Securing a Real Estate Transaction with a Security Trust
1. The Security Trust: A Flexible Form of Security
A trust is a particularly secure form of collateral that is well-suited to real estate crowdfunding, as it is also characterized by its high degree of flexibility, particularly when it involves corporate shares or stock.
Spotlight on the Security Trust
A security trust is a form of security under which a person (the grantor, who may be the borrower or a third-party guarantor for the borrower) temporarily transfers ownership of property (shares, real property, personal property) or a right to a “special-purpose trust ” (the trust), managed and held by a trusted third party (the trustee) acting for the benefit of one or more beneficiaries (often the lenders), until the loan is repaid, at which point ownership of the asset is automatically returned to the grantor.
Here are the benefits of a trust:
● Flexible collateral: The trust may be secured by real estate assets directly, by the shares or stock of the company that owns the real estate assets, or even by a combination of several types of assets within a single security interest;
● Activation of the trust at the lender’s or borrower’s discretion in the event of default: the lender and the borrower may agree to have the trustee or a trusted third party activate the trust in favor of the lender, either through:
○ the allocation of all or part of the assets transferred to the trust;
○ the transfer of all or part of the shares or ownership interests;
○ the sale of all or part of the underlying real estate assets.
● Possible structures for the trust: The assets transferred to the trust may:
○ either be retained by the trustee until full repayment;
○ or, conversely, be made available to the grantor of the trust for the duration of the transaction (in this case, only legal title to the property is transferred to the trust; the grantor retains beneficial ownership of the property during the transaction).
2. The Legal Effectiveness of Trusts for Real Estate Crowdfunding Investors
For crowdfunding investors who are financing a real estate project, the main appeal of the trust lies in its effectiveness when it is activated.
In particular, the trust allows for:
● In the event of insolvency proceedings against the borrower, the trust is activated immediately: the trust is enforced out of court (there is no need to petition a judge to request enforcement of the trust, unlike other forms of security, such as a mortgage, which require a property seizure or a court order) and is not affected by any insolvency proceedings involving the borrower.
● Exclusive rights to the value of the asset pledged as collateral: crowdfunding investors face no competition from any other creditors.
3. The Economic Efficiency of the Trust for the Benefit of All
A trust benefits both the lender and the real estate operator: unlike the enforcement of a mortgage or pledge, the parties jointly agree on the terms for the sale of the real estate assets or the shares of the company that owns the property. Furthermore, the parties may agree that the trustee will refrain from selling the asset in a declining market in order to maximize its value. Finally, it is often less costly for the grantor than a mortgage.