Legal Issues That Matter


Seller financing and land trusts

We are often asked whether a land trust can be used in a seller-financing transaction to avoid the need for judicial foreclosure in the event of the buyer-borrower's default. In such a scenario, the property would be conveyed at closing to a third-party independent trustee who would hold title to the property until the purchase money note is paid in full. If the buyer-borrower defaults, then -- under the terms of the land trust -- the trustee would convey the property back to the seller-lender.

There are a couple of problems with this scenario in Florida. First, if a buyer is buying a property to occupy it as their primary residence, they will find it difficult if not impossible to obtain the Florida homestead tax exemptions or creditor protections while the property is held in the name of a third-party trustee. To obtain the tax exemption, the occupant must have at least an equitable interest in the property being occupied. In the case of a true Florida land trust, all equitable and legal title vests solely in the trustee. At that point, the buyer has no equitable interest that would be subject to homestead tax exemptions or creditor protections.

Secondly, Florida does not allow non-judicial foreclosures except in timeshare mortgage and assessment lien foreclosure actions. While it is common to see the land trust with a primary and secondary beneficiary used for hard money loans with real estate investors, those avoid judicial foreclosure mostly because the parties involved are looking at it solely from an economic rather than an emotional standpoint and are willing to work together to avoid the need for a formal judicial foreclosure. However, when the property in trust is occupied by the borrower, it has been our experience that the borrower is not willing to go down without a fight. In that case, judges consistently have required the lender to file a mortgage foreclosure action while disallowing the summary ejectment of the borrower from the trust property.

If a client is selling or buying a property, using seller financing, we will review their situation and advise them -- in most cases -- to stick to the traditional note and mortgage or agreement for deed, knowing that they may be forced to judicially foreclose the borrower's equity of redemption in the future.


Out with the O&E Report; In with the Property Information Report

On June 23, 2017, Florida Statute Section 627.7843 was amended significantly. Many real estate investors and others are intimately familiar with the Florida Ownership and Encumbrance (O&E) reports that title insurers and agents have issued for years. Those reports were typically limited in scope as compared to a title search report or a title insurance commitment and policy. For instance, an O&E report typically listed only the current property owners, some of the easements, and liens or mortgages of record. The liability of the issuer of the report could limit its liablity for mistakes in the report to a maximum of $1,000.00.

The Property Information Report (PIR), in contrast, can be issued by anyone. There is no requirement that they be issued by anyone with any type of license or experience in title abstracting or examining. The PIR can include as much or as little information about the property's title as the requestor wants. For instance, it may include as little information as the names of the vested owners, or as much as information from the State Corporation's databases, all liens, easements, and pending litigation records related to the property. Unlike the O&E Report, if particular language is included in the PIR, the issuer's liability is limited to a refund of the amount that the requestor paid for the PIR. Therefore, if the issuer made mistakes in the PIR that cost the requestor hundreds of thousands of dollars, the issuer would only have to refund to the requestor the amount that the requestor paid for the report, even if that amount is as little as $50.00. 

Contrast this with an opinion of title from an an attorney. If an attorney makes a mistake (commits malpractice) in preparing a title opinion for a client, there is no limit on the damages that the recipient of that opinion can seek. Also, contrast this with a title insurance commitment and policy where the damages that the insured can seek are limited only to the face amount of the title policy. 

Since a PIR can now be issued by anyone, whether an attorney, title agent, or Joe Schmo off the street, and damages are limited to the amount paid for the PIR, we recommend that clients be wary of requesting or relying upon such PIR's when making major financial decisions in buying or investing in real estate. Even when considering purchasing a property at a foreclosure auction, one should be wary of relying upon a PIR which may miss the priority of the mortgage being foreclosed, or other major issues. If anything, PIRs should only be used as a first step in evaluating a property (i.e. prior to preparing a letter of intent), but should not be used for final and potentially expensive decisions.


Sloppy Titling Real Estate Assets in Self-Directed IRAs

We've noticed over the past few years that clients have gotten sloppier in how they title mortgages and real estate in their self-directed Individual Retirement Accounts (IRA) and retirement plans. Florida has a specific statute that dictates exactly how such assets must be titled in order to avoid the necessity for a title agent to review the custodial agreement or inquire as to who is required to execute the documents on behalf of the custodian.

Lately, we have seen a lot of assets titled as "IRA Custodian, Inc FBO #123456789." This is technically legally deficient. The law requires that assets be titled as, "IRA Custodian, Inc. as custodian or trustee for the benefit of   (name of individual retirement account owner or beneficiary) individual retirement account.” If the custodial account is a retirement plan, then the asset must be titled as, "IRA Custodian, Inc. as custodian, or trustee of the  (name of plan)   for the benefit of (name of plan participant or beneficiary).” Florida Statutes Section 689.072 (2006)

To title the asset in any manner that doesn't follow the statutory language to the letter runs the risk that a title agent, examiner, or underwriter may demand production of the custodial agreement for review prior to closing the purchase, sale, or refinance of the asset. That may be the least of a client's problems, however. If the asset is a mortgage and note, it is conceivable that a defaulted borrower could demand production of the custodial agreement or raise the defense that the custodian has no authority to foreclose until the custodial agreement is produced, and the power to foreclose is proven.

We would encourage anyone who is using the self-directed IRA or retirement plan through a custodial account to follow the statute to the letter when titling the self-directed asset whether in a deed, lease, or mortgage and note. Doing so will provide the benefit of a statutory presumption that the custodian has the full power and authority to protect, conserve, sell, lease, encumber, or otherwise manage and dispose of the real property described in the recorded instrument without joinder of the named individual retirement account owner, plan participant, or beneficiary. 

If the assets are held in a "checkbook-control" IRA limited liability company, or within a land trust, the title agent will likely never realize that the statutory language hasn't been used, so there may be no issue. However, we would still counsel that the statutory language be followed to the letter even when titling within the LLC or land trust to avoid the potential problems. While a client may lose a little privacy when their name is published as the beneficiary or plan participant, that loss of privacy is nominal when compared to the other issues that can arise. 

Finally, we advise that the beneficiary's or plan participant's name should never appear in the asset's title together with the plan's account number. This causes problems with redaction requirements later should litigation ever arise in relation to the asset.


Expanded Mortgage Lender Law Effective July 1, 2017

Starting July 1, 2017, the Florida law regarding mortgage lending will apply to many loans that are currently exempt from coverage. House Bill 747 became a law on May 4. The law changes the definition of a “Mortgage Loan” from one that is “primarily for personal, family, or household use” to any mortgage loan that is secured by a mortgage on any one to four-family residential dwelling or the land upon which such a dwelling is to be constructed.

Many private lenders in the past  few years had made mortgage loans without needing a mortgage lending license, arguing that they were lending to borrowers who were purchasing the residential properties for investment or business purposes rather than for the investor’s own primary personal, family, or household use. The law already defined a “mortgage loan” as any loan to an individual regardless of the use of the property secured by the mortgage. Therefore, most unlicensed private and hard money lenders had altered their lending business practices so that they only lent to entities such as limited liability companies, corporations, and land trusts, and required borrowers to execute forms stating that the loans were to be used only for business or investment purposes. With the new changes to the law, this will no longer provide a safe harbor for unlicensed mortgage lenders.

The amendments to the law also exempt licensed securities dealers and investment advisers so long as they solicit mortgage loans from their securities clients or simply refer their clients to licensed mortgage brokers or lenders. The securities dealers and investment advisers are still prohibited from soliciting, accepting, or negotiating mortgage loan applications or the sale of an existing mortgage loan to a noninstitutional investor.

Finally, the amendment to the mortgage lending law defines "hold himself or herself out to the public as being in the mortgage lending business." This issue has presented itself to our firm several times over the years when clients have been accused of “holding themselves out as a mortgage lender” when they in fact do not hold the license as such. Doing so is illegal, but there has been no bright line legislative test of what that entails. Many private lenders are "country club" lenders, only offering their lending services quietly to close friends, business associates, and fellow members of real estate investment associations. We have had to rely on guidance from the Department of Financial Services as to what the investigators consider to be or not to be a violation of the “holding out” portion of the law.

As of July 1, 2017, however, a person or entity will be deemed to be holding itself out to the public as being in the mortgage lending business when they are:

(a) Representing to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or promotional items), by any medium whatsoever, that such individual can or will perform the activities described in F.S. 494.001(23).

(b) Soliciting in a manner that would lead the intended audience to reasonably believe that such individual is in the business of performing the activities described in F.S. 494.001(23).

(c) Maintaining a commercial business establishment at which, or premises from which, such individual regularly performs the activities described in F.S. 494.001(23) or regularly meets with current or prospective borrowers.

(d) Advertising, soliciting, or conducting business through use of a name, trademark, service mark, trade name, Internet address, or logo which indicates or reasonably implies that the business being advertised, solicited, or conducted is the kind or character of business transacted or conducted by a licensed mortgage lender or which is likely to lead any person to believe that such business is that of a licensed mortgage lender.

(e) Using any form promulgated by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the United States Department of Housing and Urban  Development, or the Consumer Financial Protection Bureau in performing the activities described in F.S. 494.001(23)

Therefore, if a person is using a business card, website, flyer or other advertising medium that holds that person or entity out as a “hard money lender” or “private lender,” they would – under the amended statute – be “holding themselves out” as being licensed mortgage lenders even if only provided to friends, family, and associates. If they lend funds that are secured by mortgages on residential dwelling units, regardless of whether the borrower is an entity or human being, or if they are making loans to individuals and those loans are secured by any type of property in the State of Florida, then they are making mortgage loans that are subject to licensure. 

Based on these slight revisions of the definition of a “mortgage loan” coupled with the bright line definition of “holding oneself out as a mortgage lender,” we are now cautioning any private lenders and hard money lenders in Florida who are not licensed mortgage brokers or lenders that they should indeed obtain such a license, or they should use the services of a licensed lender to originate their mortgage loans. In fact, if a family member simply wants to lend funds to another family member, and that loan is to be secured by a mortgage, a mortgage licensee may need to be engaged to avoid running afoul of the law. Failure to do so could subject such lenders to civil and even criminal penalties for violations. It should be noted, however, that the limited federal law exceptions for seller financing are still effective in those cases where such mortgage lending financing occurs.


Land Trusts and Asset Protection

Last week, I was a member of a panel of lawyers at Nuview IRA's Planning for Prosperity 2016 conference. Afterward, an attendee asked me how a land trust provides any asset protection since they're essentially just like revocable living trusts which can be pierced easily in a lawsuit. While somewhat correct, land trusts are not like revocable living trusts which are designed to avoid the need for formal probate rather than asset protection. Revocable living trusts usually hold all of a client's real estate rather than just one parcel, and the equitable title in the real estate (the right to lease, sell, encumber and convey the property) remains with the beneficiary while the trustee of the RLT only takes legal title (the name on the official records) to the real estate. Further, the initial trustee of an RLT and the beneficiary of the RLT are usually one-in-the-same person. Meanwhile, a land trust is recommended to hold only one property at a time; all title -- legal and equitable -- vests soley in the trustee so that the beneficiary only has a personal property interest in the trust; and a third-party acts as trustee while the identity of the beneficiary is not disclosed publicly.

This is the biggest asset protection that land trusts provide: our client’s name doesn’t appear on public records as the owner of the asset. That means that, when a plaintiff is considering suing our client for a personal injury or contractual matter, the first thing their lawyer will do is search the records to see if our client owns any assets that could be used to satisfy the judgment. If the attorney finds on Sunbiz that our client is a member of an LLC, and that that LLC then owns multiple properties in the state with little or no mortgage liens, then the attorney will have some hope of recovery of at least something, even if it’s only a charging lien.  If they see our client’s name listed as a member or manager of an LLC, but then find nothing in that LLC’s or the client’s name individually, then the lawyer will point out that fact to the potential plaintiff to let them determine whether it would be worthwhile to sue the client in the first place and obtain a potentially worthless judgment, or whether they’ll prefer to throw good money after bad.

Assuming they move forward with their lawsuit and obtain their judgment against our client, then they will require our client to complete a judgment debtor Fact Information Sheet, Form 1.977 of the Rules of Civil Procedure. At that point, our client will be required to, under penalties of perjury, tell the creditor everything that our client owns. They will have to disclose the beneficial interest in the land trust to the judgment creditor. Even if our client forgets to list the asset on the form, they will be giving the judgment creditor the past two years of tax returns. If the property is listed one of those, they’ll find it that way. At that point, the judgment creditor would obtain a court order that seizes our client’s interest in the land trust and directs the trustee that they are now the beneficiary instead of our client. If our client is the sole beneficiary, then it’s an easy task for the judgment creditor. If there are two or more beneficiaries, then arguably, the judgment creditor will be able to obtain only a charging lien against our client’s interest in the trust. With that, if the trustee ever receives any funds that are to be distributed to our client, those proceeds would be distributed to the judgment creditor pursuant to the charging order. The judgment creditor would not gain control of the trust if there are multiple beneficiaries.

The above is all considering that the attack is from an “outside” creditor, someone whose claims do not arise from the property itself. If the attack is by an “inside” creditor (i.e. a tenant or guest who is injured on the property, or a contractor who isn’t paid for work on the property), then the land trust provides great asset protection. The trust’s asset, the property itself, is the only asset at risk in that event. In other words, if someone suffers damages related to their use or other connection with the trust property, then they would sue the trustee as land trustee of the trust only. The only asset that the land trust holds is that one property, so none of your other assets are at risk. This is also true of code enforcement liens against that property which are considered to be general liens that would normally attach to everything you own in that county where the lien is recorded. However, if the property is held in its own trust, then the lien only attaches to that property, assuming that the trustee is not the same person or entity as the beneficiary.

For an additional layer of protection and simplification of tax return preparation, most of our clients form an LLC or two in Delaware that serves as the beneficiary of all of their land trusts. They choose Delaware because the names of the members and managers are not publicized. The client often will form one LLC that elects to be taxed as an S-corporation. That LLC is used for buy-rehab-flip properties that will be held for less than 12 months since that company will likely be treated as a “dealer” by the IRS. They then have a second LLC that elects to be taxed as a sole proprietorship (if only one member) or partnership (if more than one member) for properties that they are buying to hold for more than 12 months. The Tax Code typically is kinder to buy-and-hold properties held as a sole proprietorship/partnership with pass-through taxation, and such entities provide more flexibility from a tax standpoint should the company ever need to distribute the real estate to the members directly. On the other hand, S-Corporations typically receive better tax treatment as “dealers” when it comes to real estate that is held for less than 12 months. In any event, clients never want to risk being categorized as a dealer by the IRS if they also have properties that are to be held for a long term. A CPA can explain the details of this particular tax issue if more information is needed.

As stated in the beginning, while most people convey multiple parcels of real property into their revocable living trust for estate planning and probate purposes, we recommend that they only convey one parcel of real estate into each land trust, and that an independent, non-beneficiary, and unrelated entity or person be designated as the trustee of each land trust. In this way, each parcel is in its own separate land trust, safely tucked away from the beneficiary’s name on public records, and also insulated from any other properties or other liabilities that the beneficiary owns. A Delaware LLC (or two, as tax issues may suggest) can be formed and designated as the same beneficiary of all of the client’s various land trusts, and the client’s revocable living trust can even be one of the members of the LLCs. While nothing is foolproof when it comes to asset protection, the land trust is definitely a vehicle that is effective and available to clients in Florida. When coupled with a Delaware LLC or two and a revocable living trust, it can not only provide anonymity, asset protection, and tax benefits for the client, it can also avoid probate after death.