Principal and leader of the real estate and construction group at Barnes Wendling

At Barnes Wendling, our Real Estate and Construction Group have helped our clients structure hundreds of commercial real estate deals. Many real estate investors have sought our advice after the deal was completed. We have seen investors make many mistakes. Here are the most common.

Working with professionals who don’t specialize in the industry.Real estate is a sector with its own language and peculiarities, so it is important to include an attorney and a CPA at the beginning of any deal. These professionals can point out common issues and help structure the deal to your best advantage.

Choosing the wrong entity structure. Real estate should be placed in a flow-through entity, such as a limited liability company (LLC) or a partnership. Real estate generally appreciates in value, placing it in a C-Corp will cause problems with distributing this appreciated value to the owners. For instance, at the time of sale you will be taxed twice — once as a corporation when you sell and once individually on the dividend of the cash proceeds from the sale. Within an S-Corp, an investor loses the advantage of using the mortgage on the real estate to distribute cash to the investors in excess of cash or property contributed. These tax rules can become very complicated. Flow-through entities such as LLCs allow for greater flexibility in allocating income and distributing profits to the investors.

Conducting “handshake” business. Always have documentation in the form of an operating agreement or partnership agreement, even when dealing with friends and family. In addition to your attorney, have your CPA review the agreement to ensure that it meets critical tax provisions required by the Internal Revenue Code.

Realizing tax consequences too late. Every deal is different, so structuring yours based on a similar one in the marketplace can burn you. Look up front at your individual tax situation and how the new transaction will affect it to maximize tax benefits and minimize costs.

Not planning your exit strategy. Know at the beginning how you will exit the deal if something happens to you or your partners. An attorney can help you structure a buy/sell agreement and advise you about alternatives, including a succession plan to transfer the property to the next generation.

For more information about how to structure a real estate deal, contact Barnes Wendling at (800) 369-6375 or www.barneswendling.com.