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socrateaser
socrateaser, Attorney
Category: Business Law
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Experience:  Retired (mostly)
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I have scenario I would like to present for analyzation. I

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I have scenario I would like to present for analyzation. I am a resident of CA. trying to go into the business of real estate in CA. with multiple investors. Can you define any problems or pitfalls that may occur from the following situation. 1) The buying & selling of properties would be minute enough to fall below the threshold of requiring an agents license. 2) The structure I am considering is a CA. land trust as I understand they are not subject to FTB Fees, with a NV. C- Corp (issuing Bearer Shares as all involved need to remain anonymous)owning the beneficial interest of the trust. 3) From what I understand all rental income and expenses must be paid from a bank account setup under the trust in CA. Can & how would I be able to move any profits to the C-Corp. for purposes of distribution?
Submitted: 1 year ago.
Category: Business Law
Expert:  socrateaser replied 1 year ago.
Hello,

California law does not recognize the concept of the land trust. To wit:

  • The "land trust" concept is not referenced in Miller & Starr, California Real Estate, except generally as follows: "An express trust may only be created by a written document. A trust can be created in real property by either a written document signed by the owner and declaring the owner as trustee or by transferring the property to another as trustee for the benefit of designated persons. Title may also be conveyed to a trust that is a separate legal entity formed to hold title to assets for the benefit of designated beneficiaries. [¶] ... [¶] When property is transferred to a trustee in trust, the legal title to the trust property is vested in the trustee, subject only to the execution of the trust. The beneficiary does not have any legal estate in the property, but only has the right to enforce performance of the trust according to the terms of the trust instrument." (3 Miller & Starr, Cal. Practice Guide (3d. ed.2000) § 8:33, pp. 62-63; fns. omitted.)

The reason why a land trust does not work under California law is because a beneficiary who exercises a right to control trust property (aka "power of appointment") is actually the trustee of the trust, and when a trustee and beneficary are the same person, the trust terminates and merges into the property of the beneficiary.

 

BotXXXXX XXXXXne, while your proposed business model may have some viability in Illinois or Massachusetts, it will fail in California.

 

Concerning a minimum amount of real estate sales sufficient to avoid the need to have a real estate license, California law has approved a "finder" fee, where an unlicensed individual introduces a buyer and seller (or landlord and tenant) to each other and then the finder exits the transaction. The finder's fee must be fixed at the time of the introduction, and not based upon whether or not the parties actually consumate a transaction. Otherwise, the finder is earning a sales commission, and that violates the real estate license laws.

 

Thus, at least two of the elements in your business model are problematic. Consequently, I don't see how you can make this work. But, then again, your description of the model is extremely simple -- almost as if it were self evident that the model is legal and something which is done routinely in California.

 

This leaves me at a bit of a disadvanage, because from my perspective, your model is legally impossible. The only thing I can think of at this point is that you are considering a business model developed in a different U.S. jurisdiction, and that the model is not viable for California.

 

If you have a citation to legal authority, or a treatise/white paper from a California law firm that demonstrates the model's viability, then I will be happy to review it and comment further.

 

Otherwise, my answer here must be that you will need a different strategy.

 

Please let me know if I can be of further assistance.

socrateaser, Attorney
Category: Business Law
Satisfied Customers: 34409
Experience: Retired (mostly)
socrateaser and other Business Law Specialists are ready to help you
Customer: replied 1 year ago.


So, with that being said and knowing the two main goals we would like to achieve, 1) invest in CA. R.E. & 2) avoid having to pay the FTB Fees, if at all possible how would you recommend we proceed?

Customer: replied 1 year ago.


Please see reply to your answer.

Expert:  socrateaser replied 1 year ago.
Sorry for the delay. I was out of town for several days and I had limited internet access.

I believe that what you are seeking is not a land trust, but rather a Real Estate Investment Trust (REIT). Such a trust is not a trust, in the conventional sense. The "trust" terminology is a historical anachronism dating to the early 1900s, where a few wealthy capitalists controlled the overwhelming majority of U.S. assets.

A properly constructed REIT will avoid both federal and state income taxation. See, e.g., this link from the Cal. Franchise Tax Board.

A REIT can purchase/sell/lease its own investment property without employing a real estate broker, as long as the employee of the REIT is not receiving any special compensation for the service (i.e., the employee must be paid wages/salary and not commissions for his/her efforts in purchasing/selling REIT properties. Cal. Bus & Prof. Code 10133(a)(1).

There is, however, a down side to this issue: Investors in a REIT are not purchasing real property -- they are purchasing a security. As such, the REIT must either register its securities with the SEC or meet the qualifications of one of the federal exemptions (aka Regulation A or D, or the Intrastate Offering Exemption). This means that general solicitation is usually prohibited, and investors must be accredited as defined by federal law.

Hope this helps.
Customer: replied 1 year ago.


There is no doubt in my mind that you are a true professional and I value your advice very highly. If you would just google set up a CA land trust and review a couple of the articles you would be able to see how one could become very confused. I appreciate your time and rate you for excellent service. It was definitely worth every penny I've paid

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