Operate Your Investment Property Like a Business – Part 1

A great number of Washington State individuals and families that acquired investment properties over the past several decades have seen an inflation-adjusted increase in value far beyond their initial expectations.  During the same time period the myriad of new case law and regulations impacting the zoning, land use, development, redevelopment, financing and leasing, and brokerage of those properties have put full- and part-time real estate investors in a potentially precarious position.  Given the density of development in Washington State and in particularly King, Pierce and Snohomish Counties, and the litigious nature of our society in general, the potential risks facing investment property owners can dampen those inflation-adjusted returns on investment.  However, there are a number of things an investor can do to increase his or her chances of success and to avoid unnecessary legal risk.  


The fact of the matter is your investment property is a form of business. It shares a number of characteristics of a traditional brick and mortar business and should be run like a business.  In this and the next few postings to my blog I will address what it takes to operate your investment property like a business.  


While we will explore the concept of operating an investment property like a business in context of owning and operating a manufactured home community (MHC), the same principals apply to any investment property, including shopping centers, manufacturing facilities and warehouse properties, apartments, or even tri-plexs or single family homes for that matter.  


Examples of similarity between a MHC and traditional “brick and mortar” business include the means of holding ownership, marketing and promotion, product differentiation, qualifying customers/tenants, sales of goods/rentals of pads or developed pads with homes, accounts receivables, payments of operating expenses and sales related expenses, tax accounting, management, the list goes on and on.  


In advising clients on good business practices to apply to their real estate investment strategy, the first thing we look at is how their property is held.  The most common form of ownership of family investment properties are in the name of the individual or in the name of the estate.  For example, taking title as “Betty Brown as her separate property,” “the Estate of Bob Brown,” “Bobby and Betty Brown, as joint tenants with the right of survivorship,” or the like.  The problem is that with property held in an individual’s or an estate’s name is risk.  That is why savvy commercial property owners have their properties vest into either a limited liability company or S-corp.  


There are three forms of business ownership - sole proprietorship, corporation or, limited liability company.  Most business are held and operated as either a corporation or a limited liability company.  The most prevalent form of commercial real estate ownership is through a limited liability company.  The reason for vesting title to investment real property in a limited liability company, or LLC, is simple.  An LLC offers flexibility of management and distributions, and offers its owners, called “members,” just what the name says – a limitation of liability.  


Before exploring the kinds of liability that the members are limited from incurring, or the flexibility of management and distribution of income, expenses and tax benefits, let’s look at what it takes to register a new limited liability company.  


What is meant by “register a new limited liability company?” Washington State LLCs must be registered with the Washington Secretary of State Corporations to be effective.  A limited liability company may be registered online at https://corps2.sos.wa.gov/LLC/Pages/StartPage.aspx, or the forms may be downloaded and delivered to the Secretary of State Corporations via regular mail.  


In our next installment we will look closer at the registration process and the information you will need to furnish your lawyer, or if you’re a DIYer, the information you will need to furnish the Department of Corporations to initiate the registration process, better known as filing a “Certificate of Formation.”