Keeping Homeownership Private in California

21 May Keeping Homeownership Private in California

 

Ruth Krishnan:

I’m with Doug Bend of Bend Law Group, PC here in San Francisco. Doug is one of my go-to attorneys . He is going to talk to us today about how to hold title privately in California.

Ruth Krishnan:

Hey, Doug.

Doug Bend:

Hey, thanks for having me.

Ruth Krishnan:

I’m so glad to have you. This is a question I get asked a lot, so I was really excited whenever you mentioned that you wanted to chat about this today. It seems like there’s actually a new disclosure that we go over with buyers when we’re writing offers that talks about privacy and that a lot of times, if something is on MLS, it stays on MLS. Some trustees are asking for photos to be taken down and different things like that. When we talk about holding title, that’s a whole another level of privacy. What are the tricks there? What does someone need to do in order to keep their secret identity of their house ownership secret?

Doug Bend:

Sure. It’s great to be here. Thanks for having me. I think a lot of people don’t realize that it is a public record, and that how you hold title is something that anyone with an internet connection can look up your address and see whose name is behind that address. An example that comes to mind for me is that my wife and I had looked at a property a couple of years ago, and I was doing a little homework on the property and looked up the address, and it turns out it was owned by a CEO of a publicly traded company. It had the CEO’s name, and had what was presumably his main residence down in Atherton. It had all this information that I think he’d probably be concerned about if he knew that all that was popping up on the internet.Β 

We see this come up really for three types of cases. The first type of case is that with celebrities, or semi-celebrities, they may not want people to know that a house, or a home belongs to them. The second case is for high net worth individuals. Unfortunately, the more money that you make, often the bigger target you have on your back with people thinking about maybe suing you. Then the third case, we have a client who has a stalker. And so, she’s very concerned about her home, private home address, and her name and her privacy. So those are usually the three cases that we see come up as a privacy issue. Regardless if it’s a celebrity, or a high net worth individual, or someone that’s concerned with their personal safety.

Ruth Krishnan:

Yeah. The paparazzi are always following me all around πŸ™‚ It’s hard to get away from them. I guess one of the things the fortunate benefits of living in San Francisco is that there’s a lot of kind of ordinary tech people that end up in extraordinary places financially. It’s not unusual. Sometimes there’s a clear path that they’re going to get there. I think even early on, I find some of my clients are really thinking about this, just in terms of maybe not necessarily wanting people to be able to look up where they live.

Sometimes people talk about putting things into a trust, but that’s not enough. So what are the options and how does one go about it?

Doug Bend:

Yeah, I think your point is spot on. We have a client that has a startup. It’s getting a lot of national press and he feels like he has to move now because the home that he’s in has his personal name on the title. Once it’s done, it’s done. It’s out there, right? He feels he should maybe buy a new home, and have a home owned by an LLC to keep his personal name private. So to your point, and Wayne Gretzky’s saying, you skate where the puck’s going to be. You know, if you really see yourself being in that position a year or two down the road, and you’re buying a property, you may want to put something like this in place ahead of time before it’s public record. I think the way to go about it, the way we’ve done for clients is a three or four step process.

The first step is, is forming an LLC here in California. We often get asked what maybe we should do in Texas, maybe we should do in Wyoming. But the reality is that if the property is here in California, if you form it in a different state, you’ll end up having to still register the LLC to do business in California. So you might as well do a California LLC right out of the gate.

So that’s step one, is forming an LLC. I think it’s keeping in mind that when you form the LLC, it’s a one-page filing to create the LLC with the secretary of state’s office. It’s a public record. If someone goes to the secretary of state’s website and they look up the name of the LLC, whoever signed that initial finally will pop up as a search result. And so if you’re trying to keep your name private, you really need to do it from that first filing of forming LLC.

Ruth Krishnan:

So that would be a Double-Blind LLC, right? There’s two LLCs on top of each other. Is that what happens?

Doug Bend:

Well, usually we just do the one LLC. We see the double LLCs in other states, and the reason we don’t see it in California as often, is California has a very high annual franchise tax. And so that’s for the privilege of doing business in a state of California. It’s a minimum $800 a year. And so if you have two LLCs, you go from paying $800 once to paying it twice. And you know, in contrast, a lot of people are doing home research, you know, Googling this. They’re turning up articles. It might be written other states where the franchise tax isn’t as high.

I grew up in Nebraska. The annual franchise tax there is a $25 a year. So in there, it makes sense. You might as well have multiple LLCs to help keep your information private. Whereas here in California, if you were to add that second layer of being an LLC, now you add on that additional franchise tax, that second franchise tax each year.

Ruth Krishnan:

What you’re saying is that when you’re forming the LLC, you have another manager sign?

Doug Bend:

Yeah. You form the LLC. And then it’s that first filing, make sure either your attorney signs it, or some third party that you don’t mind being … It being public information attached to the LLC. And then what’s key about California is that within 90 days of creating the LLC, you have to file what’s called a Statement of Information, and you have to file it every two years thereafter. On that Statement of Information, you have to disclose one of two things. So you either have to disclose who the member is of the LLC; AKA, who is the owner of the LLC. And often that’s not what we want to do here, because that the owner of the LLC is trying to keep their name private. List that the name of the trust of the owner. Often the name of the trust has the owner’s last name in it, right? So how much added privacy is there? So the second option is the one that we typically do, and that’s sub disclosing for the LLC. You can disclose who the manager is of the LLC. And so, by doing that, you help keep the name of the owner private.

Ruth Krishnan:

Okay. So one thing, I don’t know if you’ve run into this or not, but I’ve run into this a few times where someone really wants to do this and they have a loan. And banks don’t … A lot of times they … You can sometimes get special approvals to get closed in an LLC with some banks, but not all, but they certainly don’t want someone else’s name on something that they’re lending to you.

Have you dealt with that before? And do you have any advice about that, or are these only cash buyers that have these kinds of options?

Doug Bend:

Yeah. You know, a lot of times it is cash buyers in these situation. Also, if you’re dealing with ultra high net worth individuals that want to keep their names private, or if you’re dealing with a celebrity, just keep your name private often, able to make a cash offer. It doesn’t preclude them from financing the home after you close, right? You could do buy the home on behalf of the LLC to keep your name private, and then perhaps take out some sort of mortgage on the home after you close down.

Ruth Krishnan:

Okay. And then one other thing that I ran into recently, which you probably are aware of when someone was looking at doing this, was that the state of California had some absurd, I can’t recall what it was, the wait time for LLCs to get approved. So the client didn’t begin thinking about this, or doing anything with this until after they were in escrow. And then it was going to be like 10 weeks, or something like that for the LLC stuff to get through. Luckily, there happened to be one of the people working on the deal that had a dead LLC, another client was planning to use with some super random name, which was fine. And they were able to use that LLC. But just wondering if you’re running into things like that, and if there’s loopholes?

Doug Bend:

Yeah. There is a loophole, if you know it, but it all depends on how you filed to create the LLC. So for example, and we were looking at this today for a client, the secretary of state’s office, they publish their processing times on a website. And today, it’s April 22nd, they’re processing documents that were submitted in person, or via the mail that they received on March 8th. So to your point, they’re taking it right now about five or six weeks, to process documents that are submitted either by the mail, or by a courier and in person. However, if you submit the filing online, they’re only taking a few business days. So, right now they’re taking about three or four business days.

If this is really a timely LLC that you’re creating, because you plan on using it for purchasing a property and you’ve identified the property, I’d recommend that instead of filing it by the mail, or even using a courier to submit it in person, it’s a lot faster if you submit the filing online on the secretary of state’s website.

Ruth Krishnan:

Got it. All right. Well, that was really, really helpful. What else am I missing? Anything else that when clients call you, they’re asking you about with privacy?

Doug Bend:

Yes. You know, the question then is, okay, well who’s the manager going to be, right? So you got to expose who the manager is, and you have to be careful who you pick the manager as, because by statute, the manager has a lot of day-to-day operating control over the LLC. And so a lot of times you want to pick someone who is someone you trust, who is someone is not going to go out and loan … Take out loans on behalf of the LLC, the name of the LLC. We often see the manager be one of four or five different types of people. The first is that that if you’re using a property management company, so let’s say the property is a property that you have a long-term tenants at, or rentals that perhaps the property manager would be okay being listed as the manager.

The second thing that we see is that sometimes people use their CPA. So they list their CPA as the manager of the LLC. Sometimes it’s an attorney, that they list as a manager of an LLC. We’re a manager of several LLCs. Sometimes it’s a close friend. So we have a client this year that bought a very nice $10 million plus house up in Tahoe. A very nice house, right?

The managers a close friend of theirs. So part of the deal is that, hey, look in exchange for you being listed as the manager of this LLC, you can use the house. So that sounds pretty good to me. And then lastly, if it’s a super wealthy person, sometimes they have a family office and they have someone in the family office that they list as the manager, perhaps a very close friend. So you kind of get the idea. You want someone there that is someone you’re going to trust with that position of power, if you will. And then on top of that, you want to trust but verify, so to speak.

What I mean by that is that the operating agreement that we prepare for the LLC on narrowly restricts the powers of that manager. And so essentially, we added language that says, “Hey, look, the manager of the LLC can’t do anything without the prior written consent of the member of the LLC.” Okay. The owner of the LLC. You’re kind of putting a check on the powers manager’s contract, where the manager can’t go out and do anything he wants on behalf of the LLC. And abuse that power. First, you need to get the consent of the member.

Ruth Krishnan:

Sure. I just want to put my name in the hat for any clients that you have that have $10 million houses, that need a manager on their LLC, in exchange for hanging out at their house.

Doug Bend:

That’s right. There’s worst deals to be had, right?Β 

The other tip I’ll give here, if people are finding someone reluctant to be a manager and they might be, right? So when there’s a lawsuit, they sue the LLC, they sue the manager, they sue everyone underneath the sun. And so they might be a little gun-shy to be listed as a manager. Is that we’ve done what’s called an Identification Agreement for the manager. And essentially the LLC says, “Hey, look manager, if you’re sued for anything that you do on behalf of the LLC, you actually got authorization to do on behalf of the LLC, we’re going to agree to step in and cover your expenses for defending that lawsuit. And if you lose that lawsuit, we’ll cover the damages as well.” That often gives managers peace of mind, that if they were to be named in the lawsuit for playing that role and being the manager, that the LLC will have their back.

Ruth Krishnan:

Got it. Anything else on the LLC side of things?

Doug Bend:

I think the last thing I’ll mention is thinking about timing, and what I mean by timing is that the franchise tax is an annual fee, a calendar year fee, and it would be fair if they prorated it. So, okay you formed July 1st, we’re going to charge you half, because there’s only half left in a year, but that’s not the way it works in California. You pay the full boat on it. And so, especially not so much now. We’re sitting here in April, but you know, as you move to the end of the year, October, November, December, if you have not identified a property that you plan on making an offer on, you may want to wait to form the LLC effective January 1st, of the following year to save on that franchise tax for the first year.

So, we helped set up over 50 entities a year. Of the 50 plus, we do 20 plus in January. And the reason we do so many in January, is that particularly as we move closer and closer to the end of the year, more and more people say, “You know what? We haven’t quite identified that property yet. Maybe we should wait to the start of the next year to form the LCC, and save a few hundred dollars.”

Ruth Krishnan:

Got it. That makes sense. Couple things that they can do on the listing side of things. I know a lot, we get messages from people all the time, they’re like, can you make sure that the photos are taken down? So if I’m representing a buyer, or if I have a listing, obviously the listing agent can take down photos before it’s done. Unfortunately, once … MLS is a syndicated site, so once things are up in MLS and it’s syndicated, they are out there in the cookie world of the internet, kind of indefinitely.

So, there are a lot of sites that immediately will re syndicate. Redfin does. So if you take it off MLS, you’ll see it come off Redfin. One site that notoriously does not take down photos is Zillow. It’s getting more and more common where people are asking for these photos to get taken down, and I’m looking it up in MLS, trying to pull comps or something like that.

There are no photos there. I pop the address into Zillow and it’s all right there. So it is a bit frustrating for people who do not want photos of their homes out there, but once it’s been on the open market, it’s very hard to control the photos of your home that are out and about.

The only way to have a home that hasn’t been advertised is to buy something off market. It’s possible, but probably doesn’t want to be your only selection for how you choose inventory, right? Like I only want to buy off-market homes. So, that could certainly be a little bit of a challenge when you’re a person who’s wanting to keep very private.

Doug Bend:

Yeah. You know, I fully agree. For some of our clients that privacy is a real concern, the off-market option is really attractive to them for that reason. And they’re really trying to keep everything as secret as they possibly can. Photos being other … The photos of the inside of their home being something they’re concerned with. Buying direct from somebody, or buying off-market is really attractive to them.

Ruth Krishnan:

Absolutely. All right, Doug. Well, this was super fascinating, and I think a really valuable topic for our listeners. So thank you so much for taking the time today, and I’ll make sure that your information is included with the transcript. And if anybody has any questions about setting up an LLC for any of their properties in the future, they should absolutely reach out to you.

Doug Bend:

Yeah. Well, thank you for lining us up. It’s nice to chat and I appreciate the opportunity.

Ruth Krishnan:

Of course! Thank you.

Doug Bend:

Okay. Thanks. Bye.

 

Top 5 Team in SF
WSJ 2020 Real Trends Ranked #65 Small Agent Teams Nationwide
RuthKrishnan.com
info@ruthkrishnan.com | Lic #01862279

 

 

 

 

 

Yesenia Rogers
Buyer’s Agent – The Krishnan Team
YeseniaRogers.com
yesenia@ruthkrishnan.com | Lic #02057277