Investing in commercial real estate can be a lucrative venture, but structuring the transaction properly is key to mitigating risks and maximizing benefits. One critical decision investors face is whether to purchase a commercial property outright or acquire the limited liability company (LLC) that owns it. Each approach has distinct advantages and potential drawbacks. Below, we compare both options to help you determine which best aligns with your investment goals.
Purchasing a Commercial Property Outright
Advantages:
Clear Title and Due Diligence – When you buy a property directly, you can conduct a fresh title search, ensuring there are no undisclosed liens, pending lawsuits, or ownership disputes.
Tax Benefits and Depreciation – A direct purchase allows you to take full advantage of depreciation schedules and potentially reset the property’s tax basis, leading to greater tax benefits.
Control Over Financing – You can structure financing terms that suit your investment strategy without assuming any pre-existing debt obligations from the LLC.
Avoiding Hidden Liabilities – Purchasing the property itself protects you from any unknown legal, financial, or tax-related issues that may be associated with the LLC’s history.
Challenges:
Higher Transaction Costs – Transferring real estate often incurs closing costs, transfer taxes, and potential reassessments for property tax purposes.
Longer Process – Title searches, appraisals, and lender approvals can extend the timeline before closing.
Disrupting Existing Lease Agreements – If tenants are in place, a direct transfer of ownership might trigger lease clauses or require renegotiation of terms.
Acquiring the LLC That Owns the Property
Advantages:
Avoiding Transfer Taxes – In some jurisdictions, buying the LLC that owns the property instead of the property itself may help avoid significant transfer taxes.
Maintaining Lease and Vendor Agreements – Since the LLC remains the property owner, existing lease agreements, service contracts, and permits remain intact.
Faster Closing Process – The transfer of an LLC’s ownership may involve fewer legal formalities than a direct property sale, potentially expediting the transaction.
Challenges:
Assumption of Liabilities – When you buy an LLC, you inherit all its financial and legal obligations, including debts, pending lawsuits, or undisclosed liabilities.
Limited Tax Benefits – You may not be able to reset the tax basis of the property, limiting your ability to take full advantage of depreciation and cost segregation strategies.
Complex Due Diligence – Reviewing the LLC’s historical financials, legal standing, and potential liabilities requires thorough due diligence, including forensic accounting and legal reviews.
Which Option is Right for You?
The best choice depends on factors such as risk tolerance, tax implications, and transaction costs. If you prefer a clean transaction with full control and tax advantages, purchasing the property outright may be the better option. However, if avoiding transfer taxes, preserving existing agreements, and a faster closing process are priorities, acquiring the LLC could be a viable strategy.
No matter which path you choose, it’s crucial to work with legal and financial professionals to navigate the complexities and ensure a sound investment decision. Whether purchasing the real estate or the entity that holds it, due diligence remains the cornerstone of a successful transaction.
Justin Langlois, CCIM is a Commercial Real Estate Advisor with Stirling Investment Advisors servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.