John,
I just can’t resist - LT’s have been around for 500 years, but in your post and even though you hint that they do have valid uses - none where disclosed to the group. But, first things first - I really do like your write-up. The post seems geared towards another particular string, maybe here or somewhere else, which would be nice to reference for context. Even without I enjoyed reading your thoughts and agree there are ways that LT’s are misrepresented and/or misapplied just like any other tool.
I too am very familiar with LT’s - not as a “guru” but as an active investor who finds them to be an invaluable tool - second only to option contracts. I’ll share with you and the group the reasons I like them (especially in FL) in almost every deal. Regarding your various remarks about “gurus” - I think we can agree that CAVEAT EMPTOR should be employed regarding all forms of information (including both of our input on this subject matter).
Why use a LT’s? Because in specific situations, as outlined below, it is the premier tool for handling “other peoples money” (OPM). I’m blessed that my current sweet spot starts somewhere around $3M and goes up from there - too big for most mom/pop investors yet too small (more likely the projects simply comes with too many problems) for a REIT. Before playing in this market I cut my teeth using the same LT strategies on $15,000 wholesale H/L projects - especially if I was using a “silent partner” for equity.
Use #1 - The main purpose of LT’s is to provide PRIVACY: I like to work with accredited passive investors and they surely benefit from the privacy that LT’s provide (especially in FL where we have an excellent LT statute). It does not matter if I raise 10K or $3M from a passive investor, it is important for me to ethically and legally do my best to keep their identity out of public records as much as possible. All investors have choices - if a money partner purchases 1000 shares of Apple the public has no way to “see” this transaction - if I’m truly a professional REI/syndicator then if at all possible my deals should be the same. LT’s allow me to keep my clients PRIVATE for a minimal amount of paperwork and cost.
To be VERY clear - I’m only talking about PRIVACY, not ASSET PROTECTION - I encourage all my investors to talk with their advisors about holding their beneficial interest in the LT with a simple instate LLC. Unfortunately, there are times when an investor has to do business “personally” - as is the case if “Mr. Smith” sold a triplex and now wants to 1031 exchange into (all or a piece) of one of my projects. As you know, since “Mr. Smith” needs to do the exchange - so must his replacement property be titled the same way.
So, LT’s gives me and my investors = PRIVACY and LLC’s provide the ASSET PROTECTION. Used together this is a powerful tool for anyone who wants to learn how to employ OPM.
Use #2 MULTIPLE PARTNERS: There are times one might need to put multiple investors together who live all over this great country. Since the Trustee signs all legal documents, all the beneficiaries need to do is direct the trustee to sign. The direction documents are very simple, can be faxed, and do not need to be witnessed or notorized. In one of my projects my investors and I sold over 40 individually deeded lots to our tenants by remote control! I was out of state, my investors where literally across the country, and the project is in FL - none of us had to go to any of the closings and the title company simply used email for HUD statements and snail mailed us our checks. SWEET!
#3 alone is worth the price of admission! 1031 exchanges: Another practical benefit of LT’s is that I can put multiple 1031 exchange participants into the same deal (and price the investment to outperform TICs)! And (if needed) I can have other participants who are not 1031 exchanging all involved in the SAME project! This is absolutely a HUGE benefit if you want to be a real pro at using OPM.
The above are some very real reasons to use LT’s. Since we are using the LT for the above reasons the rest of these benefits are simply bonuses that come with proper use of LT’s:
#4 MANAGING LEGAL DOCUMENTS: With the beneficiaries direction a LT allows all recorded documents including security instruments to be signed by ONLY the Trustee. Any additional guarantees (by the beneficiaries) can usually be handled outside of public records (if they are even needed at all).
#5 QUIET transfer: I have already eluded to this - LT’s can keep the acquisition “quiet” from anyone’s prying eyes including the property tax assessor and yours (just like buying shares of Apple is quiet from public records). So, the property appraiser is less likely to reassess the project because a DEED was recorded, which potentially defers a large hit to the P/L statement. Now, we do plan on the fact that P. Taxes may reassess at any time. And I do work out a better deal with the seller if it is possible because the net income will likely change. But, we are happy that the P. tax assessor must value the property on his/her own without pointing a big fat arrow at the deal by using a conventional deed.
#6 LAYERS: When my LLC leases my passive investors LT property I guarantee them INCOME. I create the cash flow to pay the investors by being the sole entity to engage the public. We now have a very legitimate business that provides a very tangible benefit to my investors. My investors are now one step removed from the public and a tenant or other party should have a hard time laying blame on my investors for any potential tort issues that may arise.
#7 EASE OF TRANSFER: If I need to have one passive investor buy out another, LT’s are simply the least complicated and least expensive way of handling this.
So this is seven real world ways to properly use a LT. Regarding some of the particular negatives you presented I have some practical knowledge in this area to share:
You state, “1) LT often ATTRACTS attention, as opposed to deflecting it;”
I have not found this to be true at all - if anything it is the complete opposite in my practical experiences - especially when I record a long term NNN lease in public records with my LLC.
You state, “2) Improper use (which seems to be the rule, not the exception, where gurus are concerned) creates serious legal liability;”
I was taught these legitimate uses from “gurus” - the point as mentioned above is that all investors need to be careful about information and the proper use of these tools no matter the source. Any tool can be misused, but applied properly LT’s have been a very valuable tool (see doing deals in FL from anywhere in the world without one mail away closing).
"3) Is it included as insured under policy? If not, insurance may not cover it. If so, there is often a certain amount of hassle or monetary cost involved.
I have had little to no problems with insurance. My experience is that our rates and terms are the same whether we insure a LLC or LT or both.
"There will be a hassle factor in terms of properly running trusts (I love to read posts on
