BUYING A VACATION HOME WITH FRIENDS OR FAMILY? SOME THINGS TO CONSIDER…

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Sales of vacation homes have been rising sharply lately. Across the country, the number of vacation homes sold last year was up 30% from the year before, according to the National Association of Realtors.  Vacation homes now account for 13% of all home sales. The median price last year was $168,700. Interestingly, most vacation home buyers are under age 45.

Many people have long dreamed of owning a second home, but buying one can seem like an overwhelming task.  One solution to addressing that task, both with regard to the time invested and financial risk, is to join forces and invest with friends or family.  This can be an ideal solution – you get to use the home for part of the year, just as you planned, but the costs can be shared and risks reduced.

Before you take the leap, it’s important to think through everything that will be involved, and what will happen if something goes wrong. You’ll want to have a frank conversation with your partners and draw up an agreement that covers all the bases – a kind of “real estate prenup.”

Here are some things you’ll want to take into account:

What will you use the home for? Are you primarily interested in using the home yourself as a getaway, or renting it for income? You’ll want to be on the same page about this right away, so you don’t wind up disappointing someone’s expectations.

How will the time there be shared? This is critical, and you need a plan. The problem is that it’s often hard to work things out in advance and set a schedule in stone, because everyone’s needs will change over time.

If a brother and sister are sharing a property and they both have small families, the conflicting needs of the families might not be an issue at all. But if four or five families are splitting a home, there are bound to be schedule conflicts, and it can be good to have a formal system.  Some co-owners have created an online spreadsheet on which they can sign up for use of the house. Some randomly assign weeks at the beginning of the year, with the owners being allowed to trade and barter among themselves.

This type of system can be tweaked depending on your needs. For instance, all the owners might be guaranteed a certain number of weeks during the peak season, or families with children might be given priority during school vacations.

You’ll also want to consider whether owners who spend more time at the property should also contribute more to maintenance, insurance and utilities.

Who – or what – will own the property?  Good question for the attorneys(!!)  Often, the best solution for property ownership with friends and family is a limited liability company.  An operating agreement will be drafted to establish the rights and obligations of the “members” in the LLC.  An LLC can help with protection from creditors, and can make it easier to sell or give away an interest in the home. (On the other hand, it might limit your ability to deduct mortgage interest on your taxes.)

What happens if someone wants to sell?  This is a critical question to address in the Operating or Partnership Agreement.  Even if your best friends plan to keep the home forever, they could suffer financial problems and need to back out.  Since it can be hard to sell a fractional share of a home, many agreements provide that every few years, the co-owners will each have the option to force a sale of the entire property.  Another idea is to give the other owners a “right of first refusal,” which means that if someone wants to sell their share, the other owners have the option of buying that person out.  Obviously, you want to avoid co-owning a home with strangers or people you don’t get along with.

How will expenses be handled? While it’s possible for owners simply to contribute money for repairs and other expenses “as needed,” this can lead to a lot of confusion and even conflict. In most cases, the better method is to have owners contribute a fixed amount of money on a regular basis that can be used to pay expenses.

It’s a good idea to have a separate bank account for the management of the property, which is especially easy if the property is owned by an LLC. A separate bank account will minimize issues over who owes what and who paid for what. And if you plan to rent the property to generate investment income, a separate account will make it much easier to track expenses and profits for tax purposes.

If you’re planning to use the property to generate income, you’ll want to establish some rules about when the profits can be withdrawn from the account versus being kept there to pay future expenses.

What about routine maintenance? If maintenance is going to be a significant issue – perhaps because no one lives close enough to the property to take care of things as they arise – then it might be wise to consider hiring a management company.  But even hiring the management company and overseeing its work is a task that must be allocated among the members or partners.

FANNIE MAE WILL CONTINUE TO BACK LARGER MORTGAGES

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Fannie Mae and Freddie Mac, the quasi-government entities that insure or repurchase a high percentage of mortgages in the U.S., will continue to back mortgages as large as $417,000 – and as large as $625,500 in some high-value areas.

That’s the word from the new director of the Federal Housing Finance Agency, which oversees the two mortgage giants.  The agency had planned last year to reduce the largest Fannie and Freddie-backed loans to $400,000 (and $600,000 in the most expensive locales), but it now says that continuing to insure larger loans will help the country’s housing recovery.

This is good news for buyers who want to obtain larger mortgages. Mortgages of more than Fannie and Freddie’s maximum amounts are usually considered “jumbo” loans, and borrowers typically have to meet much higher standards and restrictions to obtain them.

‘CROWDFUNDING’ BUSINESSES HAVE OBLIGATIONS TO INVESTORS

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Start-up businesses are increasingly seeking funding on websites such as Kickstarter or Indiegogo, and promising small rewards to individual investors in return for micro-contributions.  Examples of these businesses include the Veronica Mars movie, which raised millions of crowdfunding dollars by promising small contributors posters, DVDs and movie scripts, and a space telescope project that offered “space selfies.”

Note to start-ups: pay attention to your legal obligations.  Recently, the State of Washington accused a Kickstarter company of reneging on its promise to send small contributors decks of horror-themed playing cards. The state is seeking restitution plus additional damages of $2,000 per contributor and the costs of bringing the suit.

Keep in mind that the promises made through crowdfunding sites establish legal obligations.  If a start-up ends up getting hundreds or even thousands of contributors by offering small rewards, the promises have to be honored.

 

LESSEE LIABLE FOR SLIP AND FALL?

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If you are a commercial tenant, running a business and occupying under a commercial lease, can you be liable for injuries if a visitor or other passerby slips and falls outside your business? 

The answer depends on a number of factors.  The most important, however, may be a Court’s assessment of legal responsibilities of landlord and tenant under the commercial lease.

This issue came up recently in a non-California case against P.F. Chang China Bistro restaurant.  A woman by the name of Sabena Beriy fell on what she claimed was a poorly maintained curb outside a P.F. Chang’s. P.F. Chang’s had leased the property from a landlord as part of a larger development. The lease provided that P.F. Chang’s was responsible for any injuries on its “premises,” and that the landlord was responsible for any injuries that occurred “outside” the premises.

P.F. Chang’s claimed that Sabena’s fall occurred in the common area of the development, not in its restaurant. It also claimed that the landlord was responsible under the lease for designing and maintaining the parking areas, driveways and curbs.

The landlord prevailed in the end.  According to the court, the area in front of the restaurant was not “common,” but was exclusively for P.F. Chang’s use and was part of P.F. Chang’s “premises.” Further, while the landlord was supposed to build and maintain the curb, the lease provided that any such improvements on exclusive-use areas were again part of P.F. Chang’s “premises.”

Commercial tenants should take note.  It’s important at the time of negotiating the lease exactly which areas establish legal responsibility for the tenant, and which do not.  This is especially true in the context of the tenant’s liability insurance.  Failure to accurately assess which property is part of the tenant’s premises, and which is not, may end up not only with primary responsibility for an accident, but inability to tender a claim to insurance!

SUPREME COURT SAYS “NO PATENT” IN ALICE CORP. LTD.

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A business cannot obtain a patent for taking some ordinary process in the real world and coming up with a computer program to make it easier, according to the U.S. Supreme Court.

In ALICE CORPORATION PTY. LTD. v. CLS BANK INTERNATIONAL ET AL, decided in June of this year, a company called the Alice Corporation tried to patent an online system to reduce risk in financial transactions. Alice’s program was little different from a third-party clearinghouse or escrow service, except that it offered all such services automatically online. The fact that the activity could be accomplished on-line did not make it worthy of a patent, according to the Supreme Court. Alice didn’t really come up with a new idea, technique or process. It simply took an age-old process and created an app for it.

The decision is important because many companies have been seeking to drub out competition through patents that isolate their on-line apps. The high Court obviously feels that reduction in competition in this manner is not one of the policies served by the patent process.

Immediately after the Supreme Court decision, other courts began throwing out patent claims along the same lines. For instance, a judge in New York rejected a patent for a computer program that helped people plan meals. The program let people choose meals from picture menus, learn how the meals would fit into their diet or nutrition goals, and let them substitute items and see how those changes affected the results. But that’s no different from what nutritionists have been doing for years, the judge said, and even if a computer program makes it easier and faster, it’s not such a new idea that it can be protected with a patent.