Summary:
The owner holds the title to the building as trustee of a family trust, a legal arrangement that allows a trustee to hold assets on behalf of a beneficiary. The owner also operates an ongoing retail business and holds title to an S Corporation, a type of Corporation that passes its income and losses through to its shareholders for tax purposes.
Article:
The mortgage broker acts as an intermediary between the Borrower and the lender. They are theBorrowerr’s fiduciaries. The mortgage broker said...
I have a client who is a dentist providing dental services to low-income and credit-based customers. He operates his dental practice as an S Corporation and is based in a building he owns through a revocable family trust. Can he get a loan?
The experienced lender responded.
Yes; however, the underwriting procedure differs. In the appraisal process, the appraiser will determine whether rent paid by one entity to another constitutes market rent. The valuation would rely on comparable commercial rents in the geographic area rather than on his own rate.
Part of the appraisal process involves a rent survey. The appraiser will determine whether the rent paid is above, at, or below market. Because his S Corporation is a pass-through entity, all profits will pass through to his individual tax return. The lender will underwrite the Borrower’s ability to pay by reviewing the Borrower’s and his Corporation’s income.
Since the property’s title is held in a revocable family trust, it is customary for the owner to be required to sign a personal guarantee. If the lender successfully forecloses against the property and fails to recover the amount due, including principal, interest, and costs, the lender would sue the owner personally for any deficiency.
Lastly, if the subject loan is a second trust deed junior to a first, the business entity may need to sign a subordination agreement to ensure it is junior to the recorded deed of trust. If the lender were to foreclose on the property ownership entity, meaning the family trust, the lender would not want to keep the S-corporation tenancy of a related defaulted party.