Transferring title into LLC could trigger loan repayment

Why strategy to protect asset is likely to upset lender

By Ilyce R. Glink
Inman News

Q: I purchased a fourplex, and wanted to protect my personal assets. I formed a limited liability corporation (LLC) and transferred the title to the fourplex into the LLC.

My mortgage has a clause in it that states that the lender can accelerate the repayment of my debt because of this transfer. However I do not think they will find out unless I don't pay the debt I owe them.

But now my insurance company is going to notify my lender to change the insurance policy to the name of the LLC. What should I do? I am the only member of this LLC.

A: For the most part, you may be correct. As long as a lender obtains its payments and the property is insured, the lender may not find out that there has been a transfer of the property title. Your insurance company, of course, has to tell the lender that the policy has changed and that the new entity is the owner of the property.

While the lender may not care, particularly since you are the sole member of the limited liability company (LLC), you probably should have called the lender prior to setting up the LLC and transferring title to the new company.

Now that you have done that, if the insurance policy still names you and the LLC, you may find that the lender doesn't care. If the lender does care, you will have to explain to them why you transferred title to the LLC and hope that they do not accelerate the debt.

Most, if not all, mortgages have a clause that says that if a property is sold or title to the property is transferred, the lender has the right to call the loan. "Calling the loan" means that the lender has the right to tell the borrower that it's time to pay up and pay off the loan in full.

The lender reasons that it made a loan to a particular borrower and wants to make sure that that borrower always has an interest in the home. If the borrower sells the home, the lender wants the right to quit the arrangement and get repaid.

It's time to call the lender and see if it will work with you in the transfer. Many lenders will send you a letter and tell you what you've done is OK; others may not.

One possibility is that the lender will approve the change but maintain the right to call the loan in the future.

But if you knew in advance that your lender would not approve the transfer and did it anyway, you're playing with fire. I hope you have enough cash on hand or can refinance the property quickly.

Q: I am purchasing a lot next door that has an easement giving me a right of way to my otherwise landlocked home. In order to preserve this lot next door as a lot plus the easement, do I have to deed the property to a limited liability company?

I have been told that if I deed it to myself, the entire lot would become one giant easement, instead of a lot plus an easement.

A: Someone is giving you good information. If you are the beneficiary of an easement -- in this case the easement gives you access to your landlocked property -- and you buy that property, the easement is no longer needed and merges into the newly formed property.

The easement does not become a "giant easement." The easement is eliminated.

Whoever gave you the advice of buying the property in the name of a limited liability company -- or in any other manner other than in the name in which your landlocked property is owned -- is giving you sound advice to preserve the separation of the adjacent lot and easement.

But if you are consolidating the two properties and plan to always use them as one, you wouldn't have to worry about the easement and could buy the adjacent property any way you want.

You may have various options in buying the adjacent property and you should really consult with a real estate attorney in your area.

www.LagretRealEstate.com