All Forum Posts by: Keith Barton

Several issues here:
1) Transfering the home to an LLC when there is still a residential mortgage on the property technically can trigger the due on sale clause of the promissory note/mortgage - while the bank may not actually call the note due now since interest rates are still so low, the bank has that legal right. How comfortable are you with that hanging over your head? Especially if interest rates jump?

2) Transfering assets to an LLC with no money exchanging hands (or even looking like it exchanges hands) is one (of several factors) that may weaken the protections offered by an LLC. Note that this is not co-mingling funds - it is just gifting an asset to an entity, which brings into question whether the entity (the LLC) has any separate existance from you the individual owner.

3) A single member LLC is more susceptible to veil piercing.

Please note - I am not disregarding the use of an LLC (even a single member LLC) for owning rental property. I'm just saying that you have risks: one (veil piercing) you had specific concerns about; and, one (due on sale clause) you did not mention....

Gerald David
Some ideas on who to contact if you don't have any word of mouth leads....
1) Contact title agencies you've worked with (or other title agencies in the area) and ask who they would recommend as a real estate attorney.
2) Contact apartment management companies (or other landlords you know) and ask if they would recommend an attorney they use for landlord/tenant issues.

Terry P. I could have been more clear in my last post....

The regulation of a "mortgage business" is governed by Chapter 9 Article 22 of the Kansas Statutes. You are a mortgage business if you engage in arranging "mortgage loans". A mortgage loan, for purposes of regulating mortgage businesses, is lending money to a natural person (not a business entity) to purchase (or refi) a residence that will be occupied for residential purposes by the owner.

If one loans money to buy residential property for rehab and resale, the loan of that money is not regulated by the statutes governing a mortgage business. If you loan money to a business that rehabs and flips, that is not a mortgage business. If you form one or more companies and you finance your partners through the companies and your partners buy, rehab, and flip properties, you are not a mortgage business.

The law frequently treats consumers differently from business persons. Consumer transactions are regulated in a manner that is designed to look out for the consumer. The consumer is considered in greater need of protection from deceptive business practices. Persons conducting business (whether as a business entity or sole proprietor) are considered to be more savvy and in less need of the same protections that consumers need. Therefore, the same exact activity may be treated much differently if one party to the transaction is a consumer as opposed to a business person.

I took a very brief look at the thread you mentioned.... as to the issue of reading the statutes (and caselaw) - sometimes it is pretty easy and sometimes it is not. Even when it is pretty easy, there may be ancillary topics that are very confusing to someone who hasn't been exposed to them. Part of the process of becoming a lawyer (or doctor, or engineer, or architect, or accountant, etc...) is learning a broad range of information that serve as background information - which information may not be directly related to the topic you are reading about, but which information helps put things in context. It can be difficult to put everything in context without the broad background information. So, while a layperson can be much more knowledgeable (than a lawyer, or doctore, or etc...) about any given topic the layperson has studied, the broad background information the professional has learned puts matters into a completely different light.

In recent years I've often thought I should have been a medical doctor instead of a lawyer, but it wasn't something I pursued. There have been times when I've been visiting the doctor (either for myself or with a family member) and I've taught the doctor something they didn't know, or the doctor and I got into a pretty technical medical discussion, or I've even helped the doctor do something (like holding the light with a faulty clamp so the doctor could perform a D&C on my wife - not a fun night that....) Anyway, even with my knowledge and reading, and ability to learn - I am WAY behind the 8 ball compared to doctors because they have all that prepatory background that one needs to be a medical professional.

I guess this is my long-winded way of suggesting that when you want to do something and there are questions about what is the right approach with regard to the law, or questions about what is or is not legal, etc.... You will be so much better served by getting professional legal guidance. Don't seek guidance from just anyone - take time to form a relationship with someone you feel comfortable working with, and who inspires confidence.

Terry P.
I only spent about 5 minutes looking, so I could be wrong on other grounds, but I was curious - since you quoted statutory language to support your position....

As far as I can tell, you didn't follow my rule 2a above - while the language may or may not be questionable - I still look for statutory definitions to see how the statute should be interpreted.

Article 9-22 is titled Mortgage Business. As you noted, Section 9-2202 is titled "Exempt from licensure" and outlines who is exempt from the license requirements governed under Article 9-22.

The first question that comes to mind is: What is a mortgage business?

Section 9-2201 is titled Mortgage business; definitions" and specifically 9-2201(i) states:

"'Mortgage business' means engaging in, or holding out to the public as willing to engage in, for compensation or gain, or in the expectation of compensation or gain, directly or indirectly, the business of making, originating, servicing, soliciting, placing, negotiating, acquiring, selling, or arranging for others, or offering to solicit, place, negotiate, acquire, sell or arrange for others, mortgage loans in the primary market."

Next thing that comes to mind is - What is a mortgage loan?

Section 9-2201(k) states:
"'Mortgage loan' means a loan or agreement to extend credit made to a natural person which is secured by a first or second mortgage, deed of trust, contract for deed or other similar instrument or document representing a security interest or lien upon any lot intended for residential purposes or a one-to-four family dwelling as defined in section 103(v) of the truth in lending act, 15 U.S.C. 1602(v), located in this state, occupied or intended to be occupied for residential purposes by the owner, including the renewal or refinancing of any such loan."

Note the term "natural person", which means a real live breathing human being. Fictitious, or artificial, persons are business entities such as LLCs, Corporations, Partnerships, etc.... There are also the issues of owner occupied, and what TILA section 15 U.S.C. 1602(v) has to say (which I did not bother looking up.) Therefore, the regulation of a mortgage business does not come into play in the structure outlined by Bill.

I make no claims about whether other statutes make Bill's structure untenable in Kansas. But I do want to point out the need to check the statutory definitions whenever considering what a statute does or does not regulate.

Bill Gulley I was not suggesting your proposed structure was in fact complicated. I was not offering an opinion either way. I just was emphasizing that the simplest method is often the best. There are times when a very complicated solution is actually the simplest way to proceed.

Also - a few states limit the use of Limited Liability Partnerships to professionals such as attorneys, accountants, architects, etc..., but not all. And, an LLP is a very common entity structure for such professionals, in the states that do not restrict use of an LLP, any business can use an LLP.

Terry P. I always look for the source of authority when representing a client. As I'm not getting paid for my comments in this forum, I don't spend as much time worrying about authorative sources when making general comments. However, I will be very specific with my comments/information when making very specific comments about very specific issues.

I'm actually a little surprised to hear a "layperson" expressing concern for authorative sources - thath's great. For those who may not know - the workflow for legal authority goes something like this (only considering state issues - not considering federal issues):
1) Check to see which statutes govern the matter at hand and review (this may involve reading lots of statutes, as they sometimes refer to other statutes for other issues;
2) Sometimes the language in the statute(s) are very clear and sometimes the language is not - if it is not clear:
a) Check to see if the statutes define the specific terms that are in the unclear language;
b) If the language is not made more clear by the definitions, then go to 3;
3) Search for caselaw that discusses the specific statute in question.

However, there isn't always caselaw that discusses the statute in question (either because the statute is new [either newly enacted, or recently amended]). It also may be the situation that different jurisdictions treat the matter differently. At the state court level this usually means one county (or a few counties) interpret the statute in one way and another county (or a collection of a few counties) interprets the statute in another way. Eventually the state supreme court may reconcile any differences in how the statute is interpreted.

If the statute has never been clarified in court (or the specific issue with which you are concerned in that statute has never been clarified in court) then you are flying blind and you hope and pray that a court will agree with your interpretation - IF it ever gets that far....

While I'm on the subject - something that really irritates me is when one of my clients is trying to do something and the other business party with whom my client is working (or trying to work) is leery about something and consults their attorney (that part is great - I encourage everyone to make well informed decisions). The other attorney then tells them (without any thought or time invested into the matter) "No, you can't do that." Then I try to talk to the attorney to find out what their specific concern is and they just get pissed off with me because when I ask for the authorative source they consulted in giving their advice to their client - they can't give it to me because they didn't actually look into the matter. Instead, the attorney just went off "instinct" or what they thought they heard from someone else. All of which is wrong. They get pissed because they get caught in not actually doing their homework, but they can't back down from their initial position because they think it will harm their reputation with their client.... OK, sorry, just had to get that off my chest.

Bill Gulley While I'm familiar with the concept of Series LLCs, we don't have them in Ohio, so I can't comment with much authority on the details of their use. However, I will say that one must be careful with the whole asset protection thing - it's a very complex area and some courts seem willing to disregard the protections the business entities were created to provide under some circumstances.

The more one can show a legitimate business reason for multiple intertwined business entities, the better the chance those entities will provide the protection desired. The less one can justify legitimate business reasons for multiple intertwined business entities, the less likely those entities will provide the protection desired.

For any given situation, a simpler solution is usually a better solution. However, what is simple v. not simple depends on specific circumstances and the goals of everyone involved (i.e., a Series LLC may be a simple solution under the right conditions.) Lookup "Occam's razor".

You need to think long and hard about being a landlord if you've never been one before. It is not for everyone. However, if you decide to rent it out - being out of state can make things more challenging. Is there anyone in the area that can keep an eye on things? Also, a lease-option (aka rent to own) deal probably would be to your benefit:

1) The lease term is usually longer than a standard one year lease;
2) The option price (what many people call the security deposit - but which cannot actually be a security deposit) is not refundable;
3) You should make the tenants pay for all maintenance and repairs below a certain amount (say $500) - after all, they are trying to make the home theirs. This gives them a different approach and they take care of the property better;
4) If they don't get financed in the option period (which is common) you can extend it with another option payment and they continue to lease under the same terms - long term tenants are better for you....

Assuming the plan works out (i.e., whatever investment property you acquire doesn't tank...) mortgaging your primary residence is a great way to go:

1) you get the mortgage interest deduction on your taxes;
2) interest rates are low enough that you presumably will get an ROI high enough to pay the interest on your mortgage and still be ahead;
3) you are using someone else's money (differing opinions on this but one potential bright side is - would you rather be out 100k of your own cash or would you rather lose 100k of someone else's cash and then lose your home?;
4) Having more investment properties (under the right circumstances) may lower your tax bill even further if you are able to carry over more loss from your Schedule E to your 1040.

Of course, only you can weigh the pros-cons to determine which makes most sense for you....

Is the boat titled? If not, then pretty simple. If the boat DOES have a title, then you will have to go through court action to have the title transfered into someone else's name. Assuming the statute listed above correctly means you can have the boat in this situation (I offer no opinion on that), then you would have the right to take the matter to court so the court could order the title to be put into your name.

You also might want to consider a Limited Partnership, Limited Liability Partnership, or joint venture. I would be very careful about how you structure things. After all (at least as I understand your situation), you're not really going into business with them; your not doing the work with them or making decisions; rather, you are financing them. I would hesitate to actually form an LLC with them just because you are financing them.

Assume the following:
1) You form an LLC with someone just to loan them capital;
2) The LLC owns the property;
3) The borrower screws up on something with the rehab/rental;

What possible result?
A) You probably won't have personal liability if you weren't involved in the screwup;
B) However, the LLC will be responsible;
C) The assets of the LLC can be used to satisfy any judgment;
D) The property gets auctioned off;
E) You lose your investment in that property.

If you instead have the proper promissory note, personal guarantee, mortgage, etc... what possible result?
A) You won't have personal liability;
B) The LLC will be responsible;
C) The assets of the LLC can be used to satisfy judgment;
D) The property gets auctioned off (maybe) - BUT you get the proceeds up to the amount of your lien;
E) You recover your investment, or at least part of your investment.