The other white meat - Posted by Bill Gatten
Posted by Bill Gatten on March 25, 2001 at 16:38:53:
The reason we prefer the PACTrust over just about anything else…
ANY lease for more than 3 years is a violation of the lender’s due-on-sale clause (12USC1701-j-3). Also ANY lease with an option to purchase is a violation of the DOS as well (but that?s the easy part).
Chances of a lender calling it loan in on the latter is small (unless they have another agenda); but on the former…their security can be seriously imperiled when a lease tenant can claim an equitable interest in the property. And tenants do this (their attorneys do) in order to forestall eviction and force judicial foreclosure processes, in order to buy time and free rent when they are in default (i.e., when a leasehold is for more thn 3 years). A lender (and/or you) could have to go through some real red tape to foreclose and eject.
Also, if your tenant were to chose to exercise the option to purchase after the option period has expired, you could be in for long expensive run. You would probably even have to sell to them at the option price, even though a year or two had passed since the option terminated. This is due to their equity claims and your conversion of the leasehold interest to a real estate interest and an equity position.
Personally, Ron, I’d suggest never leasing to, or from, anyone for more than 2 years, 11 months and 29 days and never with an Option. As far as the Option and term issue is concerned…if an owner puts its property into a co-beneficiary land trust, then leases it to you, or to a resident CO-beneficiary tenant: there are ways to ignore and circumvent ALL of these restrictive issues. As a matter of fact, by doing it this way, you can lease the property (in or out) for up to 20 years or more with ALL the benefits of an Option: but without there actually needing to be one. The method I’m referring also affords (can afford, if you wish it to) the tenant/s full income tax benefits and ALL of the many other incidents and benefits home ownership (which they will gladly pay for in addition to the cost of normal Fair Market Rent).
By doing it all this way, Ron, the process obviously serves well to increase your net rental income by a 100% or 300% or more, while simultaneously eliminating all of your maintenance costs, management, repairs, negative CF, vacancies, etc…
- Property goes into the land trust
- You become a co-bene with the seller
- Your tenant becomes a 3rd co-bene and leases the property
The property is now schedule for sale in 5-10 years (less or more), at the end of which time the seller relinquishes his interest to you; the tenant is afforded the first right to buy at FMV (less the monies owed to him by the trust in which he is a beneficiary). This all happens only AFTER you receive all of the equity you’ve been carrying, and after your receipt of the Positive CF over the years (plus? the fee you collected up front as a Bene Contribution…not an “option fee”). And the way I do it?AFTER receipt half of whatever the appreciation and principal pay-down has been.
Oh, the 3-year term issue? The contract provides that even thugh the trust wont terminate for 5 more years, the lease is up in 2 years, 11 months and 29 days. After this period, it states that if the tenant remains in possession, he is deemed to be on a Day-to-Day Holdover until evicted by the landlord. The landlord, of course, being the trustee, who may only act under mutual direction of all beneficiaries…the tenant (unwilling to evict himself) then stays on the Hold-Over until the trust terminates and the property is refinanced or sold.