Partnering agreement

[Ron Czecholinski]

I am partnering with someone to convert a property into a rental. I have a personal mortgage on the property and have had input to keep the deed in my name to avoid potentially activating the due on sale clause. I would appreciate any input on how to best clarify shared equity. Does anyone have experience with structuring an LLC with property equity claims without transferring the deed into the LLC? Are there other options?

[Hattie Dizmond]

@Ron Czecholinski 

You can use a simple Land Trust, transfer the property to the trust, and name both you and your partner as having beneficial interest in the trust.  Additionally, if the partnership isn't 50/50, you can specify the percentage of beneficial interest you both hold.  As long as you hold a beneficial interest in the Trust, there shouldn't be any issue with the Due on Sale clause.

The other simple option, if it's a 50/50 partnership, is to add your partner to the deed.  That works the same as if you got married and wanted to add your new spouse to the deed on your home.  Again, there is no worry about triggering the Due on Sale clause.  However, the limitation is that this structure would only allow for a 50/50 deal.

Hope that helps.

[Ron Czecholinski]

Thanks Hattie. I heard that land trusts aren't necessarily exempt from the due on sale clause but will look into it more. My current attorney isn't up on creative real estate solutions.

Does anyone know if it is possible to claim equity without changing the deed?

[Hattie Dizmond]

@Ron Czecholinski 

What a lot of people try to do is use Trusts to avoid the Due on Sale clause, when they are executing a Subject 2 financing agreement.  You are the actual, original borrower.  Therefore, as long as you are maintaining a beneficial interest in the property, you are free to deed the property over to a trust.  People do it all the time for estate planning and asset protection.  What you've described is less an issue of creative financing than it is simply structuring a business entity.  The Due on Sale clause isn't applicable to the situation you have described, simply because you are not giving up all beneficial interest in the property. 

As for claiming equity without changing the deed, I'm sure your lawyer can structure a document that essentially pledges equity in the property to someone else, without changing the deed.  However, you would be perfectly safe using a trust for this purpose, so there really isn't any reason to over complicate the situation.