Mortgage and Beneficial Ownership Problem

1990C4S · 06:41 AM

I have a tricky real estate problem that needs a creative 'solution' from the real estate geniuses and lawyers here. This is my problem:

I own a house that I rent to a tenant. I want to sell the house to a related company (Holdco) for income tax reasons. I want to earn income from the holding company, not directly from the tenant's rent payments. So I sell to Holdco, Holdco collects rent, pays the maintenance, etc, and I collect dividends.

My house has a mortgage, but it's not a typical mortgage, it's security for a future payment I am obligated to make in about five years.

The logical thing for the mortgage holder to do is to keep the mortgage on the property, and the holding company now has the mortgage. There is no loss of security to the mortgage holder with the sale, he can still call the mortgage in five years if he needs to.

The problem is the mortgage holder thinks he has leverage and he wants an extra $10k for his 'inconvenience' and legal fees, I told him to get lost, I'm not going to pay him a ransom. So now I'm prevented from changing the title unless he backs down.

Is there a way to achieve what I want without changing the title? I'm thinking a 99 year lease to Holdco, in return for $X, where X is the market value of the house. Holdco pays me interest on the debt monthly, and Holdco sub-lets to the tenant.

Or, I sell a share of the house to Holdco, but my name still stays on the title. I don't know what percent I can sell and still go this route. Can the mortgage holder object to adding a second name tot he title, if the original owner is still named?

My lawyer isn't very creative, he's pissing me off saying 'you made good money on the investment, pay the guy $10k'. Nope, not doing it.

icemann427 · 05-31-2021, 07:04 AM

Just so we understand more fully, is there a "due on sale" clause in the security documents?

1990C4S · 05-31-2021, 07:09 AM

No, there is no 'due on sale'. It's strictly protection for a future life insurance payment that he owns half of.

If I were to keep the life insurance proceeds, he calls the mortgage and collects that way.

Alan A · 05-31-2021, 07:11 AM

Refi?

1990C4S · 05-31-2021, 07:26 AM

Quote:

Originally Posted by Alan A

Refi?

There's no payment right now, it's security.

I could pay him off, I have the cash, but again, I shouldn't have to. That was not the agreement. He shouldn't benefit from this change.

One option is to pay him off with a deduction for early payment, but he's a prick, so he won't agree.

group911@aol.co · 05-31-2021, 07:38 AM

But when you do this, "Is there a way to achieve what I want without changing the title? I'm thinking a 99 year lease to Holdco, in return for $X, where X is the market value of the house. Holdco pays me interest on the debt monthly, and Holdco sub-lets to the tenant."? isn't the income taxed at ordinary income instead of pass through?
I'm assuming you're doing all this to avoid taxes?

1990C4S · 05-31-2021, 07:42 AM

Minimizing taxes and securing my capital gain on the property.

There's also a ex-wife component, so where my income comes from is relevant.

group911@aol.co · 05-31-2021, 07:46 AM

Except for the fact that he's on to you and wants boot, change ownership to an LLC and then sell the LLC.
Pay him the boot and 1099 him. Sounds like maybe he's not the sort to report?

icemann427 · 05-31-2021, 08:34 AM

If there is no due on sale clause, I'm guessing you can sell it to Holdco without getting any kind of permission from him. As such, you wouldn't have to pay him anything.

1990C4S · 05-31-2021, 10:05 AM

Where I live the mortgage is tied to the title: no title changes permitted unless the mortgage is paid off, or the transfer of the mortgage is approved by the mortgage holder.

Bill Douglas · 05-31-2021, 10:47 AM

I'd be very concerned if I was the mortgage holder. This wasn't the intended purpose for what he lent the money for. He may not want to be tied to Holdco, and it is his money.

1990C4S · 05-31-2021, 11:41 AM

Quote:

Originally Posted by Bill Douglas

I'd be very concerned if I was the mortgage holder. This wasn't the intended purpose for what he lent the money for. He may not want to be tied to Holdco, and it is his money.

It's not tied to the Holdco, it's tied to the real estate, and that's unchanged. There is zero prejudice to the mortgage holder. The property value is not affected, nor is the ability to demand payment.

The intended purpose of the mortgage is to give the mortgage holder recourse if I defraud him. That security is unchanged.

Alan A · 05-31-2021, 01:46 PM

Quote:

Originally Posted by 1990C4S

It's not tied to the Holdco, it's tied to the real estate, and that's unchanged. There is zero prejudice to the mortgage holder. The property value is not affected, nor is the ability to demand payment.

The intended purpose of the mortgage is to give the mortgage holder recourse if I defraud him. That security is unchanged.

How is it unchanged if a different entity has title?

red-beard · red-beard's Garage

You said you have the cash. Pay off the mortgage, create the holdco and collect the proceeds, save $10K.

Bing, bam, boom

MRM · 05-31-2021, 07:17 PM

You can’t do what you want to do. It’s not a matter of being creative; it can’t be done. You’re not the first to try this and look for a creative solution around the problem. It just can’t be done. Your former partner or his corporate entity has a contract with your corporate entity. You cannot change the corporate entity that owes him a contractual duty without his consent. It doesn’t matter whether he has any actual prejudice, whether he has a moral obligation, or what is “fair”. You cannot change a contractual obligation from one entity to another without the opposing party approving of the change. In this case the other party isn’t willing to allow the contractual obligation to be substituted from the existing obligation to a new one. He doesn’t have any obligation to do so. It may not be right, it might not be fair, it might not make any practical difference to him, but it doesn’t matter. The corporate entity that is obligated to him is the one that is obligated to him and he doesn’t have any obligation to substitute one for the other.

smadsen · 05-31-2021, 08:32 PM

Why would the mortgage holder want his payment stream impaired (changed) in mid-stream w/o compensation?

First source of repayment: cash flow from property.
Second source of repayment: performance by guarantor.
Third source of repayment: conversion of collateral.

Believe me #3 is a pain in the a** and should be avoided at all costs.

greglepore · 06-01-2021, 03:52 AM

The lease idea has some merit, but has serious tax implications ie imputed rent and depreciation issues that require the advice of a good accountant, who is likely to tell you no bueno.

1990C4S · 06-01-2021, 05:15 AM

Quote:

Originally Posted by Alan A

How is it unchanged if a different entity has title?

The mortgage is JUST security, there are NO payments, simply the right to call the mortgage down the road.

Therefore his risk is unchanged.

1990C4S · 05:20 AM

Quote:

Originally Posted by smadsen

Why would the mortgage holder want his payment stream impaired (changed) in mid-stream w/o compensation?

First source of repayment: cash flow from property.
Second source of repayment: performance by guarantor.
Third source of repayment: conversion of collateral.

Believe me #3 is a pain in the a** and should be avoided at all costs.

There is no stream of payments. It's security only. He has a $250k mortgage on a $2M house. Zero risk before, zero risk now.

1990C4S · 06-01-2021, 05:19 AM

Quote:

Originally Posted by MRM

You can’t do what you want to do. It’s not a matter of being creative; it can’t be done. You’re not the first to try this and look for a creative solution around the problem. It just can’t be done. Your former partner or his corporate entity has a contract with your corporate entity. You cannot change the corporate entity that owes him a contractual duty without his consent. It doesn’t matter whether he has any actual prejudice, whether he has a moral obligation, or what is “fair”. You cannot change a contractual obligation from one entity to another without the opposing party approving of the change. In this case the other party isn’t willing to allow the contractual obligation to be substituted from the existing obligation to a new one. He doesn’t have any obligation to do so. It may not be right, it might not be fair, it might not make any practical difference to him, but it doesn’t matter. The corporate entity that is obligated to him is the one that is obligated to him and he doesn’t have any obligation to substitute one for the other.

Thank you, I was hoping you would reply.

The mortgage holder does actually have a contractual obligation to accept an alternate property if I sell the house. The problem is I'm not buying another house, therefore he has no outs.

I think I will go to court, I know I will win, the contract is clear. And I'd rather pay court costs than pay him. He will likely back down before we get into court.