The Secret to Maintaining Existing Permits And Avoiding Income Delays For “Legacied-in” Nashville STR Properties
If you’re a real estate investor in Nashville, TN, you should be aware of the nuances of short-term rental property permits (STR) and the potential impacts on your expected revenue stream. These permits also play a role in the supply and demand constraints. In Nashville and Davidson County, local regulations require that anyone wishing to rent properties to others on Short Term Rental (STR) websites such as Airbnb and VRBO obtain a permit from the Metro Codes Department before listing their property.
What if we told you there’s a brilliant workaround for new STR property owners? One that allows investors interested in acquiring a STR property to maintain existing STR permits by purchasing the LLC and the underlying property simultaneously? Yup, that means no additional short-term rental property permits are necessary.
Before we get into the details, let’s discuss the history of short-term rental property permits in Nashville and the legislation that sparked this conversation. Please note that the phrase “legacied-in” can also sometimes be referred to as “grandfathered-in” based on the grandfather clause or “inherited-in”.
History of Short-term Rental Property Permits (STR) in Nashville, TN
There’s a strong possibility that you already know this, but in case you don’t, and for the sake of context, let’s discuss the two types of short-term rentals as defined by Metro Nashville/Davidson County. Nashville’s short-term rental property permits (STR) come in two types:
- Owner-occupied (OO):
- Owner-occupied residence or on a lot with an owner-occupied residence.
- Owner-occupied status must be confirmed by two documents showing that the owner occupies this as their primary residence.
- Acceptable documents may include a Tennessee driver’s license, State of Tennessee ID card, Davidson County voter registration card, pay stub, work ID or badge, IRS W2 form, or bank statement.
- Such documentation of primary residence address must match the deed as recorded with the Register of Deeds office.
- To qualify for an owner-occupied permit, the owner of the property must permanently reside at the property and be a natural person or persons.
- LLCs, corporations, trusts, partnerships, joint ventures, and other entities are ineligible for owner-occupied permits.
- Non-owner occupied (NOO):
- These properties are not owner-occupied or on a lot with an owner-occupied principal residence.
- Rentals are limited to a single party of individuals.
- Ownership information on the application must match the deed as recorded with the Davidson County Clerk’s office.
- New non-owner occupied permits will only be issued as a use permitted with conditions MUN and MUN-A, MUL and MUL-A, MUG and MUG-A, MUI and MUI-A, OG, OR20 through OR40-A, ORI and ORI-A, CN and CN-A, CL and CL-A, CS and CS-A, CA, CF, DTC North, DTC South, DTC-West, DTC Central, SCN, SCC and SCR zoning districts. UPDATE: Pursuant to BL2019-1633, new permits in RM zones will no longer be issued effective January 1, 2022. (More on this below.)
- New non-owner occupied permits are not permitted in AR2A, R, or RS-zoned properties. Existing permit holders in these zoned districts may be eligible to apply for renewals, but those permits are not transferable if the property is sold or transferred.
On January 1, 2022, Nashville passed legislation regulating short-term rentals (STRs) – any rental property that real estate investors can rent for less than 30 days. The permit allows for areas in Nashville, Tennessee zoned as “residential” that have existing short-term rental licenses to continue operating as STRs (Airbnb, VRBO) under new ownership if new ownership is “legacied-in.” These are the “non-owner occupied (NOO)” properties. The “legacied-in” purchaser will not need to set up a new LLC but rather acquire the existing LLC from the seller that holds the STR permit, thereby acquiring and transferring ownership of the rental license.
The “legacied-in” properties can only be sold via an LLC purchase for continued use as an STR. If these properties are sold using traditional financing methods, the ability to renew a permit on that property is permanently lost. The LLC purchase strategy is a way to keep active short-term rental property permits on these properties.
Defy Mortgage Launches Short-term Rental Property Permit Solution for “Legacied-in” Properties
Defy Mortgage can guide Nashville real estate investors through these complex regulations by facilitating the purchase of the LLC and working with a unique lender that allows for this type of transaction. “Grandfathered-in” or “legacied-in” STR properties can continue to be a viable investment with a finite and shrinking supply of opportunities.
Purchasing a “legacied-in” property without a Membership Interest Purchase Agreement (MIPA) will void the property’s STR status and permanently eliminate the ability to operate as a short-term rental.
“At Defy Mortgage, we understand the challenges investors face in Nashville’s competitive STR market,” says CEO and Co-Founder, Todd Orlando. “That’s why we’ve created an innovative financing solution that allows real estate investors to retain permit restrictions and secure permitted short-term rental (STR) properties in Nashville. Very few lenders have programs and expertise to facilitate transactions like this.”
By acquiring the LLC that holds an existing (STR) short-term rental property permit (and the underlying property, of course), investors can seamlessly maintain those much-needed permits without any bureaucratic hoops to jump through. The legal contract that outlines the terms and conditions under which a buyer purchases a membership interest in a limited liability company (LLC) from a seller is called a Membership Interest Purchase Agreement (MIPA) which we will discuss more below.
Short-term Rental (STR) Specialized Financing Details For Nashville Investors:
- Existing Permits Made Easy: Investors can maintain permits by purchasing the LLC and property. No deed transfer hassles!
- Flexible Financing: Up to 80 Percent LTV, minimum FICO 640, and loan amounts from $100K to $3MM.
- Smooth Transition: No deed transfer—just a seamless LLC membership change.
- Portfolio Growth: Investors can finance up to 20 properties. Imagine the possibilities!
How Nashville Investors Can Keep Short-term Rental Property Permits (STR)
With Defy Mortgage’s powerful non-QM lending capabilities, real estate investors in Nashville can supercharge their STR portfolios while sidestepping those pesky permit woes by completing these two steps:
STEP 1: Investors work with Defy’s legal partners at Collins Legal and Defy to purchase the LLC and property in a single transaction. The entire LLC and mortgage acquisition process is streamlined from start to finish.
STEP 2: The existing STR permit from the LLC is transferred to the new investor owner, while the property deed remains unchanged. It’s pretty straightforward.
Nashville LLC MIPA (Membership Interest Purchase Agreement) Benefits
An LLC Membership Interest Purchase Agreement (MIPA) is a legal agreement between a buyer and a seller to transfer ownership interests in a limited liability company (LLC). “The MIPA is a crucial agreement document that outlines the full terms of the membership interest transfer to ensure a smooth and legally compliant transaction,” says Grover Collins, Founder and Managing Attorney at Collins Legal.
This document may include provisions related to the transfer of these membership interests as well as any required changes to the LLC’s foundational documents, such as the articles of organization, certificate of formation, or other documents that outline the company’s ownership structure, governance, and voting rights.
Benefits of a Membership Interest Purchase Agreement (MIPA) include but are not limited to the following:
- Permits Transferring of Ownership: The contract permits the seller to sell the buyer ownership of the LLC’s membership interests. This makes the corporate entity efficient and legitimate transfer of ownership rights possible
- Transfer of Existing Bookings: When acquiring the LLC that owns an STR, the seamless transfer of the permitting allows for any and all existing bookings that the property has reserved to be transferred to the new owner immediately. This means immediate income for your asset!
- Flexibility: The contract’s terms can be discussed and altered to suit the needs of both the buyer and the seller. Because of this flexibility, the parties can negotiate various parameters, including the purchase price, payment periods, warranties, and representations.
- Fast Turnaround Times: From a short-term real standpoint, buyers can purchase the LLC with a MIPA and, at the same time, purchase the rental property and then market their newly acquired property within a few days. Buyers wouldn’t be able to do this if they didn’t go the MIPA route. This means no more waiting weeks+ for buyers to market their STR.
- Furnishing Inclusions: Traditional financing does not allow for the inclusion of furnishing in the purchase contract. Whereas LLC purchasing allows for all furnishing, and any additional assets tied to the property, to be included in the transaction without issue.
Short-term Rental (STR) Financing’s Benefit for Real Estate Investors in Nashville
For savvy investors, this is an incredible opportunity to adapt to Nashville’s evolving market dynamics and gain a significant competitive advantage in the city’s highly profitable short-term rental industry. Conventional, FHA, and most portfolio lending options are not designed to accommodate the unique requirements of acquiring the LLC along with the property. These standard financing options can jeopardize the property’s STR status leading to the loss of the ability to operate as a short-term rental in some cases.
To successfully navigate this complex landscape and secure your investments’ future, you need specialized solutions tailored to the specific needs of Nashville’s STR market. That’s where Defy Mortgage comes in, providing the expertise and innovative financial solutions for real estate investors to thrive in the challenging environment.
“Short Term Rentals are the best cash-flowing asset class in Nashville, and the most exciting,” says Jake Gomes, Founder of The Gomes Agency – a luxury real estate team serving the Nashville, Tennessee market. “The way that our clients are creating such unique spaces and experiences for their guests to stay in is truly inspiring. The STR LLC purchase option is a fantastic and revolutionary technique that allows for the acquisition and continued use of “legacied” or sometimes called “grandfathered” homes as cash-flowing short-term rentals. So far this year, we’ve represented 5 clients with their short-term rental purchases, and 2 of them have used this strategy!”
As Nashville continues to shatter tourism records year after year, the value of these “legacied-in” STR properties is poised to skyrocket. The increasing scarcity of these assets, combined with the city’s relentless growth in both tourism and home values, creates a perfect storm for investors seeking to maximize their returns. Short-term rental property permits and the conversations surrounding them aren’t going anywhere.
By securing a piece of this lucrative market now, savvy investors can position themselves to benefit from the inevitable appreciation of these properties over time. Don’t miss out on this unparalleled opportunity to invest in Nashville’s booming short-term rental industry while “legacied-in” properties are still available.
“At Defy Mortgage, we’re all about pushing boundaries and finding creative solutions tailored to your unique needs whether you’re a real estate investor, self-employed, entrepreneur, or business-owner,” says Orlando. “As a Nashville-based company, we understand the nuances of this market inside and out. We’re not just facilitating transactions; we’re building lasting partnerships and enhancing client trust every step of the way. Your wins are our wins.”
Real estate investors: if you’re eager to secure your place in Nashville’s thriving STR market and maintain those valuable “legacied-in” short-term rental property permits, know that you don’t have to navigate this complex landscape alone. Three Nashville-based powerhouses, Defy Mortgage, The Gomes Agency, and Collins Legal have joined forces to provide you with the expertise, innovative financing solutions, and unparalleled support that you need to succeed.
Do not settle for ordinary investments when you can be leading in this lucrative market. The future of real estate investing in Nashville is brighter than ever. Together, we’ll help you raise the bar, defy traditional STR limitations, and unlock a world of possibilities in Nashville’s booming short-term rental scene.
Short-term Rental (STR) Permit Solutions In Other US Markets
With a deep understanding of the unique challenges and opportunities in short-term rental markets across the United States, Defy Mortgage has established itself as the go-to lender for savvy STR investors. Whether you’re looking to invest in the vibrant Music City streets of Nashville, the sunny shores of California, or the majestic plains of Texas, Defy Mortgage has the expertise and proven innovative solutions in navigating complex regulations and crafting tailored financing solutions that empower investors to thrive in diverse nationwide markets like these.
As the STR landscape continues to evolve, Defy Mortgage remains at the forefront, consistently delivering unparalleled support and strategic guidance to investors seeking to maximize their returns.
