Many commercial real estate investors make a simple but potentially financially disastrous mistake when taking title to commercial properties. The mistake is placing the property title in their personal name. This leaves commercial real estate owners at great legal risk on several fronts.
When commercial real estate title is held in your name, you not only risk your business but also your personal finances and potentially any other businesses you own. In today’s highly litigious society, even the most prudent commercial real estate owners can find themselves in court defending against a frivolous but very real lawsuit.
What Commercial Real Estate Owners Risk When the Title is Wrong
Here is the risk to commercial real estate owners when property is in your name. Let’s say on a snowy winter day a customer at a building you own is hurt by slipping and falling down on the sidewalk. You can bet you’ll be sued for medical costs, loss of work, emotional distress, and even negligence for not doing a better job removing the ice.
If the property is in your personal name, they can sue you both as the property owner and as an individual. Along with your business assets, they’ll come after your personal savings and possibly your home.
It doesn’t necessarily stop there. Commercial real estate investors with multiple properties can lose any other properties held in their own name as well. You could be completely wiped out financially. After all, Stella Liebeck was awarded $2.9 million after spilling a cup of McDonald’s coffee on herself.
Title Options for Commercial Real Estate
Fortunately, it doesn’t have to be that way for commercial property owners. You have a variety of options to limit your financial exposure to lawsuits.
The most common protection is titling property in the name of a Limited Liability Company (LLC). Other options include “C” corporations, limited partnerships and land trusts.
The concept is to legally separate you, as an individual, from the property. These business entities are legally viewed as an entity separate from the owner. To be clear, the business can be sued but owners limit their liability to that specific property. By using a business entity, a plaintiff in a lawsuit can only be awarded assets owned by the specific business.
Commercial real estate investors with multiple property holdings often title each property to a separate business entity rather than a single corporation or LLC. Doing this makes each property a separate business entity solely responsible for its own liability.
One good reason commercial real estate investors prefer LLCs rather than corporations for holding property titles is because they cost much less to set up, are less complex to manage, and have tax advantages not available to most corporations. All commercial real estate investors need to legally protect themselves in today’s lawsuit happy culture.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.