Real Deal REInvestor Network

I have a few quick questions for the "community". Firstly, I was wondering how does one achieve quiet, uncontestable title when purchasing/bidding on foreclosures, REO's, short sales etc. It's my understanding that obtaining title insurance has become more than difficult as the "investors", or purchasers of the derivatives/C .D.O's (mortgages that became security instruments unbenounced to the borrower on the note) have been lining up to sue or lien properties they may (or may not) have an interest in. Is this true, and how does one protect themselves from potential pitfalls? Second question, I'm assuming that it is recommended that a person operate their business through a corporation as opposed to a sole propietorship/partnership etc.. Is this also true, and what type of corporation is best suited for this type of business? Thanks!!!

Owner’s Liability
As a property owner, you must take reasonable precautions to ensure the safety of anyone on your property. As the owner of a business that is open to the general public, you must take extra measures to maintain a safe environment, both inside and around any buildings. Therefore, parking lots and privately owned paths and walkways must also be inspected for any safety hazards.

American with Disabilities Act (ADA) of 1990
ADA guidelines are something that you need to consider on a regular basis. Your facility must have unobstructed access for handicapped individuals.
A use change could be space that was an office and now it’s going to be something entirely different—for example, a hair salon. If the use changes, many counties in this country today will demand that you bring the building up to ADA standards. This doesn’t just mean it is wheelchair accessible from the outside to the inside—it’s ingress and egress.
These standards also apply to the interior layout of a space as well. Bathroom doors must be wide enough to accommodate wheelchairs, with a specific clear span in which to circle.  ADA requirements could even make you move walls.  So, you need to be aware of what the ADA requirements are. You can look up this information online at www.ada.com.

Environmental Issues
The major environmental issue today is mold abatement. It’s such a huge issue. Remember lead-based paint in the late 70’s and, early 80’s—in which people were sickened?
Workmen came in, dressed in white hazard suits and masks, and sanded down all of the walls to abate the problem. Today, lead-based paint is not a big issue. Walls can be sanded, primed, and another coat of paint applied to seal it. Perhaps sometime in the future, you may be able to abate mold in a similar manner.
If you are considering buying a building that’s been vacant for a couple of years and has had any leakage or water damage inside, mold may still be a huge problem.
In that case, the first thing you ought to do in your due diligence period, is spend $300 to $500 to address the problem. Have a  mold abatement and inspection technician evaluate it and give you a professional opinion as to cost and procedures for abatement.
If you don’t properly treat a building for mold, and months or even years later, somebody gets sick from it, you may have a costly issue on your hands. If tenants can show that you knew the building had mold when you bought it, but you can’t prove that you paid for the proper abatement procedures, you may be liable.
Sick building syndrome is another extensive environmental issue that is usually related to mold issues in air conditioning ducts. In your due diligence period, you need to check all of these issues to make sure that you are not leaving yourself vulnerable for an expensive law suit. Also, be sure to look for hazardous materials, such as asbestos, when you’re performing your preliminary inspections.

Common Area Liability
 Liability is an insurance issue. You should carry solid insurance policies on your properties with reputable insurance companies and carry at least a $1,000,000 to $2,000,000 blanket policy to protect yourself. When you buy protection of this nature, you also buy some of the best attorneys in the world to be on your team.
Make sure that your leases include a clause stipulating that people must conduct business in your buildings, according to local building codes. Be especially wary of signage, since many of these may not be code compliant.

ADA Compliance
Go straight to the ADA website, www.ada.com for this information. You can download their extensive regulations for details.
 

In my last blog post, I talked about ways to shift responsibility to pay for damages that may come from an injury on your property. This post will discuss ways to transfer liability away from yourself and further protect your personal assets. The real question is, how can you benefit from ownership but not have the personal liability?

 

There are a number of alternatives available for owning property in the United States. They come in a number of fancy names and an alphabet soup of letter designations including: C corp., S corp., LLC, LLP, LP, General Partnership, FLP, Land Trust, Living Trust, and Children’s Trust, just to name a few. Each entity has its advantages and disadvantages for asset protection purposes. Each entity also has specific tax issues that may affect how much you benefit from it monetarily. When picking an ownership structure you must consider not only liability issues but also tax issues. We will not address the tax issues in this discussion but I highly recommend that you consult your tax advisor (you do have one, don’t you?) prior to purchasing investment property in any structure.

 

The most familiar place to start our discussion is with the corporation. A corporation is a separate legal entity whose purpose is to allow you to contribute a certain amount of capital or an item (i.e. real estate), and generally limit your risk in the business venture to that item or the cash. You might lose what you contributed to the corporation, but the rest of your personal assets would not be at risk. Assuming your investment property is owned by a separate corporation of which you are the sole shareholder, and someone is injured on the property, the corporation would be sued as the owner, not you individually. If your company lost the lawsuit, it might lose the property, but your personal assets would be safe. However, in some states, a director or officer of the company might still be liable if they contributed to the damaging act or they had control over the act causing the damage. The keys to making a corporation work for asset protection purposes are to follow all corporate formalities required by your state and make sure that the corporation has adequate capital for the type of business it conducts. Undercapitalization of corporations is the undoing of many shareholders in protecting their personal assets.

 

The next group of structures is the partnerships which include the General Partnership, Limited Partnership, Family Limited Partnership, and Limited Liability Partnership. A General Partnership is nothing more than an agreement between two persons or entities to go into a business venture together. In this type of partnership, each partner can be held responsible for the other partner’s debts or obligations in the partnership. If your partner signed on a promissory note or opened a credit account and charged it up, the creditor can come after you for payment. This type of partnership offers no asset protection and has no place in your asset protection strategy.

 

A Limited Partnership (LP) is a partnership consisting of a general partner, who is personally liable for all the debts and obligations of the partnership, and one or more limited partners, who are only liable for the amount of money they contributed to the business venture. If the general partner is a corporation, it could limit the risk of the general partner. A Family Limited Partnership (FLP) is the same thing, just with the partners all being within the same family. A Limited Liability Partnership (LLP) varies from a Limited Partnership in that no general partner is required. Therefore each partner risks only the amount he has contributed to the partnership. Many consider a limited partnership one of the best asset protection entities available to real estate investors because it can be structured to severely limit the legal remedies available to those who file lawsuits against it. From a tax standpoint, it also allows you to spread the gains on the sale of assets, thereby reducing taxes. To see if this entity is right for you and your investment goals, see your attorney and your tax advisor.

 

An LLC or Limited Liability Corporation is a relatively new entity, now valid in all states. It provides the limited liability of a corporation with the tax advantages of a partnership. It is structurally similar to an LLP in that it doesn’t require a general partner. It can choose how it wants to be taxed for IRS purposes and can include in its operating agreement the same limitations on legal remedies that Limited Partnerships include to reduce liability. There may be tax issues in your state related to doing business as an LLC so seek competent tax and legal advice before proceeding with any entity structuring.

 

Finally, let’s briefly look at trusts for asset protection purposes. As a general rule, if you control any aspect of the trust, such as being the trustee, you have no protection from creditors. If you are a beneficiary of a trust, such as a land trust, your name might not be readily seen in public records, but in judgment proceedings to levy your assets, you will have to reveal your true ownership interest. Trusts can also create problems when working with banks and mortgage companies to obtain financing and they have their own special tax issues. Therefore, I don’t generally recommend trusts for asset protection. The one exception would be a Children’s Trust where you permanently transfer ownership of your asset or property to the trust for the benefit of your children. This can be good for longer term investments that you intend to give to your children anyway.

 

There are many good books available on asset protection strategies. First get educated. Then talk to your attorney and tax advisor about a strategy that fits your circumstances. Most importantly, start today.

 

 

Ed Young is a Florida licensed attorney who has been practicing law for 22 years in the Tampa Bay area. He is a member of the Board of Advisors and regularly advises clients on entity structuring and asset protection issues. He can be reached at elyoung2909@hotmail.com.

Asset protection is one of those phrases bantered around more and more these days in all sorts of places, especially in real estate investment circles. You’ve probably heard all the statistics about the number of lawsuits in America, so much so that you’d believe me when I say that 3 out of every 2 Americans will be faced with some kind of lawsuit in their lives (credit to Yogi Berra for that kind of statement). But what does it mean to you as a real estate investor and how can you benefit from thinking differently about liability as you go about your real estate business.

 

In its simplest form, asset protection is shifting liability from you to someone or something else. Legal liability generally follows ownership and responsibility. If you own something that causes harm to another, your name will be on the lawsuit to remedy that harm. If you have an employee who discriminates or is involved in harassment, you as the employer are generally responsible for their behavior. Each state may have variations of these principles, but these are the general rules of thumb.

 

The key then to asset protection is don’t own anything and don’t be responsible for anyone. Wow, that was easy! But can you live your life that way or do you even want to? Is there a way to have it all and still not be a target? Let’s explore some possibilites.

 

As a real estate investor, you should be familiar with title insurance to protect you against title defects when you purchase a property, homeowners insurance to protect the house and renter’s insurance to protect your tenants’ property. You may also have a general liability policy for your business or a personal umbrella policy to cover any excess liability. Insurance is generally the first line of defense for common liabilities. Your payment of the premium, shifts the burden of paying for a larger claim against you to the insurance company. The more insurance you have, the less risk you will have of coming out of your own pocket to pay for damages.

 

However, what happens to you if you have a rear end collision with a highly paid neurosurgeon’s car, his injuries leave him a quadriplegic and your auto insurance cannot cover the full amount of the claim. Or a drug deal goes bad at one of your rental properties and your tenant shoots innocent people who then sue you as the home owner for wrongful death of their loved ones. Your insurance company may not cover the full amount of damages and you could still be a target for the remaining amount. This is where your asset protection plan must come into play if you want to keep all your hard earned investments.

 

Your asset protection plan must begin now, BEFORE you actually need it. In a number of court cases, judges have undone asset protection plans that were structured up to three years before a party became liable. In fact, most judges will find a way to undo an asset protection plan that looks like it was structured to avoid liability. How do you overcome this trap? Talk to an attorney who is familiar with your type of business and regularly helps people structure their affairs to avoid liability. If your plan looks like it was put together as a normal part of your business and personal life, it is much more difficult for a judge to undo your plan.

 

What should your plan include? Two components – First, ways to avoid or shift responsibility to pay for damages and second, ways to keep your personal name off your assets. We’ve already touched on one way to shift liability through insurance. Another way to shift liability is to delegate responsibility by contract to someone else. For example, when you have an accountant prepare your taxes, he will accept liability to the IRS for his preparation errors. Similarly, hiring a management company to manage your properties can allow you to shift liability to them for items covered in your contract with them. Again, get an attorney involved in either drafting or reviewing any contract such as this to make sure you know where you stand and your assets are covered. Additionally, if you have others you have delegated authority to, make sure you have procedures in place so they don’t do or say things that they shouldn’t. A written procedures manual will help you be better organized and can potentially save you from liability.

 

In my next post, I will discuss some of the ways to keep your name off your assets so you can reduce the risk of losing everything in one lawsuit.

 

Ed Young is a Florida licensed attorney who has been practicing law for 22 years in the Tampa Bay area. He regularly advises clients on asset protection issues. He can be reached at elyoung2909@hotmail.com.