTrust™ is 100% of my life, breath and thought, and has been so since 1984 (without a single law suit, tax or creditor failure, eviction failure, lender question, judicial foreclosure, 1031 failure, Ejectment action or Quiet Title).

My advice is, if you find something better… then great! I haven’t yet, but I’m working on it ('may turn out to be a PACTrust™ Lease Option combination).