Part 7 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process
Once you’ve established your legal entity, the next step will be purchase the real estate you wish to lease (or invest in). The type of real estate which will be appropriate for your business will vary depending on a number of factors, including your location, level of investment, and potential tenant base. Not surprisingly, thorough research, inspections, and planning are critical to ensuring success. In this series of posts, we’re outlining several important issues when selecting a property to purchase: title insurance, indenture review, and ensuring appropriate loan documentation.
A Note on Loan Documentation
If you purchase your property with cash, you can skip over this section. However, if you are going to seek a loan from a traditional lender, you will want to make sure the loan is properly documented. This includes, to the extent possible, working with your lender to ensure the business entity (not the members/shareholders) is listed on the loan documents. Ideally, your entity will be listed as the borrower on the promissory note and the grantor of the deed of trust (mortgage) on the property to be acquired by your entity. This helps to distinguish the transaction as one of the business rather than that of the members and shareholders personally. Every lender is different and will have its own lending requirements.
As a side note, it is becoming increasingly common for real estate transactions to involve some form of tax credits as the credits can be critical in ensuring the economic success of a particular deal. The principles above concerning appropriate loan documentation are also applicable to seeking and securing tax credits.
Personal Guarantees and the Lender Exception to Asset Protection
When you seek a loan in the name of your company, the lender may still request the principals of the acquiring entity to personally guarantee the loan. This will be more likely the case with new entities, entities without other assets, and where the debt to equity ratio of the loan to property value is high. A personal guaranty of the principals helps assure the lender that if the company fails to pay the promissory note, the lender can still seek repayment from the individual(s) that caused the company to get the loan.
Without the guaranty, the lender may not feel secure enough to make the loan. Without the loan, you won’t be able to purchase the property so the personal guaranty is often a necessary step. Of note though, the lender’s special ability to reach the members personally does not defeat the overall asset benefit protections offered through the operation of your business through a legal entity.
And as a final note, once your business is established with assets/income and your indebtedness is reduced, you should attempt to renegotiate with your lender, or another, to have the guaranty and that special exception eliminated or limited.