Expert: Cinzia Dalgarno - 7/23/2009

Question
I currently own two investment properties with a partner.  We are interested in starting an LLC to hold the properties as we are interested in acquiring more properties.  The current mortgages are in our names.  How is transfer of the mortgages handled if we wanted to transfer ownership to a LLC?  Or would the LLC have to secure separate financing and essentially purchase the properties from us?

Thanks for your help.

Answer
Hello Jason. While not everyone on a mortgage must be on title, everyone on title must be on the mortgage (well, for your purposes, at least - there are exceptions, but that's a whole different conversation!); therefore, if you are changing the title to be in a company name, the mortgage will require changing.
When you change the names on the title of the property, you are in effect selling the property. You can either have your company assume the existing mortgages from you, in which case nothing changes other than who is on the mortgages, or you can payout the existing mortgages and take out new mortgages, in the company name. The former will be easier and cheaper, as you will not incur any penalties or fees for paying out the mortgages early, as well as the legal cost of assuming a mortgage is less than that of doing up a whole new mortgage. Hopefully, your lender will allow you to do this by way of an assumption.

The assumption process is fairly simple, but not common. This doesn’t require a new mortgage, just an Assumption Agreement and a Mortgage Modification Agreement – the Mortgage Modif. Agr. will be registered against the title of the property. The lawyer will do up all the necessary paperwork to transfer the names on title, at the same time.

In order to authorize this assumption, the bank will first require a whole new credit to be done, and you and your partner will need to be covenantors - you will essentially be providing your personal guarantee. There are a few docs typically required for mortgages done in company names...borrower's resolutions, articles of incorporation, as well as financial statements, etc.
Finally, I would suggest that if you are planning on making this change to your existing mortgages, with the intention of then purchasing more properties under the company name in the future, please do discuss this fully with an Accountant. They are your best resource in determining what you should do (keep the existing mortgages in your names, and perhaps put any new mortgages in a company name?), in terms of taxes to be paid, etc. Remember, there will likely be capital gains to be paid should you transfer the property names….
I hope this was helpful to you.