I get a call almost every month from someone who is under contract on a commercial building and has not yet thought about how they are going to take title. Usually they are focused on price, financing, and closing date. Those matter, but how you hold the property matters just as much, and it is much harder to fix after closing than before.
Here is what I walk clients through before they buy commercial real estate, whether it is a small retail building or a multi-tenant office park.
1. Do not buy commercial property in your individual name
If you own a commercial building personally and someone is hurt on the property, or a tenant sues over a lease dispute, your personal assets are on the line. An LLC creates a liability shield between the property and everything else you own.
I almost always recommend a separate LLC for each property, rather than lumping multiple buildings into one entity. If something goes wrong at one property, you do not want it to expose the others.
2. Your entity and title choice affects your financing
Lenders have their own requirements for how they want title held, and those requirements are not always what is best for you long term. Many commercial lenders will require personal guarantees from the owners even when the property sits inside an LLC.
The order of operations matters here. I want to see the entity formed and the operating agreement in place before the loan application goes in, not scrambled together the week before closing because the lender asked for it.
3. Depreciation and pass-through taxation need to be part of the decision
Commercial real estate held in an LLC taxed as a partnership generally passes depreciation deductions and other tax attributes through to the owners. That can be valuable, but only if the entity structure and ownership percentages are set up correctly from the start.
Depreciation is not optional or elective in the way people sometimes assume. It changes your basis in the property, which changes your tax picture when you eventually sell or refinance. This needs to be modeled with your CPA before closing, not discovered on the return afterward.
4. Think about what happens to the property when you die
Commercial property held at death can receive a step-up in basis, which can eliminate a significant amount of the built-in gain for your heirs. How you hold the property, and how your estate plan is coordinated with that entity, affects whether your family gets that benefit cleanly or has to fight with a title company and the IRS to sort it out.
I see this go wrong when the LLC operating agreement was drafted without any thought to what happens on the death of a member. That gap can create real problems at the worst possible time for your family.
5. Get the entity and title work done before you are under contract, if you can
The best time to set up the right structure is before you sign a purchase agreement. Once you are racing toward a closing date, there is pressure to use whatever entity is convenient rather than the one that actually fits your goals.
I would rather spend an hour with a client before they make an offer than spend ten hours after closing trying to unwind a structure that does not work for them.
Buying commercial property is one of the more consequential financial decisions a business owner makes, and the entity and tax choices you make at the outset follow the property for as long as you own it. If you are considering a purchase, reach out through blgattorney.com or call my Oklahoma City office before you go under contract.