Commercial Property, Risks and Ownership Structure

Seeking to obtain views on the ownership structure for commercial property.

Are there specific risks inherent in owning commercial property such that it is advisable to hold commercial property in a trust structure? If so, what are these specific risks?

If a trust structure is recommended, would it be better to have a separate trust for commercial property assets so that these are not in the same ownership structure as say share investments?

Alternatively, could the owner of commercial property be considered sufficiently protected through appropriate insurance such that a structure may not be necessary? The owner would be only the owner of the property and not the business owner so would there be much risk?

 

Do you want to protect the property, or protect yourself from the property?

 

Yes there are greater tenant risks with commercial property. Much greater chance of litigation and much greater potential for litigation expenses. As such you would want a pty ltd company to limit liability, whether as trustee or in own right, and consider holding nothing else in that company.

Also greater chance of negligence issues.

 

Protect myself from the property.

 

Thanks Terry. Would this be litigation from the tenant because of some failure in the property? Are there some examples of what this could this be, for example, could it be if the property is not properly maintained? Alternatively, would this be public liability in which case you could get public liability insurance?

So if you set up a trust, with a corporate trustee solely for commercial property investments, would that work? Are you saying that you should set up a separate structure for each commercial property?

What type of negligence are you thinking of? Negligence in upkeep of the property?

Would this be an issue if you are buying a strata commercial property (rather than a standalone / freehold commercial property) where building issues should be properly managed by the strata and building management?

 

Contractual disputes - insurance won't cover you for that.
Slip and fall cases - search for these

Get specific legal advice.

 

You haven't asked this question but also consider the future implications on your ability to borrow funds.

 

What type of contractual disputes? Would these mainly be related to the lease? Just trying to think what type of exposure there would be for these.

For slip and fall cases, would these be covered by public liability insurance?

 

Thanks Shahin. Is the point you are raising that if you have property and associated income in a trust it isn't attributable to you and it may therefore limit your future borrowing capacity?

Do lenders take into account income from trusts at all?

 

Contracts entered into would include leases, loan agreements, perhaps other construction type leases. it would depend on what sort of property it would be.

Insurance may cover some things but not all, especially where negligence is involved.

 

Lenders will take into account trust income. Think of the effect of who the borrower is.

 

Balls up, take responsibility for your actions and be able to show that you have taken all appropriate actions to minimise your exposure.

 

I wondering how much of the devil is in the detail re trust income and servicability. I assume it helps if you (the borrower) is the trustee? And will they generally take the average of the last 2 years total trust distributions (with tax returns as evidence)? And will a history of allocating to different beneficiaries (other than borrower) impact the amount they use for servicability reasons? For most trusts, the trustee (borrower) may not have have been significant recipient of distributions. I understand this may all vary by lender.

 

If you are trustee or director of the trustee they will generally take the trust income as yours - which they probably shoudn't if the trust is a discretionary trust as there is no guarantee that you would get anything the next year.

If you are causing the trust to distribute to uncle harry, this may be a problem. If a bucket company which you control then should be ok.

 

The point is that if the purchase is made under a company entity or trust entity w/ corporate trustee combo then and the entity is able to satisfactorily meet its loan obligations then some lenders don't take the debt when the individual goes to borrow further funds in their individual name.

 

Sorry can I clarify this please. Is the borrower the trust but the borrowing capacity assessed against the individual taking into account the individual's trust income?

 

A trust can't borrow.
Only a trustee can. If the trustee is a company then a personal guarantee will be needed and the guarantor's income will be taken into account as would be the trust income.

 

Thanks Shahin. So are you saying that it is actually a benefit? The debt of the trustee may not be taken into consideration when borrowing funds in individual name so borrowing capacity may actually be enhanced?

 

Trust Strategies to Increase Borrowing Capacity Trust Strategies to Increase Borrowing Capacity

 

Thanks for the link Terry.

On the examples in your link, if a bank asks you to disclose your liabilities, loans or debts, would that include your guarantees?