For individuals and corporations considering purchase of commercial real estate, a variety of tools are available to lawfully limit liability in transactions. Special considerations exist in structuring larger transactions. Solutions which might otherwise be cost prohibitive should be considered. Unlike a smaller transaction where the principals will usually be personally and actively involved in the transactions, those arranging a larger transaction may not be those who hold the most at stake.

Choice of entity to hold property
Liability considerations have prompted many to agree that commercial real property should never be held in the personal name(s) of one or more individuals. Limited liability companies ("LLCs") and limited partnerships ("LPs") have become a predominate choice of entity to hold most larger commercial real property.

In California, LPs do not have to pay the Graduated Gross Receipts Fee ("GGRF") which applies to LLCs. For this reason, many properties are held by LPs with a corporate general partner because this arrangement provides liability protection similar to that of an LLC in the most cost-effective manner. Because every LP must have at least one general partner with absolute liability for the venture, it often seems less expensive to form a corporation to hold a small general partnership interest than to pay a GGRF of as much as $11,000 each year. The perceived savings can be misleading though, because in an LP - even one with a corporate general partner - the absolute liability of a general partner can be imputed to a limited partner solely by virtue of the limited partner's personal involvement in the company.

Because there is normally no similar risk for members of an LLC and there is a good chance that, during the time a commercial property is owned, a limited partner will have occasion to become personally involved in the operations of the company, would a limited partner to whom general partner liability was imputed consider the relatively small tax savings to be worth the risk? Particularly in larger transactions, where the GGRF is "capped" in California, this long-term risk should be carefully evaluated.

Environmental insurance
Long thought to be a tool most appropriate for transactions involving known environmental uncertainty, environmental insurance should now be considered by every investor who cannot afford to lose both (1) the full amount of their investment in the acquired property, and (2) all other assets in their name which were not properly asset-protected prior to any notice of claims. Many outside the commercial property industry do not understand that a Phase I (or even a follow-up) Environmental Site Assessment can fail to reveal major problems, and liability can extend for an indefinite amount of time under certain circumstances. A relatively new product available from several insurers is a portfolio policy, which can provide limited "blanket" coverage for all properties owned.

Equity reduction and expense allocation through dedicated subsidiaries
Because building equity can be a primary target for nuisance claimants, it should regularly be monitored and reduced by the greatest extent practical. Because traditional lenders may balk if financing leaves little equity in a property, larger properties or portfolios may justify the formation of subsidiary entities dedicated to the purpose of making equity reduction loans. Of course, such entities should not engage in other business transactions and should also take care to sufficiently distinguish themselves from the borrower entities so that allegations of alter ego and de facto partnership cannot circumvent the arrangements.

A common mistake of property owners of all sizes is to fail to properly allocate operating expenses when no claims exist, thus creating the appearance of excess profitability. While owners may have a variety of reasons for doing this, in the event an adverse judgment is obtained against the property owner, courts may be reluctant to reallocate expenses which did not exist in the company's financial statements before the claim. Examples of this are when an owner occupies its own property (rather than setting up an independent subsidiary to create a landlord-tenant relationship), performs services "in house" which could be "outsourced" (such as maintenance, marketing, administrative, etc.), or defers maintenance.

Personal asset protection considerations for principals
The strong liability limitations of LLCs, and to a lesser extent LPs, can create a false sense of security for those involved in the highly litigious real property industry, particularly in larger property transactions. A common misconception is that LLCs/LPs protect the personal assets of their members/limited partners. In fact, they only distinguish between the business assets of the company and the personal assets of the principals. While the liability of the company is normally limited to the assets of the LLC/LP, principals in these enterprises should keep in mind that they can always be sued personally, with or without justification.

Accordingly, there is no substitute for implementing an appropriate personal asset protection plan at a time when there is no notice of claims. The reliability of insurance, indemnities (whether from the property owning firm, other principals or the sellers), or other apparent accountability may prove to be limited when actually required. A single environmental claim can often exhaust such resources.

"Custom" sale agreement terms
A growing trend in larger transactions is to depart from the "standardized" purchase and sale agreements, many of which are produced by organizations of brokers in an attempt to balance the interests of buyers and sellers. It is astonishing that, even in some very large real estate transactions, these "standardized" agreements are still used, because they invariably contain clauses which would most likely never have been included if the agreement were developed ab initio for the particular transaction in question.

Even worse, too many "standardized" agreements fail to include common provisions which could reduce the likelihood of disputes. Particularly in a larger real property transaction, the expense of the seller preparing, in advance of receiving any offers, a completely suitable transaction structure to submit to a prospective buyer (i.e., a "custom" agreement), is dwarfed by the potential risk it can reduce.

Timely dissolution after sale
A business entity that sells a property should properly dissolve as soon as possible after the sale to activate the appropriate statute of limitations. Often, liquidating distributions are paid in their entirety before any consideration is given to proper organizational dissolution procedures. Frequently, funds which should have been withheld as reserves are instead paid out to members and the cost of recovering those funds in the event of claims may be prohibitive.