Land trusts, LLCs, and Refinancing

[Jim Brozny]

Hi Everyone – I've recently entered into a land trust with two partners to purchase and flip an SFR. Since the closing, two of us have decided to keep the property and buy out the third partner. Now that we plan to hold, I'm inclined to dissolve the land trust and create an LLC. My attorney agrees (via a brief email conversation).However, I'm wondering if there are any implications. Specifically, we purchased the property with private money with a term of one year. We'll need to refinance in order to keep the property. I've read that banks won't provide a loan if a property is in an LLC.

Would you recommend my partner and I retain the land trust or create an LLC?

Thanks.

[Clint Coons]

The acceleration clause can be triggered if a property is transferred to any entity (LLC, land trust, corporation, etc.) if the loan allows for acceleration. Some loans permit assignments, e.g., portfolio loans, Fannie Mae, etc. Even if your lender has an acceleration clause, this should not drive your decision making. Lenders are in the business of loaning money, not owning property. In 20 years of practice, the handful of instances where I have seen a lender accelerate a loan always dealt with the owner not performing, I.e., falling behind on mortgage payments or not insuring the property. Ask a broker how many times they have seen loans accelerated, and the answer, in my experience, is little to none. The real issue as I see it based on your post is the financing angle. If you plan to refi the property, complete all your financing before moving the property into an entity. After the funding is complete, then explore your land trust versus LLC options. The land trust has some benefits, but this is not to say, placing the property directly in an LLC is the wrong way to go. I use land trusts strategically to obtain specific goals with my investing. My portfolio is well north of 100 properties, and I have used land trusts less than ten times, and each time the decision was driven by the investment and not a concern over what a lender may or may not do.