Cohabitation and Real Estate (a primer for gay and straight non-married couples who own or want to buy Real Estate)

          In Florida, there are three recognized states of real property ownership. First is Tenants in Common in which each party owns a distinct interest of the real estate, generally 50-50 if equally shared but ownership can be in any percentage or multiple percentages if there are more than two owners.  If the deed is silent on the percentage of ownership, the shares are always deemed as equal. Upon the death of anyone owner, the interest of that deceased owner passes to that owner’s heirs at law. 

          The second estate is called Joint Tenancy, in which each owner owns the entire estate together and is distinct from Tenants in Common. If properly created, the interest of a deceased owner passes to the surviving joint tenant.  In Florida, because a simple joint tenancy is deemed to create a tenants in common relationship it is crucial that the deed state “joint tenants with full rights of survivorship and not tenants in common” to make sure the intent of the parties at the time of creating the estate is met.  Creditors of one of the joint tenants can lien and attach the joint tenant’s ownership interest, and upon foreclosure the purchaser of the property at the foreclosure sale becomes a tenant in common with the other owner, breaking the joint tenancy.

          The third estate is called Tenants by the Entireties and is reserved to married couples in the state of Florida.   In addition to having a survivorship benefit like a joint tenancy, the Tenants by the Entireties estate also prevents the creditors of one owner from reaching the interest held by the other owner.

          Under current Florida law, gay marriage is not recognized, and therefore gay couples who are legally married in other states cannot take advantage of this type of estate.  At the beginning of next year, the legal stay currently in effect regarding gay marriage will expire and it is possible that marriage certificates will be issued to gay couples while the case challenging the Florida constitutional prohibition on gay marriage is appealed. It would appear that if a gay couple obtains a marriage certificate then they will also be eligible to hold real property as Tenants by the Entireties.

          Under Florida real property law simply stating “husband-and-wife” or “his/her spouse” after the grantee’s name in any deed creates the Tenants by the Entireties estate.  No case has addressed whether stating “husband and husband” or “wife and wife” will be sufficient to create the desired estate. Therefore it is recommended the any deeds delivered to a gay married couple state with specificity the intent to create the Tenants by the Entireties estate. In addition, due to the uncertainty of the law, I would recommend also adding the following to any deed created while the gay marriage ban is appealed: “In the event it is determined that the Florida constitutional ban on gay marriage is constitutional, and the marital status of the grantees hereunder is voided, is the intent of the parties to create a joint tenancy with full rights of survivorship and not tenants in common.”  Otherwise, if the estate is not created properly, the estate would revert to Tenants in Common which would not effectuate the right of survivorship that most couples desire.

          Please also note that to create joint tenant estate or the tenant by the entireties estate certain elements must exist at the time of the conveyance as follows:

          1.       The owners must acquire the property at the same time;

          2.       The owners must have the same title to the property;

          3.       The owners must have an equal share in the property; and

          4.       The owners must have equal right to possession of the property.

          Therefore, even if a gay couple currently owns Florida property jointly with their significant other, or were married in another state, the fact that the ban on gay marriage may become unconstitutional does not automatically create the Tenants by the Entireties estate. This also applies to couples who acquired property together before marriage and then thereafter became married, or who, prior to marriage, only held title in one of the spouse’s names.

          In order to rectify the situation, it will be necessary for the owners to reconvey the property to themselves with the proper vesting language.  For example, if Mary and Jane Smith acquired property in 2005 as joint tenants with right of survivorship, and legally become married in Florida after January 2015 they would have to execute a new deed to themselves conveying the property and asserting the creation of the Tenants by the Entireties estate. If only Mary Smith owned the property prior to the legal marriage, she would have to convey the property to both herself and Jane Smith to create the estate, and, if the property was there homestead, Jane Smith would have to join in the deed as the spouse of Mary Smith to clear her Homestead interest.

          Many unmarried couples whether gay or not, who later become married, will find out the hard way that that deed which conveyed title to their property did not result in the survivor owning the property after their co-owners demise, but instead allowed the heirs of the deceased spouse to inherit. If you own property with another person which was acquired before marriage, you should take action to ensure that your interests are protected and that your intent to provide for survivorship is legally enacted.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate and can assist owners in drafting deeds and trusts to insure proper transfer of assets.  They can be reached at 561.594.1452, or at mjposner@warddamon.com

E-Recording: a Curse and a Blessing

          For years, clerks of courts, lenders and Realtors^® have talked about e-execution and e-recording, heralding the move from paper to purely electronic forms, but for the most part the industry has resisted, with many concerns regarding security, validity and fraud.  Tests have been held, a few loans closed with electronic signatures, but for the most part closings are done the same way as always, a closing agent prepares and prints the seller and buyer documents and the bank prepares the much larger paper loan package.  In fact, the only nod to modernity is that instead of mailing or overnighting the 50 to 100 page loan package, printed at the lender’s expense; it is now sent electronically to the closing agent so they can print at their expense.

          Well another milestone has been reached as Palm Beach County has joined most other Florida clerks in moving toward e-recording.  Traditional recording required bringing the original document to the Clerk of Court who would stamp the document with a Clerk’s File Number and an Official Records Book and Page Number, then review the document, enter the pertinent information into the Clerk’s grantor grantee index, scan (or in the old days, photograph for microfilm or microfiche), place online for viewing (except documents deemed impermissible for online viewing such as custody and divorce documents), and then mail back the originals to the party listed on the document.

          Under the new system, a registered title company, attorney or closing agent will log in to their online account with a private approved vendor, fill out the grantor grantee index, scan the original document to be recorded, and upload the document to the vendor who will then transmit the document to the Clerk to be recorded.  The Clerk’s office will review the incoming documents, and then record same in the Public Records.  Unless the Clerk’s office is diligent in reviewing the uploads, I expect far more index errors arising, as untrained processors input party names with misspellings, backwards (first name last) or in the wrong location (buyers as sellers, etc.).  Without a proper index, the Clerk’s own database becomes useless as a tool for searching.

          The Palm Beach County Clerk’s office is touting this new system as both a money and time saver.  They claim documents will be recorded faster, that courier fees paid to deliver documents to the Clerk will be eliminated and that less fraud due to gap issues will be obtained.  The Clerk does not mention that they can also cut their budget by eliminating employees from their recording departments, but that is an issue for another day.

          While in theory these claims are true, in practice they may not always pan out.  First, while it is true that e-recording will eliminate courier fees, the cost is simply replaced with new private vendor recording fees of about $5.00 per document to record.  So to record a more complex closing with a deceased seller, the e-recording fee will likely exceed the average courier cost of about $19.00 to $25.00 for one file to simply deliver the same documents to the Clerk. In addition, for larger closing agents, sending ten closings in one day by courier will be far cheaper than e-filing fees. Of course, these new costs will simply be passed onto the buyer and seller.

          Gap issues have always been a risk that title companies assume.  It is the window between the last available title search and the recording of the instrument that is being insured, when a title problem, defect or fraud can occur without notice.  This window is usually five to ten days long depending on the county.  While the clerk may update their records to within a few days, title agents do not rely on the Clerk’s online database to search and examine title.  Instead, they use their title underwriter’s abstract plant to search and update title.  Therefore, the alleged recording speed (by a few hours, at most) will not reduce gap issues.

          Finally, we come to the million dollar question of original documents.  With e-recording, it will be possible for less than scrupulous closing agents to record copies of executed documents without possession of the original.  With time pressures to close, a closing agent waiting on the return of the originals may succumb and file a scanned copy to get the deal done.  If the originals are different or never arrive (or are never sent), how valid will these recorded documents be without proper verification.  This will likely lead too many cases being filed over disputed e-recorded “originals,” and more lost note/mortgage claims than ever before. 

          While I am all for technological advances, doing things just because we can is not always the best course, and touting systems without mentioning the risks and downside is always a dubious way to promote a new method of doing a traditional task.  I for one hope they are more right than wrong.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law and business law, and can assist owners in buying and selling real property.  They can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com

The New Seller Financing Reality (Living in a Dodd-Frank World)

      Purchase money financing or seller financing has been a traditional tool of investors and owners to expand the pool of buyers for their residential owner occupied real property. Many buyers have the ability to put money down or the ability to make monthly payments, but not the ability to qualify for institutional bank financing. This includes recently foreclosed homeowners who have now gotten back on their feet and desire to purchase a new home or those whose existing debt pushes them slightly above the “quality mortgage” requirement of a 43% debt to income ratio. If these buyers still want to buy a home their only option is borrowing money from either the seller or a “hard money” lender.  Since “hard money” lenders frequently charge interest in the double digits, many buyers look for seller financing as a way to acquire a home, build credit and eventually pay off that loan by obtaining bank financing.

          In Florida, when a seller finances the purchase of a property, the mortgage is labeled a “true purchase money mortgage.” This is to distinguish between financing provided by any third party, which is simply a “purchase money mortgage.”  These seller loans are also sometimes referred to as “Vendor’s Lien.”  Traditionally, seller financing usually has the following terms:

          1.       Short term of 2 to 5 years;

          2.       A balloon payment at the end of the loan period;

          3.       No review of the borrower’s ability to repay the loan, instead relying on the borrower’s down payment;

          4.       Monthly payments of interest only or a loan amortized for less than 30 years;

          5.       Higher interest rate than market and frequently an adjustable rate loan.

          As a result of the recent real estate collapse, Congress adopted a new law known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  One of the consequences of Dodd-Frank is that now all seller financing is regulated by, and subject to, strict new rules adopted under the Act. Depending on certain factors, it may be impossible for a seller to provide true purchase money financing to borrowers because of the restrictive requirements.

          These requirements include that (i) the note cannot contain a balloon payment; (ii) the seller as lender must qualify the borrower in the same manner that an institutional lender qualifies a borrower for a loan; (iii) the interest rate must be fixed for at least five years and thereafter may only adjust two percentage points a year with a maximum of six percentage points; and (iv) the loan must have a term of 30 years. Given these restrictions, very few, if any, sellers will provide financing, which will either reduce the pool of potential buyers or drive the few buyers who can get financing only into the arms of institutional lenders. This will also result in sellers losing a secured loan paying 5 to 10% interest and instead be forced to deposit their sale proceeds in a money market account earning less than 1% with an institutional lender.

          In recognizing the problems with these restrictions the Consumer Financial Protection Bureau adopted certain rules which loosened the restrictions on individual seller financing for one property in a 12 month period. These rules allow for a balloon payment and the seller does not have to qualify the borrower for the financing. The other rules still remain in effect.  This means all seller financing that qualifies under these exceptions must still be amortized over 30 years and must still contain a fixed interest rate for the first five years with limitations on adjustments thereafter.

          In adopting these new rules, sellers must keep in mind that they do not apply to sellers who constructed the home or if the seller is not an individual or trust. Many investors purchase property in a limited liability company. If that company is going to finance the sale, even if it is the only sale in a 12 month period, the rules described above apply without the exception.

          These new rules will act to put a severe damper on private financing of residential owner occupied property. It will result in fewer sales, drive otherwise eligible borrowers to institutional financing, and cause hardship borrowers to lose their homes because many small time “hard money” lenders make only a few loans to residential borrowers in a year, and will no longer be willing to lend with these restrictions.

          The Dodd-Frank restrictions are onerous and unwarranted and act as a substantial intrusion on private transactions. This is clearly the law of unintended consequences. While most of the Dodd-Frank rules relate to institutional lenders, the inclusion of the private seller financing restrictions is likely to cause substantial damage and expose those who finance owner-occupied residential property to claims by defaulting borrowers who are looking for any angle to avoid foreclosure.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law and can assist private lenders and sellers in all legal matters.  They can be reached at 561.594.1452, or at mjposner@warddamon.com

Latest Trends in Foreclosure

Statute of Limitations

          One big issue in the mortgage foreclosure world is the issue of the statute of limitations. Under Florida law mortgages that have expired for more than five years after the maturity date are deemed unenforceable. The legal question was whether mortgages that were in default for more than five years before a new foreclosure action was filed were actually enforceable. 

          For example, a mortgage that went into default in 2007 and which had a mortgage foreclosure case filed in 2009 that was dismissed in 2011 with a new foreclosure case filed in 2014 six years after the acceleration notice was sent could have been found to be wiped out by the statute of limitations. Two appellate courts have reviewed cases with similar facts and have ruled that only payments that are more than five years delinquent are actually wiped out but the mortgage is still valid for the remaining sums due. These decisions balance the equity of a late filed foreclosure with the inequitable position of basically giving people free homes by not allowing the lenders to enforce otherwise valid mortgages.

          It is very likely that this case will eventually be decided by the Florida Supreme Court. Given that two courts have held that the old mortgages are enforceable, it is very possible Supreme Court will agree, ending this legal debate.

Deficiency Judgments

          Last year the Florida legislature amended the statute of limitations for deficiency judgments from five years to one year. This was due to the uncertainty caused by the five-year statute of limitations. As a result of the new law, lenders must bring an action to seek a deficiency judgment within one year after obtaining a foreclosure judgment.  Prior to the new law, there were very few deficiency actions pending in residential foreclosures. However, recently there has been a substantial uptick in the number of deficiency actions filed especially by one law firm located in Texas.

          The law firm of Dyck-O'Neal, Inc. has filed over 200 deficiency actions in the last several months. Many of these actions have caught homeowners by complete surprise believing that their foreclosure nightmare was over. The deficiency arises when the home that is foreclosed is worth less than the amount owed to the lender. After foreclosure, a lender has the option of either forgiving the deficiency in which case the homeowner may have tax consequences resulting from such forgiveness or the lender may proceed to obtain a money judgment for the difference.

          In many cases, companies have purchased the right to pursue a deficiency judgment from the original lender at pennies on the dollar. They then pursue the former owners, many who have moved on and may even be in a position to pay money towards a deficiency judgment. In addition, once judgment is obtained it is like any other judgment in that wages and bank accounts can be garnished and property that is not protected can be foreclosed.

Cash for Keys

          With the growing emphasis of preventing foreclosures many institutions and servicers are willing to work a deal with homeowners who have been in foreclosure for many years to basically trade the mortgaged home for what is commonly known as cash for keys. Basically, if the homeowner only has one mortgage, and no other liens or judgments, a homeowner can execute a deed in lieu of foreclosure to the lender which would end the foreclosure action. This would transfer title to the property to the bank. As an incentive, the bank pays the homeowner and agreed sum which the homeowner may use to pay relocation expenses. In addition, in many cases, the bank agrees to waive any deficiency.

          The move out incentive varies from case to case and can be anywhere from $3000-$20,000. In addition, the homeowner avoids having a foreclosure judgment against them which may enable them to obtain a new home mortgage sooner than they could if a foreclosure judgment is entered. Finally, many lenders will even allow a homeowner to remain in possession for a period of time after the deed in lieu is executed in exchange for the homeowner’s agreement to maintain the property.

Shutting down phony trusts and class action companies

          At the height of the foreclosure crisis, many unscrupulous companies took advantage of homeowners who are facing foreclosure claiming that they had the secret to lower or eliminate mortgage debt. The first scheme involved transferring the property to a trust with the trust then suing the bank seeking to quiet title. Few lawsuits were actually filed and most were dismissed in favor of the bank. Another scheme involved claims of filing a class action lawsuit on behalf of multiple homeowners seeking to punish lenders for their aggressive lending tactics with the goal of lowering or eliminating the mortgage encumbering the consumer’s property. Again, few cases were filed with most of the efforts of the companies involved centering around hard sell tactics to obtain homeowners payment rather than pursuing legal actions.

          The Florida Attorney General has aggressively pursued these cases shutting down the most egregious trusts and recently the Florida Bar has commenced proceedings against the Hoffman Law Group, a law firm in North Palm Beach that has taken substantial sums from consumers as part of their attempts to file class-action lawsuits.  It appears very little success has come from the law firm’s actions, and many homeowners are out thousands of dollars.

          With the recovering economy, and the increase in the value of many homes, the number of foreclosures has declined but there still is a substantial volume in process and may take many years for the levels to return to pre-crisis numbers.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law and can assist lenders and banks in all legal matters.  They can be reached at 561.594.1452, or at mjposner@warddamon.com

New Florida Condominium and HOA Law 2014

         Another year and another round of tweaking to Florida’s Homeowners Association Act (Florida Statutes Chapter 720) and the Florida Condominium Act (Florida Statutes Chapter 718) have been enacted.  The new laws were signed by the Governor on June 13, 2014 and went into effect on July 1, 2014.  The new law is not very expansive but did clarify a few issues and expanded certain rights.  Please note that the laws do not necessarily apply equally to both condominiums and homeowners associations, as a legislature continues to modify the applicable chapters inconsistently.

          Under current law, a Condominium Association has certain right to access a unit owner’s unit, “when necessary for the maintenance, repair, or replacement of any common elements” and “or as necessary to prevent damage to the common elements or to a unit.”  Due to foreclosure, many units in Florida have become abandoned and the legislature took notice of this issue and expanded Florida law to grant an additional right of access to a Condominium Association when a unit is abandoned by the unit owner.  Prior to access, the association must determine that the unit is abandoned and give the owner at least two days’ notice prior to access. This new right includes the right of the Association to turn utilities on and to inspect for and repair mold.

          The insurance provision of the Condominium Act has been clarified to address non-insurable events. These are events that are either not covered by insurance or maybe for a loss of less than the minimum deductible of the Association’s insurance policy or for loss or repair due to ordinary use. The coverage of these losses to condominium property is now determined by looking at the declaration of condominium for the specific condominium in question.

          In clarifying the right of the Associations to create a directory containing the name and address of each unit/homeowner the statute includes a provision that allows for multiple phone numbers to be listed, with the right to opt out still retained by each unit/homeowner by sending written notice to the Association. In addition, the Association may, with the consent of each unit/homeowner, include additional information in the directory, presumably the electronic mail address or other information that the unit/homeowner is willing to disclose to other owners.  This provision is applicable to both Condominium and Homeowners Associations.

          A current problem in many Condominium Associations is the transfer of power from one board to the next. The law will now require the outgoing board to turn over all official records in their possession within five days of the election of the new board. In addition, the Bureau of Condominium may impose civil penalties on those who fail to cooperate with this requirement.

          In recognizing the greater use of electronic mail, the Condominium Act has also been expanded to allow board members to communicate via email with other board members without creating a quorum which would require a meeting open to all members. No voting is permitted by electronic mail.

          In order to address a recent case that held that unit owner is not liable for previous owner’s assessments if the Condominium Association had foreclosed or took title to a unit, the statute now provides that a current owner is liable for assessments of the previous owner except for the period in which the Association held title to the unit. This commonly occurs when Association forecloses then subsequent to that foreclosure the bank forecloses and either the bank or a third-party obtains title from the bank foreclosure.  This provision was added to the Homeowners Association Act in 2013.

          In order to provide access to Homeowner Association meetings to disabled persons, the Act was amended to require Associations to provide disability access if requested by a handicapped person who is entitled to attend the meeting.

          An entirely new section was added to the Homeowners Association Act to address issues arising from an emergency situation. For purposes of this change, which is very similar to a previously enacted law affecting condominiums, an emergency is defined as a state of emergency affecting the area in which the association is located as called by the Governor. The difference between the Homeowners Association statute and the Condominium statute is that the Homeowners Association does not gain the right to access individual homes, a right that the Condominium Association retains.

          Overall, the revisions were mostly minor and, in part, to clarify existing law or to unify certain parts of both Acts. Presumably, were substantial changes will be addressed by the legislature in upcoming sessions.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate and can assist community associations in all legal matters.  They can be reached at 561.594.1452, or at mjposner@warddamon.com

The Secret Language of Lawyers

         All professions, be doctors, lawyers or baristas, have a secret language or code, which serves to both assist the profession by providing shortcuts for immediate explanations, but also to act as a barrier to entrance and to make the profession appear more important and above the normal person.  Lawyers are especially not immune to that view and the secret language of lawyers is a mixture of Latin, Old French and Old English.  While law schools these days try and teach “Plain English for Lawyers,” all new initiates seek to model their behavior like their peers, so the strange words continue to be used.  Here are some of the most popular still used by lawyers in the real estate world.

          Lis Pendens:   A Latin phrase for notice of a pending suit.  Whenever an action involving real property is filed, a Lis Pendens must also be filed to notify all parties that an action involving a specific property has been commenced.  Unlike pleadings, the Lis Pendens is also recorded in the public records and allows the lawsuit to have priority over subsequently filed liens, mortgages or other land interests (assuming the party that filed the Lis Pendens prevails).

          Ab Initio:  A Latin phrase that means from the start or beginning.  Useful for conveying, at a later date, that an obligation was meant to commence or was invalid at a certain point.  For example, a defective contract (missing a signature or key element) is often said to be void ab initio.

          Caveat Emptor:  A very popular Latin phrase for Buyer Beware.  In residential transaction, the Florida Supreme Court has held it no longer applies (imposing a duty on seller’s to disclose material information that affects the value of the house), it still is prevalent in commercial transactions, as well as many contractual arrangements (as they say, always read and understand the fine print, or get a lawyer).

          Allonge:     An Old French law term that means to draw out.  In common terms it is the endorsement on a negotiable instrument, such as a promissory note or a check (yes, when you sign your name on the back of a check you are creating an allonge in blank in favor of the bank which is cashing or depositing the check.  The phrase “Pay to the Order of XXX” is a classic example of an Allonge.

          Tenements, Hereditaments and Appurtenances, oh my: Latin phrases used in deeds to convey the bundle of rights in real property. Tenements grant the right to hold the land (as opposed to own, which is reserved for the King); Hereditaments grants the right of inheritance, used so that the land conveyed goes to the buyer and their heirs; and Appurtenances are the improvements and fixtures attached to the land.  An example is from a quit claim deed as follows: “TOGETHER with all the tenements, hereditaments and appurtenances thereto belonging or in anywise appertaining and all the estate, right, title, interest, lien, equity, and claim whatsoever of said Grantor, either in law or in equity, to only the proper use, benefit and behoof of said Grantee, his heirs, successors and assigns forever.”

          et al.: A Latin abbreviation for et alii, it simply means “and others” and is used as a useful shortcut to avoid having to list all parties to an action or contract. 

          Chattel:  Not to be confused with cattle (which are a form of chattel), it is an Old French Law term meaning personal property.  Mostly archaic, occasionally still used to describe personal property or car loans such as a Chattel Mortgage.

          Ultra Vires:  A Latin phrase meaning “beyond power,” it commonly comes up in disputes over corporate or substitute party actions as whether the act of the corporate officer or attorney-in-fact was beyond their legal authority.  Ultra vires actions are unenforceable.  In real estate, the use of powers of attorney are often subject to ultra vires attack, when actions are taken (sale or pledge of property) and the original owner contends that they did not grant that power to the attorney-in-fact.

          Hypothecation:  A Latin phrase to pledge collateral.  A mortgage on real property or chattel is a hypothecation.  In Spanish, the word for mortgage is hipoteca, derived from this Latin word.

         

          Fee Simple:  Derived from the Latin term fief, was a feudal right granted by a king or lord to allow use of lands in exchange for allegiance (which evolved into paying taxes).  Eventually came to mean the right to own, mortgage, sell and devise land without a higher authority claiming an ownership interest.  Most property interests today are conveyed in fee simple.

          Knowing a few Latin phrases can make you a hit at your next cocktail party.  Just remember in vino veritas (in wine, truth) before you claim to be an expert in Latin.  There are lawyers everywhere ready to out Latin the layman.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  He is Board Certified in Real Estate Law and can assist sellers, buyers and community associations in all real estate matters.  He can be reached at 561.594.1452, or at mjposner@warddamon.com

Florida Real Property Ownership

(Part 3)

         In the last two issues we looked at several different methods for real property ownership, from tenants by the entireties, life estates, revocable trusts and other methods allowed in Florida.  These methods work for more basic needs but when dealing with specialized issues such as asset protection, limiting liability across multiple properties and foreign ownership, only ownership in an entity can provide that extra protection, but with certain restrictions and drawbacks.

           Foreign owners who would traditionally buy Florida property in their own name face substantial tax and estate consequences on sale due to the Foreign Investment in Real Property Tax Act and multi-jurisdiction probates.  Any sale to an investor or a sale over $300,000 requires withholding of ten percent of the gross sales price regardless of profit or loss until a withholding certificate is obtained.  If the property is held by an entity, this withholding can be avoided. 

           Entity ownership instead of personal ownership can also serve as an estate planning tool.  Instead of having a domestic probate and a separate probate in Florida, the entity interest would be treated as personal property and probated solely at home, with ownership of the real property remaining in the entity.

           Entity ownership also limits liability from loss or damage due to issues at the property.  Individual and trust ownership of rental property exposes the personal owner to claims for loss, injury or damage in connection with the property.  For example, if a tenant is hurt or dies at the property, the tenant or the tenant’s estate can sue the owner and reach personal assets.  If an entity is used, the tenant can only look to what the entity owns (typically the property only) to recover damages.  While insurance can reduce this exposure, entity ownership can reduce the need for excess coverage and the costs associated therewith.

           Traditionally the most common form of entity ownership was the corporation.  Corporations have existed for hundreds of years, and are the best understood and most common form of ownership.  However, corporate ownership has several drawbacks from both a tax and reporting areas.  Corporations can be taxed as “C” corporations which is the default status under Federal law.  C Corporations pay income tax on profits, and then the shareholders again pay tax on distributions.  These entities also are liable for an additional Florida corporate income tax at a rate of 5.5%. 

           The alternative tax status is an election to adopt “S” Corporation status.  S Corporations do not pay either federal or state income tax on profits.  Instead, these entities are deemed a pass through, with all taxes paid at the shareholder level.  However, this election is restricted, as “S” corporations cannot generally have entity shareholders, foreign owners or trust owners.

           Another traditional entity for real property ownership is the limited partnership.  Limited partners, like shareholders, have no personal liability beyond their investment in the partnership.  However, the general partner of the limited partnership does have personal liability (though most general partners today are, in fact, corporations or LLCs).

           To avoid the problems inherent in corporations and partnerships, a new entity was created called the limited liability company.  Beginning in Wyoming in 1977, the LLC is now valid in all states. The LLC combines the limited liability characteristic of a corporation with the pass through tax treatment of a partnership.  LLCs can be owned by foreigners, can have entity ownership for multi-layering (meaning the members of the company can be another entity, including a foreign owner), and have no limit to the number of owners.

           LLCs are generally less complicated than partnerships and corporations, with only two layers of management (members and managers), and require less paperwork and meetings to maintain viability. This lowers the overall cost of formation and operation.  Delaware has even created a specialized LLC called a serial LLC which allows for one parent LLC with a single tax id number and accounting to have multiple LLC children, with the benefit of limiting liability to each child LLC.  This is extremely useful for owners of multiple rental properties.  Florida has not approved this format but I expect it to be adopted in the future.

           While entity ownership has its benefits, it is not always the best approach.  Financing can be more difficult to obtain, and insurance costs can be affected.  Choosing the proper form of ownership requires planning and consultation with tax and legal professionals.  Failure to properly plan can cause substantial problems after purchase. 

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate and entity ownership and can assist sellers and buyers in all real estate and entity matters.  They can be reached at 561.594.1452, or at mjposner@warddamon.com