Holding the title to a commercial real estate property can be managed in several ways that differ quite a bit from each other.
From tax advantages to liability pitfalls, each type of commercial property ownership brings unique benefits and drawbacks, therefore it is important to understand each clearly before you take over a new real estate asset.
In this post, we will review the different types of property ownership in commercial real estate and discuss the pros and cons of each option.
Types of Property Ownership
When looking to purchase commercial property, it is always wise to consult with a lawyer not only specializing in real estate, but also practicing in the state where the property is located.
Different types of ownership may be preferential for commercial property owners in different locales due to varying laws and other factors.
Let’s take a detailed look at seven of the most common types of property ownership:
- Sole Ownership
- Joint Tenancy
- Tenancy in Common
- Tenancy in Common vs. Joint Tenancy
- Tenants by the Entirety
- Owning Partnership (LLC)
- Owning Corporation
- Owning Trust
In this scenario, the full ownership of the real estate asset belongs to a single individual.
The biggest appeal of sole ownership is that decisions about the property, such as how best to use it or when to sell, do not need to be approved by tenants or any other party aside from the owner. As you will see in the upcoming sections, this is not the case with property ownership scenarios such as joint tenancy and tenancy in common.
A major drawback of sole ownership however, is the added complexity for a property owner’s heirs. In order to transfer the title, a sole owner’s heirs will need to probate their estate, which can be a costly and time-consuming process.
Sole ownership is commonly used for multi family rentals like duplexes and triplexes, small retail properties, as well as land.
With a joint tenancy, two or more tenants own equal shares of a property. The tenants are entitled to equal rights, income, and use of the property, and can also benefit from sharing the mortgage and tax payments.
A joint tenancy is one of the most common types of land ownership.
One of the most important aspects of a joint tenancy agreement is the right of survivorship. This means that if one or multiple tenants die, the ownership passes on to the surviving tenant. Unlike probate, right of survivorship allows for ownership to be passed on easily after the death of one party.
In order to enter into a joint tenancy agreement, the property conveyance or deed need to specifically state that a joint tenancy and rights of survivorship have been created.
Joint tenancies however also come with a number of drawbacks, which can add a certain element of risk. For example, if one of the tenants has unpaid debts, a creditor is legally entitled to collect what they are owed through the forced sale of the asset.
In addition, each tenant must agree to the sale or transfer of the property, which can be very limiting.
Joint tenancies also have tax consequences. For example, estates exceeding $600,000 at the time of death are subject to state estate and federal taxes.
Lastly, joint tenants are liable for their share of property maintenance and repair costs.
Tenancy in Common
A tenancy-in-common property is owned by two or more persons at the same time. This type of ownership however can be split into different percentages among the tenants, hence it does not provide equal use, rights, or income.
Survivorship rights are not included under a tenancy in common. In the event of death, the decedent’s share is acquired by their heirs, who then enter into the tenancy-in-common agreement with the other surviving owners.
A tenancy in common is another pretty popular type of commercial property and land ownership.
Tenancy in Common vs. Joint Tenancy
While they may look similar at first glance, these two types of property ownership differ in several ways.
In both scenarios, the asset is co-owned by two or more parties. Unlike a joint tenancy however, a tenancy in common does not include rights of survivorship.
Furthermore, a tenancy in common does not provide equal use, rights, or income, whereas a joint tenancy does grant equal shares to all owners.
Tenants by the Entirety
Tenancy by the entirety refers to a property ownership in which a wife and husband own equal shares of a real estate asset and any income generated by it.
One of the main advantages of this type of ownership is that it offers rights of survivorship. If either the wife or husband dies, the title is transferred to the surviving spouse in its entirety.
If the couple divorces, the two owners automatically become tenants in common.
The biggest drawback of a tenancy by the entirety is that both spouses must agree to sell the property. However, this can also be perceived as a benefit – since neither party can sell without the consent of the other, the asset and any income it generates is protected from an unauthorized sale.
Owning Partnership (LLC)
The title to a commercial real estate asset can be held through an owning partnership, also known as a limited liability company (LLC).
For example, if two investors share the ownership of a warehouse building through an LLC and a worker suffers an injury on site, the LLC would protect their personal assets in the event of a lawsuit.
In addition, owning partnerships offer tax benefits as they are subject to pass-through taxation. The LLC’s members pay the business taxes through their personal tax returns and the LLC itself pays no taxes.
Corporations are separate legal entities that can also hold the title to a real estate asset, as in the case of an owning corporation.
The major downside to this form of ownership is liability. For example, if someone suffers an injury on the premises, the owning corporation can be sued, and an asset can be acquired and sold by a creditor.
While the risks can be mitigated with liability insurance, asset owners are still vulnerable due to policy limits.
The last type of property ownership we will discuss is an owning trust.
In this scenario, a designated trustee manages real estate assets under the direction of a trustor, who has also designated one or more beneficiaries. Either an organization or an individual can act as the trustee.
In the event of the trustor’s death, their interest is passed on to the designated beneficiaries.
When discussing trusts, it is also important to explain the difference between irrevocable trusts and revocable trusts.
An irrevocable trust can only be modified or terminated with the beneficiary’s permission, as the grantor of the trust has effectively relinquished all control.
In contrast, a revocable trust still allows the trustor to make changes to the trust. Additionally, the trustor must pay tax on the income generated by the property.
What is the main benefit of owning land or property through a trust? Most significantly, commercial property owners enjoy the privacy that a trust provides.
When land or real estate is owned through a trust, the actual individuals behind the trust can remain anonymous. Their personal ownership is not recorded in public real estate records and this can help them avoid the risk of litigation.
However, anonymity is not guaranteed. A court can unearth property owners’ identities, such as in the case of any suspected criminal activity.
Choosing a Property Ownership Type
As we illustrated in detail above, there are several types of property ownership to choose from, and each comes with its own benefits and drawbacks.
Before you enter into an agreement for a real estate asset, it’s important to be fully informed about the legal, tax, and practical implications of the form of property ownership you are considering.