Lease Option Contract Setup- What NOT To Do

[Account Closed]

Hello to the BP community.

I am currently working with a RE lawyer to set up a lease option agreement as a seller. I have been seeing numerous posting about legal issues that come from a lease option from the sellers standing and I want to hear some more advice on them. I was seeing that banks typically want a LO to be at least 30mos before they consider it a disguised sale and could potentially trigger the due on sale clause. I'm in NY so I especially would like to hear feedback from you fellow New Yorkers who have experience dealing with this type of thing.

I will be going back to meet with my lawyer in a couple weeks so I'd like to have a good amount of questions to ask and make sure that my contract is solid and will offer me the most protection from as the seller.

Looking forward to hearing what you all have to say!

Thanks,

Amber

[Brian Gibbons]

IRS Tax and Lease Options

STRATEGIES TO AVOID RECHARACTERIZATION OF A SALE:

Where the parties want to avoid having the lease/option recharacterized as a sale, the overall planning strategy is to avoid or minimize the above indicators of a deemed sale as follows:

1. The rent should be at or near fair rental value. Breece Veneer & Panel Co., 232 F .2d 319.

Get a written opinion of the rental value from a qualified real estate professional. (Licensed Property Manager)

2. Keep rent credits toward the option price to a minimum.

Generally, 20% or less is considered reasonable.  Warning - If you use rent credits, use a RMLO Reg Mortg Loan Originator to look at Tenant Buyer as per the Abilty to Repay Rules

3. The option price should be at or near fair market value.

Get a written opinion of the market value from a qualified real estate professional.(Licensed Appraiser)

Breece Veneer & Panel Co., Ibid.

4. Try not to tie-in substantial lessee improvements with the option exercise.

5. Do not pass legal (or equitable) title to the optionee\lessee\buyer.

6. Demonstrate that you intend to do a lease-option and that you believe the rent and option price to be reasonable. See Benton, 197 F.2d, 745; Lester, 32 TC, 711.

Use arm's length lease-option documents along with the counsel of qualified professionals.