How Can a Business Buy a House or Real Estate?

Businesses often acquire real estate to establish a stable operational base, gain control over their premises, and build equity. Unlike personal home purchases, business real estate acquisition involves distinct financial, legal, and strategic considerations. This represents a significant financial commitment, requiring careful planning and a thorough understanding of commercial transactions. Buying real estate offers long-term advantages but necessitates a structured approach.

Choosing the Right Business Entity

The selection of a business entity is a foundational decision impacting how a company holds real estate, its liability exposure, and its tax obligations.

For a sole proprietorship, the individual owner directly holds the property, exposing them to unlimited personal liability as there is no legal separation between personal and business assets. Partnerships can also own real estate, often held in the partnership’s name. A comprehensive partnership agreement is crucial to outline asset ownership, management responsibilities, and distribution of income or losses related to the property. General partnerships, similar to sole proprietorships, typically do not provide personal liability protection for partners regarding partnership debts or obligations.

Limited Liability Companies (LLCs) are a popular choice for real estate ownership, offering liability protection and operational flexibility. An LLC separates the owner’s personal assets from business liabilities, protecting personal wealth. This structure also allows profits and losses to “pass through” to owners’ personal tax returns, avoiding double taxation.

Corporations, including S-Corps and C-Corps, are distinct legal entities that can own real estate directly. In a C-Corp, the corporation owns the property, and profits are taxed at the corporate level, with dividends potentially taxed again at the shareholder level. S-Corps pass profits and losses through to shareholders’ personal income, similar to an LLC, avoiding corporate-level taxation. The chosen entity influences property transfer, management structure, and tax treatment.

Securing Business Real Estate Financing

Acquiring commercial real estate often requires substantial capital, making financing a key step in the acquisition process. Commercial mortgages are the primary financing method for businesses. These loans require higher down payments, often 10% to 30% of the property’s value, and usually have shorter repayment terms, frequently 5 to 20 years. Underwriting standards are more stringent, focusing on the property’s income potential, the business’s financial health, and the borrower’s creditworthiness.

Government-backed Small Business Administration (SBA) loans, such as the SBA 504 Loan Program, can provide favorable terms for eligible small businesses. The SBA 504 program involves a partnership between a private-sector lender, a Certified Development Company (CDC), and the small business borrower. This structure allows for lower down payments, sometimes 10%, and offers long-term, fixed-rate financing for major fixed assets like real estate. To apply, businesses need to provide comprehensive financial statements, tax returns, a detailed business plan, and credit reports.

Seller financing, where the property owner acts as the lender, can be an alternative, especially when traditional financing is difficult to obtain. This arrangement involves the buyer making payments directly to the seller under agreed-upon terms. While potentially offering more flexible terms, seller financing may come with higher interest rates or a shorter repayment period than conventional loans. Hard money loans are another option, typically used for short-term, high-risk scenarios, characterized by quick approval, high interest rates, and reliance on the property’s value rather than the borrower’s credit.

For any loan application, lenders require extensive documentation to assess risk and repayment capacity. This includes:

Detailed business financial statements, such as profit and loss statements and balance sheets, for the past two to three years.
Personal and business tax returns for the same period.
A comprehensive business plan outlining operations, management, and financial projections.
Credit reports for both the business and its principals.
Any existing business debt schedules and a list of business assets.

Navigating the Property Acquisition Process

Once a business entity is established and financing options are explored, the practical steps of acquiring commercial real estate begin. Identifying a suitable property often involves working with commercial real estate agents who help define specific needs like size, location, zoning, and operational suitability. After identifying a potential property, a Letter of Intent (LOI) is submitted to the seller, outlining proposed purchase terms. This non-binding document sets the stage for formal negotiations and drafting a Purchase and Sale Agreement.

The due diligence period allows the buyer to thoroughly investigate the property before finalizing the purchase. During this phase, buyers conduct various inspections, including structural, mechanical, and roof assessments, to identify physical deficiencies. Environmental assessments, such as Phase I Environmental Site Assessments, identify potential environmental liabilities like contamination, with Phase II sometimes necessary. A thorough title search confirms clear ownership and identifies any encumbrances or liens, alongside obtaining title insurance.

Reviewing zoning and land use regulations ensures the property’s intended use aligns with local ordinances and clarifies future development restrictions. Financial analysis of the property, including existing leases, operating expenses, and potential income, is important for investment properties or those with existing tenants. After due diligence, formal financing approval is secured, leading to a binding commitment from the lender. The deal then closes, involving signing all legal documents, transferring funds, and recording the deed, officially transferring ownership to the business.

Key Legal and Tax Considerations

Owning commercial real estate entails ongoing legal and tax responsibilities distinct from the acquisition process. Businesses are obligated to pay local property taxes, which are assessed annually based on the property’s value and can vary significantly by jurisdiction. These taxes are deductible as business expenses, reducing overall taxable income.

A primary tax advantage for businesses owning real estate is the ability to deduct depreciation. The IRS allows businesses to recover the cost of income-producing property, excluding land, over its useful life. For commercial real estate, the Modified Accelerated Cost Recovery System (MACRS) mandates a recovery period of 39 years for nonresidential real property. This annual deduction reduces the property’s basis and lowers taxable income, even without cash outflow.

Beyond depreciation, many operating expenses related to the property are also deductible. These include maintenance, repairs, utilities, property insurance premiums, and interest paid on the commercial mortgage. Keeping meticulous records of all property-related expenses helps maximize these deductions. If the business eventually sells the property, it will be subject to capital gains tax on any profit realized from the sale.

Understanding and adhering to local zoning and land use regulations is an ongoing requirement for property owners. These regulations dictate how the property can be used, any restrictions on modifications, and potential future development. For businesses that lease out portions of their owned property, additional legal considerations arise, including compliance with landlord-tenant laws and the drafting of comprehensive lease agreements.