This article was re-printed from the Denver Post, dated July 13, 2008 by Tom LaRoque.
Landlords incur risks from all sides. They are often seen as wealthy, particularly by the people who write them monthly checks. Their tenants have ample opportunity to develop grievances, real or invented.
The risks call for self-protection, said lawyer William Bronchick. Among all professions, landlords face the greatest threat of being sued, he said.
An active
real estate investor and president of the Colorado Association of
Real Estate Investors, Bronchick sells do-it-yourself software to help savvy property owners protect themselves with the right legal structure. It is one of several products sold for that purpose.
The right legal structure, he said, often includes a land trust. Such an agreement allows one party, called the trustee, to hold ownership of property for the benefit of another, called the beneficiary.
Land trusts offer several advantages to property owners under the broad headings of privacy, protection from liability, and tax minimization, according to Bronchick.
Want a land trust?
There are many books and software programs that help
real estate investors learn the ins and outs of land trusts.
Some lawyers contend that the liability benefits are illusory. When push comes to shove in court, they say, a land trust will provide no real protection.
In an age when anyone can determine property ownership using public databases, owners sometimes find themselves targeted by private investigators or plaintiffs’ attorneys. Municipal code-violation enforcers as well as journalists may have interests in tracking down property owners.
“Lawyers want to sue people with money,†Bronchick said.
The best defense is to hide your assets, he said. “Make it look like you’re broke.â€
An investor with several properties can place each one in a separate trust, making them hard to link together, according to Bronchick. All the trusts in turn may be held by a single corporation.
The choice of corporate structures varies, depending on individual considerations such as taxes. For someone with a total annual income of less than $100,000, for example, a C-type corporation is taxed at a lower rate than an S corporation. Another option is a limited liability corporation, or LLC.
When property is controlled by a corporate entity with limited liability, the landlord enjoys a degree of protection, Bronchick said. Forming a corporation requires legal and tax counsel. Canned software such as Bronchick’s product for land trusts is no substitute, he said.
Denver
real estate investor Chris Yates of CM Yates Inc. has often used land trusts for privacy and protection of assets, he said. But tighter lending requirements are making it harder to do.
“In the past, a land trust was often part of creative deal structuring,†he said. “Now when they see a trust in the chain of title, it’s a red flag. They’re more nervous than in the past, and they may think a buyer using a trust is engaged in some sort of fraud.â€
Buying property from a trust is generally not a problem, said lender Sean Bennett of Moncor Inc. But lenders may look askance at someone proposing to buy property from a trust that they themselves control as the beneficiary, he said.
The dark side of land trusts, critics argue, is that they enable bad behavior on the part of landlords by allowing them to operate anonymously. A slumlord can escape accountability by using corporate smoke screen.
Denver lawyer John Head, who has represented plaintiffs in many
real estate cases, has another take. He doesn’t believe anyone, by using land trusts, effectively escapes liability or pursuit by attorneys.
“There is no legitimate reason for someone to set up a land trust purely for investment reasons,†he said. Trusts do have legitimate purposes, such as when a trustee is assigned to act as the caretaker of a property, he said.
Whether a property is held in a trust or not, debt financing can be a big deterrent to someone hoping to sue. If there’s little equity to recover, the plaintiff’s attorney may pass on the case, Bronchick said.
Trusts can protect against title claims. When a property is sold, typically sellers sign a warranty deed saying there are no liens against the property, dating back to its origin.
If a past lien is discovered later, the seller may still be held liable, Bronchick said. This surprises many sellers who thought they were indemnified by title insurance. If the property had been held and then sold by a trust, normally the trust would now have no assets to recover in a lawsuit.
