If you own land that is not being used, fixed asset tax will continue to accrue without creating value. One way to put land to effective use is through a "land trust." This article explains how land trusts work, their main types, and the advantages and disadvantages investors and landowners should understand.
How does a land trust work?
A land trust is a structure in which the use of land is entrusted to a professional trust company, and part of the operating profit is distributed to the owner as dividends. Compared with stock investing, it is similar to contributing "land" instead of "money." During the contract period, ownership of the land is transferred to the trust company, but it is returned when the term ends (in the lease-type model).
The trust company handles everything from business planning and financing to construction orders, management, operations, and tax payments. As a result, land can be turned into an income-producing asset even without specialized real estate know-how. However, income is not guaranteed, and there is also a risk that distributions will fall to zero if operations perform poorly.
There are two types of land trusts
What is the lease-type model?
The lease-type model is the most common form, and ownership of the land and building is returned to the landowner after the contract period ends. It is often used for apartment and condominium projects, so contracts typically run for a long period. However, if a building loan remains outstanding, you will need to decide whether to assume it or extend the contract.
What is the disposition-type model?
In the disposition-type model, the trust company prepares and develops the land and ultimately sells it. After the contract ends, the land and building are not returned, but the gain from the sale after adding value to the land is distributed. This model is suitable when you are comfortable letting go of the property in the end.
What are the advantages of a land trust?
- No specialized expertise required: The trust company handles all planning, operations, and management
- No personal capital required: Because the trust company arranges financing, the landowner does not need to prepare funds
- In the lease-type model, the property is returned with the building: You can receive the building as well when the term ends
What are the disadvantages of a land trust?
- Land with low profitability may be declined: Trust companies may reject land with limited value
- Income is unstable: Depending on operating conditions, distributions may fall to zero
- The profit you keep is smaller: Because trust fees are deducted, profit may be lower than with self-management
A land trust offers a practical way to monetize land, but choosing the right trust company is critically important. Make your decision after building the legal and tax knowledge required for real estate investment. It is also worth comparing this option with investment in multi-story row houses as another approach to land utilization.
Related reading
- Why is real estate investment in multi-story row houses attracting attention? A thorough explanation of the benefits, drawbacks, and regulations
- Is real estate investing difficult because of a lack of comprehensive capability? Understanding the three barriers of tax, law, and construction
- Real estate exit strategies in an era of inflation and rising construction costs | A thorough explanation of whether to sell or hold
Frequently Asked Questions (FAQ)
Q. What is the difference between a land trust and a real estate investment trust (REIT)?
A land trust is a structure in which a person entrusts owned "land" to a trust company. A REIT is a fund-style product in which investors contribute capital to invest in real estate, and there is no need to own land directly.
Q. How long is a land trust contract typically?
In the lease-type model used for apartment and condominium projects, long-term contracts of around 20 to 30 years are common.
Q. Are distributions guaranteed in a land trust?
No. If no profit is generated, distributions may fall to zero. Neither principal nor returns are guaranteed.
Q. What kind of land is suitable for a land trust?
Land in a location with good access and expected rental demand, along with a reasonable amount of area, is generally suitable. Land with low profitability may not be accepted.
Q. Can I sell the land during the trust period?
As a general rule, the landowner cannot freely sell the land during the trust period. It is important to review the contract terms carefully in advance.
