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Who Holds the Keys to Your Office Building?
Making the leap from leasing to buying an office building can be daunting for business owners. After all, enduring the risks that come with owning a business is hard enough; venturing into the commercial real estate market can present a whole new set of hazards. However, the purchase of your own space can be highly profitable and advantageous.
If you are ready for ownership, you must first determine "who" will actually own the purchased real estate. It may seem like a nuance to legally distinguish between the business and the building in which the business operates, but it is an important distinction for many reasons. Serious implications hinge on whether the office building is purchased by the business or whether it is acquired by a separate legal entity. It is highly recommended the purchase is conducted outside of the business's umbrella for these reasons:
1) Risk management.
If the business owns the building, then the building is subject to the business's debts and liabilities. The building is an asset. As such, it could be sold to satisfy a court judgment or seized to pay off creditors in the event of the business's bankruptcy. By separating the two, you are wisely protecting one of your most expensive assets.
Different tax rules apply to different entities. By creating a separate entity, you can maximize profits and minimize taxes. For example, by putting the building under the protection of a limited liability company, you (as the owner of the LLC) will have the income and deductions from the real estate passed through to you on your individual tax return.
So your business partner is not sold on the idea of real estate ownership. By placing the real estate into a separate legal entity, owners can choose whether or not they want to invest in the property. This can be especially beneficial if business owners have conflicting interests. For example, a co-owner who is about to retire may see no reason to purchase a new office building. On the other hand, the much younger co-owner is willing to take the risk because he knows it will benefit the business in the long run.
4) Easier transitions.
In the event that a buy-in or buy-out arrangement is needed for the business, business-owned real estate will only complicate the deal. If the building is a business asset, then an appraisal (which can be costly) will likely be required every time ownership changes hands. Separate entities eliminate the need for this.
Do not worry-the business will still benefit from the purchase. You, as the owner of the real estate entity, can rent "your" building to the business entity. The monthly rent can then be used to cover the mortgage payment. If done correctly, the purchase of a new office building need not be an interruption; everything can carry on like business as normal...only in a nice new space!
If you are a business owner and would like to explore your options in purchasing commercial real estate or would like to know more about the various legal entities, contact the corporate lawyers at McBrayer, McGinnis, Leslie & Kirkland, PLLC.
James H. Frazier, III is the Managing Member of the firm, a position he has held for over 18 years. Mr. Frazier's practice focuses on real estate, bankruptcy, mergers and acquisitions and general corporate practice with special emphasis on mineral and energy law. He can be reached at email@example.com or (859) 231-8780, ext. 303.