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Bridge Loans for Trust Buyout Financing to Preserve Low Property Tax Rates

Posted by helvetica on Dec 8, 2017 1:11:01 PM



Using a bridge loan to finance commercial real estate properties held in a trust is often the best option with competing beneficiary interests. 

The Property Tax Advantage

In the state of California property taxes are not automatically raised as value increases. Instead, they are adjusted only when a reassessment is triggered, usually through a purchase / sale, transfer, or other significant property event. This can mean EXTREMELY low property taxes on a piece of real estate that has been in the owner's possession for many years.

Properties that are left to a person's heirs when they pass on, by way of a trust, are often shielded from property tax reassessments, meaning an even greater benefit to the children or remaining family. But what happens if the property is left to multiple parties within the trust and some wish to keep the property while others want to cash in on the value?  In many cases, a "buyout" would likely be the best stategy.

The Buy-Out Concept

The idea behind a buyout is quite simple. The party or parties that wish to keep the property agree to pay the other party or parties for their share of the ownership, essentially "buying out" their portion of the property. This is often accomplished by obtaining a loan against the real estate in the amount of the buyout. So, for example, if a parent passes away and there are 3 heirs having an equal split of the property, then each person's "buyout" amount would be 33.3% of the value of the real estate in question. If one or more heirs wanted to cash out their inheritance of real estate, they could request a buyout form the remaining heir(s).

But What About Property Taxes?

While the buyout may seem fairly straightforward, there can be property tax implecations depending on how it is done. If a sibling does a trust buyout by obtaining a loan and vesting it in their own name and not in the name of the trust, then a reassessment will usually be triggered and higher property taxes assessed, a mistake that cannot be undone. Alternatively, if the trust obtains the loan and then the trustees elect to distribute the proceeds of the borrowed money to one or more of the heirs, then this is not considered a property transfer and no reassessment should be triggered.

Bridge Loans for Funding Trust Buyouts

The issue, then, is how does a trust with little to income (in many cases) obtain a cash out loan against the property in question? While it may be possisble to locate a conventional lender that will finance this type of request, more often than not alternative financing will be the most viable solution for a trust buyout. Because of their flexibility in underwriting, a bridge loan can often step in and provide funding for the trust or sibling buyout.

In addition to their propensity to loan to a trust, here are several other reasons to use a bridge loan to finance a trust buyout:

  • SPEED - better ability to meet tight funding deadlines
  • CERTAINTY - underwriting guidelines are more flexible and chances of closing are much more likely
  • TIMING - a bridge lender helps to fill funding gaps and give the borrower time to prepare

Have a trust buyout or sibling buyout scenario in the works that you want to discuss?  We welcome the chance to review the details of the transaction and provide honest feedback. Get started now by clicking below!

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Topics: Brokers, Insights