Real Estate Issues Archives

Loan Can’t be Called if Land Is Transferred to an LLC

Question: Can my lender call my loan that encumbers my land if I transfer the land to an LLC I own?

Answer: Probably not. The Federal National Mortgage Association, aka Fannie Mae, has something called Servicing Freddie Mac Mortgages Series 8000. Section 8406.4(b) Additional permitted Transfers of Ownership Effective 10/20/2021 states:

“Permitted Transfers of Ownership subject to conditions. In situations where all of the following conditions are met, Freddie Mac will permit a Transfer of Ownership of the Mortgaged Premises:

At least 12 months have passed since the Origination Date and
The transfer is to a limited liability company (LLC) or limited partnership (LP), provided that:

The managing member/general partner of the LLC/LP is the original Borrower. If there are multiple Borrowers, all of them must be members/partners of the LLC/LP, and at least one of them must be a managing member/general partner. If the transfer results in a permitted change of occupancy type to an investment property, such change must not violate the Security Instrument (e.g., the 12-month occupancy requirement for a Primary Residence), and

The Servicer notifies the original owner or natural person that the Mortgaged Premises transferred to an LLC/LP must be transferred back to the original owner or natural person prior to any subsequent refinance or modification application to meet Freddie Mac’s underwriting requirements

Fannie Mae ruling D1-4.1-02: Allowable Exemptions Due to the Type of Transfer (04/13/2022) says due on sale clauses cannot be enforced if the borrower transfers the encumbered land to a limited liability company. The rule states:

“the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer: . . . A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to a limited liability company (LLC), provided that

the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and
the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).”

Bottom line is Fannie Mae approves transfers of encumbered land without the lender being able to enforce a due on sale clause.

Richard Keyt2023-09-24T09:03:52-07:00September 24th, 2023|FAQs, Miscellaneous, Operating LLCs, Real Estate Issues|0 Comments

Title Insurance for an LLC that Acquires Real Estate from a Member

Question: I own Arizona rental real estate. I want to form a limited liability company to own the real estate for asset protection. If I transfer title to the real estate to my one hundred percent owned Arizona LLC will the LLC be covered by the title insurance policy issued to me when I bought the land?

Answer: No unless you take action that causes the title insurance company to add the LLC to your title insurance policy. As a real estate attorney I recommend that the owner(s) of the LLC always do what is necessary to cause the LLC to be covered by the title insurance when the LLC acquires real estate from the owner(s) of the LLC.

A nationally recognized title insurance expert named John C. Murray wrote an excellent article called “Title Insurance For Limited Liability Company Transactions” in which he says:

“The best solution may be for the grantee LLC to request an ‘additional insured’ endorsement from the title insurer (in those jurisdictions where it is available), which would be effective as of the date of the conveyance. This endorsement specifically amends the existing owner’s policy to add the LLC as a named insured. The cost of the endorsement is usually nominal ($100 to $300) and many title insurers will routinely issue the endorsement for successor LLCs”

See also the Adobe pdf file that contains an article called “Do I still have Coverage if I transfer my property to.” The author states the following with respect to a property owner who transfers land to the owner’s LLC:

“To ensure that title insurance coverage continues on the property, [the owner] should contact [the title insurance company] to discuss obtaining an additional insured endorsement to the current policy and/or discuss obtaining a new policy depending on the facts and circumstances supporting the transfer. Without doing that, they risk terminating title insurance coverage on the property.”

Richard Keyt2019-07-25T13:11:02-07:00August 4th, 2018|FAQs, Real Estate Issues|0 Comments

Owners of Arizona Rental Real Property Subject to New Rent Tax Rules 1/1/18

In Arizona residential rental is the renting of Arizona real property for more than 30 days for residential purposes only.

Arizona residential rental properties are subject to state rent tax. Some, but not all, Arizona cities also tax residential rental income.
Arizona transaction privilege tax is a tax on the privilege of doing business in Arizona. TPT applies when an owner of Arizona rental real estate is engaged in business under the residential rental classification by the Model City Tax Code.

If you rent Arizona residential real estate all payments made by the tenant or on behalf of the landlord are taxable. The following is a non-inclusive list of the types of payments from tenants that are taxable rental income:

Rent
Non-refundable and forfeited deposits
Late payment fees
Pet fees
Federal rent subsidies (HUD)

The following fees passed on to the tenant are also taxable rental income:

Common area fees
Maintenance charges
Homeowner association fees
Landscaper maintenance
Property tax
Pool Service
Repairs and/or improvements

Individual owners of taxable rental properties are required by law to obtain a Transaction Privilege Tax (TPT) license with the Arizona Department of Revenue (ADOR), regardless if the owner rents the property themselves or employs a property management company (PMC). A city TPT license is only required if your residential real estate is in a city that imposes a tax on residential rental rent.

Starting with the January 2018 reporting period, PMCs will no longer be permitted to report and remit TPT using their own TPT license (formerly referred to as a “Master License”) on behalf of client property owners. All taxes are to be filed and remitted using the property owners’ license numbers.

To participate in the new E-File Solution, PMCs will need to complete and submit the Property Management License Application.

Warning to Arizona Landlords that Have Property Managers Collecting Rent Tax

Starting with the January 2018 reporting period, property management companies will no longer be permitted to report and remit transaction privilege tax using their own TPT license on behalf of client property owners. All rent taxes must be filed and remitted using the property owner’s TPT licenses. To participate in the new E-Solution, property management companies must complete the Property Management License Application.

Every residential rental property owner is required to obtain an Arizona transaction privilege tax license from the Arizona Department of Revenue (ADOR) for each location where residential rental income is taxable.

For more information and resources on Arizona residential rentals, visit the following links:

If you need assistance, call 602-716-7368 or email [email protected]. You can register, file and pay online at www.AZTaxes.gov.

Richard Keyt2018-05-20T14:08:55-07:00December 13th, 2017|Real Estate Issues, Tax Issues|0 Comments

Home Conveyed to LLC Caused Loss of the Homestead Exemption

Arizona Revised Statutes Sections 33-1101 – 33-1105 contain Arizona’s homestead exemption that protects up to $150,00 of equity in a person’s Arizona home. Section 33-1101 provides:

“A. Any person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following:

1. The person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides.
2. The person’s interest in one condominium or cooperative in which the person resides.
3. A mobile home in which the person resides.
4. A mobile home in which the person resides plus the land upon which that mobile home is located.

B. Only one homestead exemption may be held by a married couple or a single person under this section. The value as specified in this section refers to the equity of a single person or married couple. If a married couple lived together in a dwelling house, a condominium or cooperative, a mobile home or a mobile home plus land on which the mobile home is located and are then divorced, the total exemption allowed for that residence to either or both persons shall not exceed one hundred fifty thousand dollars in value.

C. The homestead exemption, not exceeding the value provided for in subsection A, automatically attaches to the person’s interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. Only one homestead exemption at a time may be held by a person under this section.”

People sometimes ask me if they should transfer title to the home in which they live to an LLC for asset protection. My answer is no because:

There is no business purpose so a court would probably disregard the LLC.
It could cause a loss of the Arizona homestead exemption that protects $150,000 of equity in a personal residence.

An August 3, 2017, decision of the Court of Appeals of Utah called “Dean White vs. Julie Dawn White” ruled that the transfer of a home into a limited liability company caused the owner of the home to lose the Utah homestead exemption. Although the case is not an Arizona case it causes me to believe more strongly that a person who transfers his or her Arizona home into an LLC will lose the Arizona homestead exemption.

Richard Keyt2017-08-07T16:25:00-07:00August 7th, 2017|Asset Protection, Lawsuits, Real Estate Issues|0 Comments

LLC Documents Needed by Title Insurer & Escrow Agents

Question: My limited liability company is the buyer on a contract to purchase Arizona real estate. What LLC documents will the title insurance company or the escrow agent want?

Answer: When a limited liability company is the buyer or seller of real property the title insurance company and escrow agent will require the LLC to supply copies of the following documents:

The LLC’s Articles of Organization approved by the Arizona Corporation Commission. If we formed your LLC we would have sent this document to you as a pdf file attached to an email and given you a hard copy of the AOO in your red LLC portfolio (Silver & Gold LLC purchasers only). Many times the title insurer and escrow agent will get a copy of the ACC approved Articles of Organization by doing a search of the LLC’s name on the ACC’s LLC online database and then printing the AOO that is linked to on the LLC’s page.

The LLC’s Operating Agreement signed by all of the LLC’s members. This is an important document because it should state who can sign contracts for the LLC and authorize that person to enter into contracts to buy and sell real estate. If we formed your LLC we would have sent you the LLC’s Operating Agreement as a pdf file attached to an email and given you a hard copy of the OA in your red LLC portfolio (Silver & Gold LLC purchasers only). If your LLC doesn’t have an Operating Agreement hire us to prepare a custom Operating Agreement.

Some title insurers and all prudent buyers and sellers will require the LLC to deliver a copy of resolutions signed by the members that approve the LLC entering into the contract to buy or sell and that names the member of a member managed LLC or the manager of a manager managed LLC who has the authority to sign the contract and other documents on behalf of the LLC. If you need resolutions purchase our do-it-yourself LLC member resolutions form for $37.

If a trust is the member of your LLC then you will also need to give the title insurer and escrow agent a copy of the trust agreement or a certificate of trust in lieu of giving the entire trust agreement.

Richard Keyt2019-06-15T06:51:13-07:00May 2nd, 2017|FAQs, Real Estate Issues|0 Comments

How Do I Transfer Real Estate to My LLC?

Question: I own Arizona real estate that I rent to tenants. I don’t want to be sued personally if somebody gets hurt on the property so I formed an Arizona limited liability company to own my investment real estate. If a tenant or guest is injured on the property and he or she wants to sue the owner the defendant will be the LLC not me because the LLC will own the land. What do I have to do to transfer the land to the Arizona LLC?

Answer: Forming an LLC to own the real estate and to shield you from liability if something goes wrong with the real estate is definitely a good idea. The plan, however, will not work unless you actually transfer ownership of the land from the current owner(s) to the LLC. To transfer the land to the LLC the owner(s) must sign a deed and the deed must be recorded with the county recorder of the county in which the real estate is located.

Warnings:

1. Title Insurance Issue #1. Example: After the LLC acquired title it discovers that the property is encumbered by a $25,000 lien. The title insurance policy acquired by the prior owner(s) did not list the lien as an exception from title insurance coverage.

Quit Claim Deed Bad Example. Because the LLC acquired title by a Quit Claim Deed the title insurance policy will not pay the $25,000 lien. A Quit Claim Deed does not contain any title warranties. This means that if a title defect is discovered while the LLC owns the land the LLC does not have a claim against the prior owner for breach of a title warranty. Because the LLC does not have a claim against the prior owner for breach of a title warranty the prior owner’s title insurance policy does not cover the $25,000 lien. The LLC must pay the lien or risk losing the property in a foreclosure.

Warranty Deed or Special Warranty Deed Good Example. A Warranty Deed and a Special Warranty Deed both contain title warranties that if breached give the new owner a claim against the prior owner(s). If a properly drafted Warranty Deed or Special Warranty Deed had been used to transfer title to the LLC the deed would contain a warranty that the land was not subject to the $25,000 lien. The breach of this title warranty gives the LLC a claim against the prior owner(s). Because the LLC has a claim against the prior owner(s) for breach of the title warranty the prior owner(s) could then make a claim under the prior owner(s) title insurance policy and the title insurance company would pay off the $25,000 lien.

2. Title Insurance Issue #2. The LLC should contact the title insurance company that issued the prior owner(s) title insurance and purchase an endorsement to the title insurance policy that names the LLC as an additional insured under the original title insurance policy issued to the prior owner(s) as of the date the prior owner(s) acquired the title insurance. With the endorsement the LLC can make a claim on the title insurance policy directly to the title insurer rather than against the prior owner(s) for breach of a title warranty. This type of endorsement typically costs $75 – $125.

3. Insurance Issue. When the LLC acquires title to the land be sure to contact your insurance company and notify it that the LLC owns the property and arrange for the LLC to be the named insured under the policy or added to the policy as an additional insured. If the property burns to the ground you don’t want the insurance company to deny coverage because it insured the prior owner(s) not the LLC. Make sure the LLC acquires all types of insurance that is appropriate for the property and its use.

4. Due on Sale Clause Issue. If the property is encumbered by a lien, the lender may have an option to call the loan if the borrower(s) transfers title to the LLC. This type of option is called a “due on sale clause.” If you ask the lender for permission to transfer the land to your LLC the lender will always say no. I’ve formed thousands of LLCs that acquired real estate subject to due on sale clauses. I’ve never had a client tell me that their lender called their loan when they transferred their land to their LLC. If you transfer your land to an LLC and your lender calls your loan, please let me know. The good news with respect to Arizona real estate encumbered by a Deed of Trust is that Arizona Revised Statutes Section 33-813.A allows the prior owner(s) to cure the default and stop a trustee’s sale under a Deed of Trust by deeding the property from the LLC back to the prior owner(s) who must also pay the lender its foreclosure costs.

Purchase a Do-It-Yourself Special Warranty Deed

If you need to transfer Arizona real estate to a limited liability company, purchase one of my editable do-it-yourself Word documents for $47. Each deed comes with instructions on how to complete the deed and record it with the appropriate Arizona county recorder. Purchase a deed in my legal forms web form store.

Richard Keyt2023-10-24T10:26:50-07:00January 8th, 2017|Asset Protection, FAQs, How Do I, Real Estate Issues|0 Comments

Arizona Corporation Commission Nails Real Estate LLCs Selling Unregistered Securities

On April 12, 2012, the Arizona Corporation Commission announced that it sanctioned multiple individuals and their affiliated companies whose unregistered investment programs—most of which involved real estate—caused investors to lose over $8.57 million. The Commissionordered that amount in restitution and a total of $377,500 in administrative penalties.

First, the Commission ordered Kent M. Axtell of Phoenixand his affiliated companies to pay $1,142,747 in restitution and a $75,000 administrative penalty for committing securities fraud in connection with an unregistered real estate investment program. The Commission found that,while doing business as Sherlock Homes and Finding Homes for Investors, and as the sole member of Executive Real Estate Solutions, LLC, Axtell sought investor funds to buy and sell real estate in Arizona. The Commission found that, while not registered as a salesman or securities dealer in Arizona,Axtell and his companies pooled the money of at least 26 investors and issuedpromissory notes, some of which were collateralized by deeds of trust. Further, the Commission found that, through promotional materials, Axtell touted his extensive real estate experience, representing to investors their funds would be secured with a collateral assignment in a sizable life insurance policy owned by Axtell. The Commission found that, in at least one instance, Axtell failed to record a deed of trust to secure the amount invested and used investor funds to repay another investor. In settling this matter, Axtell neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

In a separate case, the Commission ordered James F. Curcio of Sun Lakes to pay over $4.94 million inrestitution and a $40,000 administrative penalty for fraudulently offering and selling unregistered membership interests in limited liability companies that were in the house-flipping business. The Commission found that, while not registered to offer and sell securities in Arizona, Curcio and his affiliated companies—3CG, LLC and Choice Property Group, LLC — sold the unregistered investments to over 50 investors, promising them 15% annual returns. The Commission found that Curcio informed some of the investors they could rollover their IRA funds to purchase the unregistered LLC membership interests. The Commission found that Curcio promised investors their money would be used to purchase real estate, but Curcio and his affiliated companies actually used the money to service loans from institutional lenders who were creditors of the house-flipping business. In settling this matter, Curcio agreed to the entry of the consent order and admitted to the Commission’s findings only for the purposes of the administrative proceeding.

In the next case, the Commission issued a default order against former Scottsdale resident Arthur Fried who bilked more than $1.05 million from 16 investors. The Commission ordered Fried to pay a $150,000 administrative penalty for fraudulently offering and selling the unregistered real estate investment program. The Commission found that Fried managed four companies—Comprehensive Cash Flow Funding, Inc., WeBuyHomesinAZ, LLC, My Bargain Gift Bag, LLC and Loan Mod Shrink, LLC—and, while not registered to offer or sell securities, raised money from investors to fund the purchase, renovation and sale of real estate properties in Arizona. The Commission found that, through various sources—websites, real estate investment clubs, and advertisements in newspapers, including the Jewish News of Greater Phoenix—investors were promised a guaranteed, double-digit return with an investment secured by a first-lien position on real estate. The Commission found, however, that Fried, in some instances, did not even hold title to the real estate, and as a result, issued fictitious deeds of trusts to some investors. The Commission entered a separate default order against Fried’s business entities in March 2012.

In another case, the Commission ordered Robert Coleman Stephens of Cave Creek to pay $1,366,897 inrestitution and a $100,000 administrative penalty for fraudulently offering and selling an unregistered real estate investment program. The Commission found that, while not registered to offer or sell securities in Arizona, Stephens raised money from investors to fund a large, real estate and commercial resort development involving condominium timeshares with access to a golf course, indoor mall as well as air, car and boat racing. The Commission found that, through free seminars in the Scottsdale area, Stephens misrepresented to investors that he was a successful real estate developer when, in fact, his prior businesses had failed, resulting in multiple judgments against Stephens and his companies. Additionally, the Commission found that Stephens failed to inform investors that he would use some of their money to pay for questionable expenses, including personal vehicle repairs. Further, the Commission found that Stephens failed to secure on behalf of the investors liens against his jet aircraft, which Stephens pledged as collateral. In settling this matter, Stephens neither admitted nor deniedthe Commission’s findings, but agreed to the entry of the consent order.

Finally, the Commissionordered respondent G4i Capital Partners, Inc., a Delawarecompany, to pay a $2,500 administrative penalty for offering and selling anunregistered securities offering in Arizona. The Commission found that, while not registered as a securities dealer, G4iCapital Partners, through two websites, made a general solicitation forinvestor money to fund its government contracting and consulting operations,offering potential investors a secure, high-yield return on their investment. The Commission found that G4i Capital Partners sold the unregistered investmentprogram to a least one investor who was subsequently repaid withinterest. In settling this matter, G4i Capital Partners neither admittednor denied the Commission’s findings, but agreed to the entry of the consent order.

More caution for investors:

Evenwhen selling a legitimate product, some promoters do not recognize theinvestment program they have created is a security. Determining whetheran alternative investment program is a security is not always easy to determineand depends upon the unique facts and circumstances of the transaction and noton what a promoter calls the investment product. Even when investing with someone they know, investors shouldverify the registration of sellers and investment opportunities and investigatedisciplinary histories by contacting the Arizona Corporation Commission’sSecurities Division at 602-542-0662 or toll free in Arizona at 1-866-VERIFY-9. TheDivision’s investor education web site also has helpful information at www.azinvestor.gov.

Richard Keyt2016-11-16T08:23:46-07:00April 17th, 2012|LLCs & Securities Laws, Real Estate Issues|0 Comments

Lessons to be Learned from Sheriff Joe’s Bad Example

Maricopa County Sheriff Joe Arpaio and his wife formed an Arizona limited liability company in December of 2010 called “Ava Investments, LLC.” In June of 2011 they transferred eight parcels of land into Ava Investments, LLC.

Apparently Joe and Ava were not concerned about confidentiality because their home address is listed in the Articles of Organization and on the Arizona Corporation Commission’s website as well as their names. I can’t fault Sheriff Joe, however because he didn’t have a chance to read my article called “The Confidential LLC – How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s)” because the article was written after the Arpaios formed Ava Investments, LLC.

Lesson 1: If you want to keep your ownership of an Arizona limited liability company confidential and not on public display, do not be a member or manager of an Arizona LLC or use your home address for any purpose in the LLC’s Articles of Organization.

Apparently the purpose of Ava Investments, LLC, is to hold the Arpaio’s investment real estate. I searched the Maricopa County Recorder’s website for Ava Investments, LLC, and found the following deeds:

June 6, 2011, Special Warranty Deed recorded on June 14, 2011, was signed by Joe and Ava as grantors conveying two parcels of land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investments Corporation, not Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio who acknowledged that she was “duly sworn on oath . . . that the foregoing statement is a true and correct of the facts pertaining to the transfer of the above described property.” These two parcels are located at 10635 & 10637 North 71st Place, Scottsdale, Arizona. Problems: The price listed is $75,00, but the deed transferred two parcels. What is the price of each parcel? Is $75,000 the total price? Who was the seller? The deed was signed by the Arpaios, not Ava Investment Corporation. The Affidavit of Value states that the seller was the corporation. If the property is/was owned by the corporation then the deed signed by the Arpaios did not transfer the title to the LLC.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10614 North 71st Place, Scottsdale, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10610 North 71st Place, Scottsdale, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 16733 East Palisades Blvd., Fountain Hills, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10632 North 71st Place, Scottsdale, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is a single family residence and used for commercial or industrial use.” Note: The Affidavit says to check only one box to indicate the type of property, but two boxes were checked. The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 16743 East Palisades Blvd., Fountain Hills, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10630 North 71st Place, Scottsdale, Arizona.

Lesson 2: Diversity – do not put all of your eggs or assets in one basket. We all know what happens when you drop your basket, you lose all of your eggs or real estate if you have all of your real estate eggs in one basket. The Arpaios have 8 parcels of real property in one LLC. If somebody gets killed or injured on one property and there is a large lawsuit against the LLC, all the properties could be lost. For maximum asset protection, put each parcel of real estate in a separate LLC so in the worst case scenario, you only lose the equity you have in that one LLC. Do not put multiple parcels of valuable real estate in the same limited liability company because you could lose everything if something goes wrong with one of the properties. For more on this topic see my article called “How Many LLCs Should I Form for My Properties?“

The paper trail raises some interesting issues that everybody who transfers land into an LLC should consider before making the transfer.

Lesson 3. Always Consider Income Tax Consequences When Transferring Property. The total purchase price of all the properties stated on the Affidavits of Value is $995,000. The Affidavits of Value indicate that all the transfers involved an exchange or trade to satisfy the purchase price. Therefore the newly formed Ava Investments, LLC, must have been funded with property valued at $995,000 that was used to exchange or trade with the sellers of the properties. Did the Arpaios fund their LLC with a loan of property or make capital contributions of property valued at $995,000. If the latter, the LLC’s basis in the property would be a carry over basis. Would the exchange / trade be a taxable transaction? Income tax law (Internal Revenue Code Section 1031) does provide for tax-free exchanges of real estate for real estate, but not real estate for personal property or money. It is possible that one or more of the transactions could have created taxable events for buyer and seller. Hopefully the Arpaio’s consulted with an experienced tax advisor before they consummated the transfers and taken steps to eliminate or mimimize any adverse income tax consequences.

Lesson 4. Document & Track the Tax Basis of the Property Going into the LLC. The LLC should document the income tax basis of property it acquires so it can deduct the basis from any amount realized on a later sale of the property. If the LLC buys the property from the seller for its fair market value then the tax basis of the purchased property is the amount paid to acquire the property. If the property is contributed to the LLC by a member, the LLC takes the same tax basis in the property that the member had in the property.

Lesson 5. Document the Affect the Contribution of the Property to an LLC Has with respect to the Contributing Member’s Capital Account. This is especially important when the LLC is a multi-member LLC other than a two member husband and wife LLC. If a member contributes money or property to a multi-member LLC, the member’s capital account should be increased by the amount of money contributed or the value of the property contributed. This is an important concept for multi-member LLCs. Documenting or failing to document the value of members’ contributions added or not added to a their capital account has real economic consequences to the all the members. All of the members should sign a document in which they agree to the value of contributed property and the amount that will be added to the contributing member’s capital account. Think of a member’s capital account as similar to a bank account. If you contribute real estate to a multi-member LLC that has $50,000 of equity, you want your capital account to increase by $50,000 because for every dollar that does not get credited to your capital account you will lose $1 or real money at some time in the future.

Lesson 6. How Do You Determine Property Values? It is unusual for two parcels of real estate to have the same value. The purchase price of two of the parcels was $60,000, three parcels were priced at $75,000 and two were $325,000. What a co-inky-dink! How did the Arpaios determine the values of the properties?

See “Sheriff Joe Arpaio and His Fiesta Bowl Freebie.”

Richard Keyt2018-05-31T17:09:28-07:00August 19th, 2011|Articles of Organization, Asset Protection, Real Estate Issues, Tax Issues|0 Comments

Should I Form an LLC before or after Acquiring Real Estate?

Question: I intend to purchase an Arizona real estate property for investment in the near future. My plan is to rent the home or I might fix it and then flip it. I know I need to put the property into a limited liability company to limit my liability and protect my life savings from things that could go wrong with the property. Should I form the LLC before or after the acquisition?

Answer: Either way is fine, but you can save yourself some administrative tasks and some money by forming the LLC first so it can be the grantee on the deed that conveys title. The important fact is that you make sure the LLC holds the title so that it will be the defendant in any lawsuit that arises from the property.

The benefits of forming the LLC first so it can take title are:

1. The LLC is the original owner named in the deed from the transferring property owner.

2. The LLC can be the insured on the property and liability insurance policies from day one.

3. The LLC can be named as the insured on the title insurance policy if you purchase title insurance at the time of acquisition, which as a real estate lawyer I recommend you always do.

If you purchase the land in your name first instead of in the name of your LLC then you must do the following after you form the LLC and acquire title:

1. Prepare a deed, sign it and record it in the county where the real estate is located.

2. Cancel the property and liability insurance policy and get a new policy that names the LLC as the insured.

3. Get an endorsement on the title insurance policy that names the LLC as an additional insured.

Warning: Do not sign and record a deed to the LLC before it is created. You cannot put the title in the name of the LLC unless it exists at the time the title is transferred. A deed to a nonexistent entity is void and creates a cloud on the title.

Richard Keyt2016-11-16T08:23:54-07:00July 7th, 2011|FAQs, Forming LLCs, Real Estate Issues|0 Comments

How to Transfer Land to an Arizona LLC

Question: How do I transfer land to an Arizona LLC?

Answer: You may have formed a limited liability company to help protect you from things that might go wrong with property you own. For the LLC to protect your personal assets from liability, it must hold the title to the land. To get real estate into a limited liability company, the current owners must sign a deed that conveys the property to the limited liability company and record the deed in the county where the real property is located. If you acquired title to the property in a transaction that went through an escrow company, ask the escrow company if it will prepare the deed. Sometimes the escrow company will prepare the deed for you for no charge or a nominal amount.

Some other issues to consider are:

1. If you transfer the title to the LLC, ask the title insurance company that issued you the title insurance policy on the land to give an endorsement to the title insurance policy as of the date the policy was issued that names the LLC as an additional insured on the title policy. The cost for this type of endorsement is typically $75. If you do not get the endorsement, the LLC will not have title insurance on the land unless it purchases a new policy.

2. Coordinate with the insurance companies that insure the property and arrange to get a new policy or policies of insurance that name the LLC as the insured. Alternatively, you could add the LLC as an additional insured on the existing insurance policy or policies. If you purchased fire insurance that names you as the insured and the home is damaged or destroyed in a fire, the insurance company will probably deny coverage because you are not the owner of the property. Make sure you have written evidence from the insurance company that says the LLC is covered as of the date the real estate is transferred to the LLC.

3. Consult with your insurance agent and make sure that you and your LLC are covered with all appropriate types of insurance that have high amounts of coverage. Examples of such insurance would be home owners and liability insurance, however the types of insurance you need depends in part on the actual business and/or activities of the LLC. An LLC that owns a home leased to a family needs different insurance types and coverages than an LLC that operates an assisted living facility.

Richard Keyt2019-06-15T11:00:44-07:00July 4th, 2011|Ask the KEYTLaw Girl, FAQs, Operating LLCs, Real Estate Issues|0 Comments

Sarah Palin Purchases Scottsdale Home – a Lesson on How to Purchase Real Estate in Arizona Confidentially

Sarah Palin, recently, made national headlines for purchasing a luxury home in North Scottsdale, Arizona. Palin purchased the home through a Delaware Limited Liability Company that took title at closing. I suspect one of the reasons Sarah formed a Delaware limited liability company to purchase the home was to make it more difficult for people to determine the owner of the real estate.

In Maricopa County, Arizona, where the home is located, it is a simple matter to determine the legal owner of a home. Anyone who knows the address of the home can search the address on the Maricopa County Assessor’s website and find both the title holder and a link to the recorded deed on the Maricopa County Recorder’s website. Her new home is located at 29005 North 82nd Street, Scottsdale, Arizona 85266. See the Affidavit of Property Value recorded with the deed. This document states that the buyer was Safari Investments, LLC, and shows the purchase price was $1,695,000.

The seller was Ian Whitmore who purchased the home in March of 2010 for $803,650 cash. The Affidavit of Property Value recorded with the deed states that Ian Whitmore bought the home to use as his residence or the residence of a family member.

Safari Investments, LLC, is not an Arizona LLC nor has it registered to do business in Arizona. Delaware does not require members of the LLC to disclose their identity in public filings. The only information required in the Articles of Organization of a Delaware limited liability company is the name of the company and the name and address of the resident agent. Arizona, however, requires that the Articles of Organization of an Arizona limited liability company contain the name and address of all members if the LLC is member managed or the names and addresses of members who own 20% or more of the company if the LLC is manager managed.

By forming a Delaware LLC to purchase the home in Scottsdale, Arizona, Sarah Palin may have intended to keep her ultimate ownership confidential, but that plan didn’t work. Her ownership was discovered by many other sources. Here are some potential downsides to having your LLC own your home:

If the LLC was formed outside Arizona, it may have to register to do business in Arizona in which case Arizona law will require that the foreign LLC disclose the names and addresses of its members using the same rules described above. If the LLC is getting a loan to buy the property or if the LLC is purchasing title insurance (a buyer of Arizona property should always purchase title insurance) the title insurance company, the lender and the title insurer will require the foreign LLC to register to do business in Arizona, which would cause the disclosure of the foreign LLC’s owners. If your foreign LLC will be required to register to do business in Arizona and you want to keep the ultimate owner(s) name off the LLC’s public, you will be forced to create two foreign LLCs, one of which will be the sole owner of the LLC that will register to do business in Arizona. This is an expensive and an administrative nightmare. See below for a better alternative.

The ultimate owner of the home will not be able to take advantage of Arizona’s homestead exemption because the exemption does not apply to entities, only to people. Arizona’s homestead exemption protects the first $150,000 of equity in a person’s primary residence from non-consensual creditors.

Homeowner’s insurance may cost more because the home in not owned by the resident owner.

If the LLC is taxed as a C corporation, S corporation or a partnership for federal income tax purposes, the ultimate owner will not be able to exclude up to $250,000 ($500,000 for people filing a joint return) gain on a future sale of the property. Internal Revenue Code Section 121(a) states:

“Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”

See “With New Arizona Home, Palin Can Skip the Tanning Bed.”

A Better Cheaper Way to Purchase Arizona Real Estate Confidentially

I routinely form Arizona LLCs that allow the ultimate owner of the company to remain confidential. A better way to maintain the secrecy of the ultimate owner of an Arizona LLC is for the owner to own the LLC in a trust. When a trust owns the LLC, the name and address of the trust appear in the Articles of Organization and the Arizona Corporation Commission’s public records. If the trust’s name does not include the owner’s name, then it is not possible to determine the beneficiaries (ultimate onwers) of the trust.

If you need to form an Arizona LLC and keep the ultimate owner(s) of the LLC secret, you should hire me to form the LLC and purchase my Confidential Trust. This is a special trust I draft for the purpose of owning the membership interest in an Arizona LLC. The ultimate owner is the trustee and the beneficiary of the trust and has total control over the trust’s assets – the membership in the LLC. The name of the Confidential Trust appears in the Articles of Organization, not the name of the ultimate owner.

For more on this topic, read my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s)” and “Sarah Palin confirms buying home in north Scottsdale.” This article explains that the way to form an Arizona LLC and keep your name and address off the public records of the Arizona Corporation Commission is to buy Arizona LLC attorney Richard Keyt’s Gold LLC package, aka the confidential LLC, for $1,297.

Richard Keyt2023-11-03T07:46:19-07:00June 3rd, 2011|Articles of Organization, Forming LLCs, Real Estate Issues|0 Comments

Arizona Damage Awards in Premises Liability Cases

Owners of residential and commercial buildings face potential liability for accidents which occur on the property’s premises. Two premises liability cases found their way into the top ten civil damage awards in Arizona during 2010. In LeClair v. Lumberman’s Building Center, the jury awarded $3,900,000 to a truck driver who slipped and fell on black ice. The accident occurred at the Lumberman’s Building Center and caused the truck driver to lose his leg. In Kerege v. Viscount Hotel Suite, an elderly woman fell down carpeted stairs in a hotel atrium, ultimately, caused her death. The jury awarded the plaintiff $3,000,000.

These two cases illustrate the need to form an Arizona Limited Liability Company (LLC) to protect the personal assets of the owner. Imagine you just purchased a small strip mall in Phoenix. You depend on this strip mall as one of the assets to help fund your retirement. However, when you purchased the strip mall, you did not have title to the strip mall held in an LLC. Rather, you personally held title to the mall believing an insurance policy covering the strip mall sufficiently fully protected you against any lawsuits and judgments arising from the real estate.

The insurance policy on the strip mall covered the first $2,000,000 of damages occurring to any person on the property. During a rainy monsoon day, a prospective plaintiff slips on the sidewalk of the strip mall and injures themselves badly. The upset plaintiff sues the owner of the real estate, i.e., YOU, and the jury awards the plaintiff $3,000,000 in damages. Your insurance company pays the policy limits of $2,000,000, but you now have a $1,000,000 problem, which is the unpaid amount of the judgment. Guess where the plaintiff will collect the additional $1,000,000. If you said from your life savings you are correct. Unfortunately, the plaintiff will be able to collect the unpaid amount of the judgment from your personal assets. The strip mall you depended on to help fund your retirement has caused you to expend other personal assets you depended on for retirement to satisfy a judgment on a lawsuit.

This disaster could have been avoided if the property owner had formed an Arizona LLC to hold title to the real estate. The general rule regarding property held or a business operated through an Arizona LLC is that the owner(s) of the LLC are not liable for the debts or obligations of the company. People form LLCs to protect their assets from things that go wrong with investment real estate and businesses. Thus, in the above example the property owner could have protected the owner’s life savings by forming an Arizona LLC and transferring title to the strip mall to the LLC.

Important Lesson for Business Owners & Investment Real Estate Owners: Insurance is always your first line of defense, but your second line of defense is the LLC.

Richard C. Keyt2016-11-16T08:23:55-07:00May 25th, 2011|Asset Protection, Lawsuits, Real Estate Issues, Why People Need an LLC|0 Comments