The Importance of Asset Protection for Commercial Real Estate Investors
There is no doubt that investing in commercial real estate is a very lucrative career. From small rental properties to large construction developments, commercial real estate investors at all levels can generate revenue to last for generations. The real value in commercial real estate is the equity, and that makes investors a target for judgment creditors. Often overlooked, asset protection against judgment creditors is essential to the future success of any serious commercial real estate investor.
Ownership of Commercial Properties
Because of the accessibility of commercial real estate acquisitions, many investors purchase properties in their own names. After all, individual ownership is the easiest and simplest method for commercial real estate purchases. An individual owner gets to directly reap the tax and depreciation benefits, as well as deductions for other expenses. Additionally, there are no extra fees involved when preparing annual tax returns because there are no other legal entities holding the property. The major drawback to individual ownership is that it provides no asset protection. Without asset protection, individual owners are vulnerable to any liability claims by tenants, partners, buyers, and even government agencies.
Asset Protection and Business Entities
One of the easiest ways to protect yourself from judgment creditors is to create a business entity. Limited liability companies, corporations, and limited partnerships are the most common entities used by commercial real estate investors. Instead of personal ownership, the corporate entity owns the property. Each business entity offers varying degrees of asset protections against judgment creditors. In the case of corporations, the individual’s investment is made apparent by common stock ownership in the entity. Common stock is vulnerable to judgment creditors, who can levy and take ownership of the common stock as well as the corporation, after which they can liquidate property assets to pay the judgment.
Limited partnerships and LLCs, on the other hand, provide better asset protection for commercial real estate investors and are much more cost effective to create and maintain. Judgment creditors cannot levy the individual’s membership in the entity, nor can they get a lien against properties owned by the LLC. At most, a judgment creditor can get a lien against cash distributions from the LLC to the individual owner, but a well-drafted asset protection agreement can keep the entire cash flow safeguarded within the LLC. This works best if there is more than one LLC member, otherwise, the judgment creditor can target the interest of the sole member.
Taxes and Asset Protection
The IRS treats business entities such as limited partnerships and LLCs the same when it comes to taxes. However, LLCs and corporations can elect how they want to be treated. An LLC can choose to be treated as an S-corporation or a C-corporation. As a partnership or S-corporation, a multi-member LLC can protect individual commercial real estate investors from lawsuits related to their properties, and it provides protection against judgments against owners that may arise due to real estate liabilities as well as unrelated business ventures and personal liabilities.
At CounselPro Lending, we offer funding and guidance to help commercial real estate investors get the most out of their properties, while also protecting their best interests. If you would like to learn about asset protection or any of the other services we offer to commercial real estate investors, contact the team at CounselPro Lending today.