Property ownership in commercial real estate (CRE) can feel complex. Here we try make it simpler.
Baby steps – residential
Let’s start off with residential property – familiar and accessible to everyone. In residential property, generally, the owner of the property is a person (human). In this instance, the legal owner and the effective owner is the same. If that person owns many properties, that person generally owns them directly, and is the legal owner of those many properties.
That person may introduce a property manager to manage the properties and collect the rent from the tenants on their behalf.
Enter commercial real estate (CRE). To avoid confusion, let’s deal, initially with the concept of property management vs ownership.
Property ownership vs property management
A tenant will generally always engage with a property manager. A property manager may be controlled by the same entity as the property owner, or property management may be outsourced by the owner to a third party.
- Property owner A used to manage its properties inhouse. This meant sending the tenants their bills, working out the tenant’s share of expenses, dealing with leasing enquiries, resolving property maintenance issues, reconciling payments to invoices etc.
- Property manager B approached A and offered to manage A’s properties
- A approved, and now B manages the properties
- Previously A’s tenants used to deal with A. Now they deal with B
- B sends management reports to A every month, and A only has to get involved on matters requiring “head work”, as opposed to the previous “hands work” of owning a property
With property management addressed, now we move on to the complexity of property ownership for CRE.
Property ownership for CRE
Property legal owner
The legal entity reflected on the title deed as the direct owner can be termed the legal owner. (Depending on the country’s legislation, this legal entity may be a trust, a company or some other juristic entity with a legal personality)
The entity that exerts control over that property legal owner entity above may be termed the effective owner or “holding company”. For a tenant-biased definition of holding company, please see here
Property ownership for CRE – specifics
This interposing of a legal entity between the effective owner or holding company and the owned property itself may be due to taxation efficiencies, operations reasons, shareholder structures or other reasons.
This creates a hierarchy – where you have an effective owner at the highest-possible layer, and the legal entities that own the properties at the lowest layer. One owner may have 100% control of many legal entities. In turn, each of these legal entities may directly own one or many properties.
Property holding company Holding company Iron Castle controls five legal entities. Four of the five legal entities own properties. Black Ginger 50 and Red Rocket 100 each own one property. Green Turmeric 20 owns five properties. While Blue Basil 5 owns 20 properties.
Iron Castle thus owns a portfolio of 27 properties. (While they are named above, the legal entities that these 27 properties are housed in fade into the background)
In certain instances, a property fund may group their owned portfolio by their own custom groupings. These groupings may follow the legal entities, or not. Leaning on the example above, Iron Castle may group their fund into four categories based on property attributes – for example
- Office development,
- Office passive,
- Retail coastal and
- Retail inland.
Further, ownership of properties may be syndicated. For example, Iron Castle may choose to purchase a property together with another property fund, Boggy Moat, to buy Property A, using a newly created legal entity Yellow Nettle 55 – which they both own 50%.
According to the title deed, Property A will be owned 100% by its legal owner Yellow Nettle.
Under the bonnet, the property is actually owned 50% by property fund Iron Castle, and 50% by Boggy Moat.
Finally, Iron Castle and Boggy Moat may have elected to establish their own legal entities to each own 50% shares of the property. For example, Iron Castle may either directly, or through one of its existing legal entities, say Black Ginger 50, purchase 50% of the property. Similarly, Boggy Moat could do the same with its own legal entity Bog Troll 1000.
Effect: in the deeds office, the property will be owned 50% by Black Ginger 50 (representing Iron Castle), and 50% owned by Bog Troll 1000 (representing Boggy Moat)