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irrevocable trust as purchaser


5 replies to this topic

#1 diegobritt

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Posted 16 December 2004 - 09:30 PM

My first post here. Thanks for all info!

I have a client purchasing residential property on a 10-31 exchange using an Irrevocable Trust as the principal on the mortgage. The lender I've always used has said they may not be able to close as it's an irrevocable trust and they can't foreclose on an irrevocable trust. They will not accept PG's from the trust's members either.

Can anyone shed any insights into this situation or ideas if you've had the same problem before.

Thanks in advance.

Diego Britt

#2 loanuniverse

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Posted 17 December 2004 - 08:43 AM

Diego:

Honestly, I could not answer. If the borrowing entity were something out of the ordinary such as the trust you mention I would probably have to do a couple of things.

1- I would contact the SVP of credit who would be smart enough to not give me an answer to this question and pass along the question to outside legal counsel {we probably deal with half a dozen attorneys that review documentation for us}. The attorney would be smart enough to answer ”it depends, the documents need to be reviewed” not only so that he can give the correct opinion, but to bill us several hours of work.
2- We would make the loan subject to the satisfactory review of the trust documents.

I do not see why they could not foreclose on the property. You are not foreclosing on the legal entity, you are foreclosing on the property. But I am not an attorney and you need to run your question by a local real estate attorney.

#3 diegobritt

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Posted 17 December 2004 - 11:22 AM

thanks for your reply, I appreciate it.

Hopefully someone reading will have had some personal experrience with the same issue regarding an irrevocable trust. I know there are banks which have financed deals with this sort of entity, I'm just hoping to arm myself with more info before speaking to them again.

Thanks again,

Diego

#4 loanuniverse

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Posted 09 January 2005 - 11:31 PM

It just so happens that my employer sent me to some training recently about titles, and the attorney giving the seminar mentioned that Trusts could not be borrowers, but the trustee could…….. Nevertheless, you mentioned that there is already a loan out to the Trust for one of the properties so that confuses me. After all, the lender would have the documents drafted by an attorney when real estate is involved.

You really need to consult an attorney on this.

#5 diegobritt

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Posted 10 January 2005 - 10:06 AM

just as a follow up to this.

there are it turns out ways to do it. It seems that in certain states, Florida being one, underwriters have had to deal with the irrevocable trust issue more and have developed language whcih will allow closing with the trust on title and PG's from the trustees.

A semi private bank in New York is prepared to do the loan as well. they are structuring it as a strictly commercial loan (they're all investment properties) with PG's and a bit hard hitting on points and prepay pens but are representing after having the paperwork reviewed by legal and underwriters that they can in fact do it for us. LOI is supposed to come tomorrow so until I see it in writing I'm reserving my enthusiasm but it seems language is evolving to deal with these structures.

BTW the first lender was prepared to close had it been a revocable trust, only the irrevocable status caused the legal gurus to balk.

It's been a bit of a roller coaster and we're not back to the gate yet.

Regards,


Diego Britt
Fillmore Real Estate
NYC

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Posted 10 January 2005 - 02:41 PM

1. Yes, couple hours billing would be in order so I can view the document (lol).
2. The purpose of an irrevocable trust, especially if it is a spendthrift trust, is to thwart a creditor's attempt at collecting debt from the beneficiary of the trust. A revocable trust is one that can be broken, or revoked, and courts look at this to mean that if a creditor needs money, the beneficiary must break the trust (i.e., liquidate assets) to pay the debt. An irrevocable trust cannot be broken (or at least of it is designed properly) for a creditor. Hence a rev trust could be used as collateral, but an irrev trust generally would be worthless as a source of colelcting debt.
3. Thus, an irrevocable trust might be useless as a means for a creditor to obtain satisfaction of a debt, even if all the bene's sign off on it, because an irrev trust is a tool of the settlor, not the bene's.

Anyway, it sounds like you have your problem settled.

Best luck.





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