we built a store (titled and held in a family trust) on a leased piece of property(the land was leased by a familyLLC) and over the years the trust paid off the building in full. Some of the family decided to buy the land and got a mortgage just for the cost of the property which they are holding in that family LLC. In a recent meeting this week we realized that nowhere did we cover the cost of the building. In other words the land LLC has a 300,000 first deed of trust ...but the building worth 600,000 has no paper work as to its value andno protection if somehow somewhere there is a lawsuit...in other words although its crazy....if someone won a suit against the property , they would only pay 300,000 for the land and wind up with the 600,000 building.WHAT DO WE DO TO PROTECT THE EQUITY of the building held in the trust?
State/Country relating to question: Virginia
this is the first time this came up
Can I get some clarification from you here?
Do you mean that there is a lender out there that has a $300,000 mortgage against the "Land" -- but that the property actually consists of the Land and the Store building on the land for a total value of about $600,000 and you are concerned that if the holder of the land mortgage forecloses, that lender will receive the land and building worth 600K to pay off a 300K debt?
This property is in virginia.Not the lender so much but lets say there is
a lawsuit against the LLC or against one of the family LLC members
or what ever(we are watching way too much TV) and suit goes against the property and there is only the 300,000 first Deed of Trust recorded....and the trust has no protection for the 600,000 it paid for the building!! What the heck can we do to protect the equity in the building??
I see your concern but I am trying to think of situations where it might be applicable and there is any real risk of losing the equity in the property. First, if the 300K lender were to foreclose, any monies that they received above that 300K would have to be paid back to the owners of the property (although in a foreclosure situation the lender will typically sell the property for less than it is worth because they only care about being paid off themselves -- so if your family trust were ever in this situation you could step in to arrange to sell the property at a market value prior to any foreclosure and just pay off the 300K lender with the proceeds of the sale). Second, if there is a lawsuit, then it would have to be a situation where the insurance that you have for the trust or the building or the land was insufficient to cover the damages awarded in any such lawsuit -- and this is relatively rare (although with a business interest like this, the trust managers should consult with the insurance agent and determine if the liability coverage for insurance is sufficient -- being an ongoing business concern the trust should have some type of umbrella coverage that covers not only what happens at the building and on the land but the actions of the trust itself so in the event that the trust is sued for some reason that does not involve the land or building and the plaintiff in such a lawsuit is pursuing the assets of the trust, the insurance coverage that the trust has is high enough to cover any such eventuality). Third, if the individual members of the family LLC were sued, the lawsuit against that individual member would not be able to penetrate the veil of the limited liability company -- that is the reason why we set up these limited liability companies -- so when the owners of the company are sued, the plaintiff in the lawsuit cannot touch or get to anything that is owned by the LLC itself.
So I think you might be worrying needlessly or at least prematurely because it really is not that easy to sue a company or an LLC and be able to get at the equity that is built up in property owned by the LLC. You should consult with your insurance advisor, though, and let the insurance advisor know of the amount of equity in the building and determine together if there is enough liability insurance on the property and for the trust LLC itself so that if some party were to bring a suit then if there is a recovery for that plaintiff then the plaintiff will not be able to get anything beyond what the insurance coverage offers.
I hope that helps. Please let me know if you have further questions or if you have further concerns.
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Mary....I think I need to restate this.... if there is(lets say) a falling out in the family....some are part of the trust...... others are in the llc.... the trust guys have no way to protect themselves cause nothing is recorded for them (va. being a recording state). So I think the question should be they might be looking for a way to encomber the building with some kind of instrument to show they own or are owed 600,000. I think that is what is at the heart of this. And so no matter what takes place outside of the family or within the family....they have their asset protection of ownership. Make any sense Mary ? I just asked them and they have all that insurance. They want to put to record that they own the building and have 600,000 tied up in it ....so if all goes haywire.... they have a way of officially showing the trust owns the building.
So -- these are two separate sets of owners? One group for the land and then another group for the building itself that was built on it?
If yes, the property deed in the public records -- it just states that it is land owned by one group and there is no reference to the other group that actually built the building?
Am I on the right track here? (I apologize for the questions but sometimes writing back and forth does not adequately explain a situation and we are unable to contact you offline or out of this forum to speak with you).
You hit the nail right on the head...Mary....yes....that is the case!
Okay -- now I see the problem. Ugh -- this is not good. Okay -- the only way that the second group of owners who built the building are going to get any protection here is if they are added to the actual deed to the property. Currently, the first group of owners who actually own the land are the legal owners of EVERYTHING because they are the only ones on the deed in the public records. The land owners are going to have to sign a lease of the land that the building is on (there is such a thing as a 99 year renewable land lease -- and this is the type of lease that is needed because that lease will then be recorded in the public records and will show clearly that the land owners do not own the building) AND the land owners will also have to sign off any right, title or interest in the building in a deed which is also recordable in the public records. This way, the separate ownership of the building will be clearly shown in the public records. The process is fairly simply but they will need an experienced real estate lawyer to pull together the appropriate documents and there may be a bit of an issue with the 300K lender because the landowners are going to have to get their permission before executing the lease and the deed over to the building owners (in the mortgage/deed of trust document for the 300K lender there is a provision that states that there will be no sale or assignment of the property during the term of the loan and technically what will be happening is an assignment of ownership rights). So, if you do not get the permission of the 300K lender then that lender can call the loan and demand that it be immediately repaid (now, the two groups might be able to get another lender to step in and refinance that loan so it might not be that big of an issue if the 300K lender refuses to agree to the lease and transfer -- but it is something that will have to be dealt with and the attorney that they hire to do this will have to read the mortgage and then contact the 300K lender for permission first and that lawyer should get the permission in writing from them if the permission is granted because if they leave the mortgage intact then the lawyer will have to ask the lender to subordinate its rights in the mortgage to the rights of the lease and the deed that will be executed and put onto the property -- and so what that lender will have is a mortgage on the land and the ground lease to the building owners (currently they have a mortgage on everything and if that was not the intention then it must be fixed)).
I hope I did not confuse you with my answer -- there is a way to fix this but it must be handled by an experienced real estate lawyer in your area -- I suggest that they please do not try to handle this themselves because if it is not done correctly then they could end up losing the rights to the building for one reason or another and it can be avoided with the appropriate documentation -- and if for some reason the lawyer they hire does not do it correctly, then that lawyer can be sued for malpractice and damages at the end of the day.
I actually worked on commercial buildings and real estate for 10 years and did things like this frequently -- subordination agreements, splitting deeds, ground leases, etc. so I am pointing you in the correct direction. If you need a local lawyer then they should contact the bar Association of the largest nearest city and ask for a referral to someone who has handled specifically commercial real estate projects involving lender subordinations and ground leases -- just getting someone who says they know how to do real estate is probably not going to go far enough.
Best of Luck -- please let me know if you have any further questions. If not, can you please press the 3rd, 4th or 5th smile face below so that I will be paid for my time. I am paid NOTHING unless you press the 3rd, 4th or 5th smile face below so I appreciate it when my customers make sure that they press the 3rd, 4th or 5th smile face below before leaving the website. THANK YOU VERY MUCH
13 years experience in RE Law, including LL/Tenant, contractor disputes, comm'l prop. issues
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