All Forum Posts by: James Haig Streeter

Hi, I own a Victorian 4-plex in the SF Bay Area, which at some point would have been converted from a single family home.  County records, Property Tax records, and the Title report all show it as a 4-unit building, and so I bought it in good faith as a legal 4-plex.   However, the local Building Control is now telling me they think the County records are wrong and it should be a 3-plex, as there are only 3 gas/electric meters, not 4 (2 units share 1 meter), plus they can't find any records of when these 2 units where created - note the building is from 1900.

If this is correct, is the County liable for providing incorrect records used to purchase the property? If I knew this when I purchased it, I either would not have bought it or negotiated a lower price.

Clearly, if Building Control forces me to convert 2 units into 1 this has huge financial implications, with loss of property value, rental income, and construction costs.

Any advice is much appreciated.

Thanks, James

Thanks for all these replies. This was not a FSBO and our realtor even reminded the buyer's realtor in writing that their client would lose the earnest money before they formally cancelled. So all seems pretty iron-clad. I think I will sit on it a bit longer (maybe not a decade!) and see what they will accept. They are currently demanding all the money be released!..

I recently sold my CA home, with the initial accepted offer being 7% over asking, with all contingencies removed from the outset. After paying the standard 3% earnest money into Escrow the buyer then cancelled the contract and demanded the deposit back. This is even though the California Purchase Agreement has a liquidated damages clause that states if the buyer defaults the seller “shall retain the deposit”. The buyer also signed a contingency release which has similar language.

I finally sold to a backup offer, for asking price – therefore a 7% loss compared to the initial offer. As this home is located in the SF Bay Area this represents quite a substantial sum.

Question: As the buyer who was in default is refusing to sign the release of the earnest money, are there any next steps I can take to compel them to sign? I understand that often this situation ends with an agreement for each party to take a 50/50 split. Any other options that anyone can suggest, keeping in mind this is a CA contract?

@Brian Bradley thanks for the detailed reply.  To summarize, just to confirm I am understanding correctly;

Firstly, a DST uses estate plan trust Spendthrift provisions to provide comparable asset protection as an LLC with Charging Order protection. Therefore it sounds like a DST provides just a good asset protection as an LLC - which is great news!

Question: Has the use of a DST for real estate asset protection been tested in the courts? Has the use of series (child) DSTs also been tested in the courts, in terms of whether they can hold up against being collapsed into a single DST (assuming the trust is being managed correctly), or is this type of entity structure still too new to know for sure?

Secondly, from your second reply it sounds like the IRS Ruling 2004-86 does apply in that properties cannot be improved/rehabbed when within a DST but repairs and maintenance are ok. The workaround would be to complete a rehab in my our name - and therefore unprotected - then transfer to the trust once complete. This is not such good news for someone doing BRRRR like myself but guess its ok if you invest in turnkeys.

Question: If the first 'R' of 'BRRRR' cannot happen within a DST, what about the other 'R's' of Rent, Refinance, Repeat? Can you enter into new lease agreements or renegotiate current leases?; do a cash-out refinance of an existing loan?; and then purchase new property, all within the DST?

Living in CA a DST sounds almost too good to be true as a way to provide asset protection while avoiding LLC franchise tax – potentially saving $thousands per year! However, from what I understand there seem to be two major drawbacks;

Firstly, DSTs do not provide asset protection through Charging Orders as LLCs do. This seems like a major drawback, as a Charging Order prevents a successful plaintiff from forcing the sale of an asset to pay the debt, instead limiting the plaintiff to only being able to place a lien. In the absence of a Charging Order are assets held by DSTs protected in a similar way, or can a successful plaintiff potentially force their sale?

Secondly, IRS Ruling 2004-86 has placed many restrictions on how an asset held by a DST can be managed, making it almost impossible to manage a typical investment property and certainly preventing BRRRR. These include; capital expenditure limited to normal repair and maintenance only; no additional equity contributions after the DST is formed; cannot renegotiate terms of existing loans or borrow new funds; cannot enter into new lease agreements or renegotiate current leases. Having read the relevant tax code is not clear to me whether this only applies to DSTs that are taxed as a trust, as opposed to ones which have elected to be taxed as a business entity (we seems to be possible). However, other sources say this ruling applies to all DST structures, with there even being a way to convert a DST to a 'Springing LLC' if the trustees find these restrictions are not working for them.

I am neither an attorney nor CPA and would love to have clarification on these 2 points - and hopefully be proved wrong! The CA LLC franchise tax savings would be great to have!