There are several ways to obtain, hold, and transfer title to commercial real estate.
From liability pitfalls to tax advantages, each type of commercial property ownership brings unique benefits and drawbacks – and it’s important to be fully aware of them before you invest.
In this post, we explore the different types of property ownership in commercial real estate.
Types of Property Ownership
It’s also important to note that the state commercial property owners are in can greatly effect what type of property ownership they decide to pursue.
In any case, if you are a commercial owner of any kind, you should be in contact with a lawyer in your desired state to make sure you’re checking all the right boxes.
Below, we’ll provide you with a detailed look at seven of the most common types of property ownership, highlighting the benefits and potential limitations of each.
We’ll look at:
- Sole Ownership
- Joint Tenancy
- Tenancy in Common
- Tenancy in Common vs Joint Tenancy
- Tenants by the Entirety
- Owning Partnership (LLCs)
- Owning Corporation
- Owning Trust
In the sole ownership of property, full ownership of the asset belongs to a single individual.
The biggest draw of sole ownership is that, unlike a joint tenancy or tenancy in common, decisions related a property, such as how best to use it or when to sell, do not need to be approved by any tenants.
Or any parties other than the owner, for that matter.
However, one drawback of sole ownership is the added complexity for a property owner’s heirs.
In order to transfer title to property, a sole owner’s heirs need to probate their estate – which can be costly and time-consuming.
Sole ownership is common for multi family rental properties like duplexes and triplexes and small retail properties.
It’s also a fairly common type of land ownership on the grander scale.
With a joint tenancy, two or more tenants own a property – each owning equal shares. As such, tenants enjoy equal rights, income, and use of the property.
A joint tenancy is also one of the most common types of land ownership.
Key to a joint tenancy agreement is the right of survivorship: if one tenant or multiple tenants die, sole ownership passes on to the surviving tenant.
To enter into a joint tenancy agreement, it must be specifically stated on a conveyance or deed that a joint tenancy and rights of survivorship have been created.
As well as enjoying equal use, income, and rights, tenants can also benefit from sharing mortgage and tax payments. In addition, right of survivorship means that tenants can avoid probate and easily pass on ownership after a tenant dies.
What are the drawbacks to a joint tenancy? Joint tenancies come with a certain element of risk.
In the case of the unpaid debts of one tenant, a creditor is legally entitled to collect what they are owed through the forced sale of an asset.
Moreover, joint tenants are liable for their share of maintenance and repairs costs.
In addition, every tenant must agree to the sale or transfer of a commercial asset under a joint tenancy – limiting freedom. In addition, there are also tax consequences of a joint tenancy.
For example, estates exceeding $600,000 at the time of death are subject to state estate and federal taxes.
Tenancy in Common
With a tenancy in common, an asset is owned by two or more persons at once.
A tenancy in common does not include equal use, rights, or income for every tenant – ownership can be divided up into different percentages.
Survivorship rights do not fall under a tenancy in common. In the event of death, the decedent’s shares are acquired by their heirs, who enter into the tenancy agreement with the surviving tenants.
A tenancy in common is the most common type of commercial property ownership or land ownership.
Tenancy in Common vs Joint Tenancy
There are several differences between tenancies in common and joint tenancies.
Just like a joint tenancy, a tenancy in common also involves the co-ownership of an asset. However, unlike a joint tenancy, a tenancy in common does not automatically fall under the rights of survivorship.
Furthermore, in comparison to a joint tenancy, a tenancy in common does not demand equal use, rights, or income.
Tenants by the Entirety
Tenancy by the entirety refers to a tenancy in which a wife and husband are joint tenants– owning equal share of the property and any generated income.
One of the main advantages of a tenants by the entirety is that it offers the right of survivorship: if one half of the couple dies, the title is transferred to the surviving spouse in entirety.
If the couple divorces, the two tenants automatically become tenants in common.
The biggest drawback of a tenancy by the entirety?
Both spouses must agree to sell the property. However, this may also be a benefit – as one party cannot sell without the consent of the other, protecting them from the loss of an asset and any income it generates.
Owning Partnership (LLCs)
You can also hold title to commercial real estate through an owning partnership – also known as limited liability companies (LLCs).
For example, if two investors share the ownership of a warehouse building and a worker suffers an injury on site, LLCs—would protect their personal assets in the event of a lawsuit.
In addition, there are also tax benefits to an owning partnership.
An owning partnership is subject to pass-through taxation, in which company owners pay tax on any income generated – avoiding double taxation, in which both the company and shareholders pay tax. In addition, you can also own land through an LLC.
An owning corporation refers to property which is owned by the shareholders of a company. Corporations are separate legal entities that can also hold title to real estate, as in the case of an owning corporation.
One downside of 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.
In addition, you can also own property through a trust.
In this type of real estate ownership, a trustee is directed to manage the property based on direction from the trustor on behalf of a beneficiary or group of beneficiaries.
An organization or individual can act as the trustee for real estate. In the event of the death of the trustor, their interest is passed on to the designated beneficiaries or successor trustees named in the Declaration of Trust.
Additionally, it’s also important be aware of the two types of trust that exist: an irrevocable trust and revocable trust.
An irrevocable trust refers to a trust in which only the trust’s beneficiary has influence over the trust, with the creator of the trust relinquishing all control. An irrevocable trust is dissolvable.
In comparison, a revocable trust still allows the trust’s creator to make changes to the trust.
In the case of a revocable trust, the trustor must pay tax on the income they gain from the property. Furthermore, a revocable trust cannot be dissolved.
In addition, a land trust, through which land is acquired for a specified time, can also be obtained. A land trust is also overseen by a trustee, while the land owner still retains control of the plot.
What is the main benefit of owning land or property through a trust? Most significantly, commercial property owners profit from the privacy that a trust provides.
When land or real estate is owned through a trust, property owners remain anonymous – their personal ownership is not recorded in public real estate records – this can help owners to avoid the risk of litigation.
However, anonymity is not ensured. A court can unearth property owners’ identities, such as in the case of any suspected criminal activity.
Property Ownership Types
There are several types of property ownership to choose from – each with its own benefits and drawbacks.
Before you enter into an agreement, it’s important to ensure you’re fully informed about the legal, tax, and practical implications of your chosen form of property ownership.