One of the considerations you should be thinking about during a commercial real estate acquisition, whether a Class-A office building or a strip mall — is how you will hold title.
This is a decision you should not take lightly as there are many eventualities that occur due to this election. Of course (and it almost goes without saying), you should consult your attorney and accountant, and anyone else you feel is relevant, at minimum before making this decision. It should also be advised that this post is not intended to replace professional advice and is only meant to be food for thought as you consider acquiring commercial real estate.
There are at least four chief concerns when thinking through title alternatives: ease of trade/transfer, liability, taxes and estate planning. Ease of trade I would define as the level of challenge you will encounter either on the acquisition side or the disposition side of your commercial real estate transaction. This may not be the most important driver on the hunt to find the perfect title structure, but including this component as you look to acquire may save you headaches and heartburn later.
Liability is one issue that normally is top of mind as you begin to think about all of the stakeholders in your asset and the infinite situations that may lead some to consider litigation against you and your assets. Liability is quite simply how open your personal assets and the property’s equity are to being lost in a lawsuit. It is worth thinking about the breadth of potential lawsuits that may impact this holding as well. We tend to restrict our thinking to what lawsuits may arise in a tenant/landlord scenario only, or matters only directly related to the piece of commercial real estate, when in fact, that may not be the case at all. We could just as easily be talking about a completely unrelated matter that when litigated may affect your asset — in a very negative way.
One reason you may have been attracted to commercial real estate in the first place is the positive impact owning a piece of commercial real estate would likely have on your tax situation. Depending upon how you decide to treat the asset, you could inadvertently make your tax bill bigger, not smaller. Even worse still, like death by a thousand cuts, your tax structure may not be giving you all of the tax advantages that are available to an owner of commercial real estate. You could be paying many hundreds or thousands of dollars more than you rightfully owe.
The fourth problem, estate planning, is somewhat related to both taxes and ease of transfer. You’ve opted to invest in commercial real estate, maybe not just for personal gain, but perhaps for the benefit of future generations. If you aren’t careful in the construction of your title (and/or entity selection), additional tax burdens and concerns over who owns what may ensue. It wouldn’t take more than a few minutes of searching on the internet to find cases where people had spent their lives building a tremendous portfolio of assets just to have that portfolio dismantled after the death of the principal, effectively negating that lifelong effort.
I am sure I haven’t discussed all of the salient points of holding title to your commercial real estate project, but I do hope that I’ve discussed just enough that you will feel compelled to make appointments with the professionals on your team to hammer out your details before you sign on the dotted line. There is no ‘one size fits all’ in terms of how purchases should be structured and operated — and there are a great many variables that must be included as ingredients to your title structure. This process requires thought, research and consultation. On the face of it, rushing, skimping or shortcutting may appear to some, to be a smart and frugal way to approach this process. Results from taking this approach could run from less than optimal to utterly disastrous. You want your commercial real estate investment to fire on all cylinders and work with you to achieve your financial goals. Doing your homework and holding title in the right way is just one piece of that puzzle.