Structuring Ownership of Commercial Property: Why the Entity Holding Title Makes a Difference

By Hank FasthoffJuly 5, 2026

Holding commercial real estate in your personal name or in a general-purpose operating company exposes every other asset you own to liabilities arising from the property. A slip-and-fall on the parking lot, a construction defect, an environmental claim, or a defaulted loan can reach your personal accounts, your other businesses, and your other properties if you haven't isolated the real estate in a separate entity. A single-asset LLC holding one property ensures that a liability arising from that property can be satisfied only from the LLC's assets, not from your personal assets or your other investments.

Entity structure also determines how lenders evaluate your borrowing capacity, how partners share profits and losses, how decisions are made about the property, and how tax consequences flow to the owners. Getting the structure right at acquisition saves money and prevents disputes. Getting it wrong creates liability exposure, financing complications, and partnership disputes that compound as the property's value increases.

Single-Asset LLCs Are the Standard

Most commercial real estate is held in a single-asset LLC, meaning one LLC for one property. A developer who owns an office building, a retail center, and a warehouse holds each in its own LLC rather than holding all three in one entity. If a lawsuit against the office building produces a judgment that exceeds the building's insurance coverage, only the office building LLC's assets are at risk. The retail center and warehouse, held in separate LLCs, are protected.

Single-asset structuring also simplifies transactions. When you sell a property, you can sell the LLC that holds it (an entity sale) rather than the property itself (an asset sale). Entity sales can be faster, may avoid reassessment of property taxes in some jurisdictions, and can simplify the transfer of leases, permits, and contracts that run with the property. When you refinance, the lender underwrites the single-asset LLC and the property it holds, without needing to evaluate unrelated business activities.

For Texas LLCs, formation costs $300 (certificate of formation filing fee with the Secretary of State), and the entity requires a registered agent and annual franchise tax reporting. Maintaining a separate LLC for each property adds administrative overhead, but the liability protection justifies the cost for any property with meaningful value or liability exposure.

Why Lenders Require Special Purpose Entities

Most commercial real estate lenders, and virtually all CMBS (commercial mortgage-backed securities) lenders, require the borrowing entity to be structured as a special purpose entity (SPE). An SPE is a single-asset LLC or limited partnership formed for the sole purpose of owning and operating the financed property. Lenders require SPEs because they isolate the collateral from the borrower's other assets, liabilities, and business risks, and they reduce the risk that a bankruptcy filing by the borrower or an affiliated entity will delay or prevent foreclosure.

SPE requirements go beyond single-asset ownership. Lenders impose a set of structural restrictions and operating covenants, collectively called separateness covenants, that ensure the SPE functions as an entity that's separate in fact from its parent and affiliates. Violating separateness covenants typically triggers recourse under a non-recourse carve-out guaranty, meaning the violation converts a non-recourse loan into a personal obligation of the guarantor.

Separateness Covenants

Separateness covenants are included in both the loan documents and the SPE's operating agreement (or other organizational documents). Common requirements include maintaining separate books, records, financial statements, and bank accounts from all other entities. Not commingling funds or assets with any affiliated entity. Not guaranteeing the obligations of any other entity. Not pledging the SPE's assets as collateral for any other entity's debts. Maintaining a separate taxpayer identification number. Holding itself out to the public as a separate legal entity (separate stationery, invoices, and signage). Not filing consolidated tax returns with any other entity (except where required by law). Paying its own expenses from its own funds. Not incurring any indebtedness other than the mortgage loan and limited unsecured trade payables.

For CMBS loans and many balance-sheet loans above a certain threshold, the lender also requires bankruptcy remoteness provisions. Bankruptcy remoteness means the SPE can't file a voluntary bankruptcy petition without the approval of an independent director or independent manager who has no affiliation with the borrower, the guarantor, or their affiliates. For larger loans (typically $50 million and above), lenders may require two independent directors. For smaller loans (below $15 million), some lenders waive the independent director requirement.

A "springing member" provision protects against dissolution. If the last remaining member of the SPE ceases to be a member (through death, withdrawal, or dissolution of the member entity), the springing member automatically becomes a member to preserve the LLC's existence and prevent an involuntary dissolution that would complicate the lender's collateral position.

Operating Agreement Provisions for Real Estate

Beyond the SPE covenants that lenders require, the operating agreement for a real estate LLC should address several provisions specific to property ownership and investment.

Capital contributions and capital calls define how much each member invests initially and whether the manager can require additional capital contributions for property improvements, unexpected repairs, operating shortfalls, or debt service shortfalls. Capital call provisions should specify the amount and timing of each call, the consequences of a member's failure to fund (typically dilution of the non-contributing member's interest), and any limits on the manager's authority to issue calls without member approval.

Distribution provisions (sometimes called a "waterfall") define how cash flow from the property is distributed to members. A common waterfall structure in commercial real estate prioritizes distributions in the following order. First, a preferred return to investors (typically 6 to 10 percent annually on contributed capital). Second, return of capital contributions. Third, a promote (carried interest) to the sponsor or managing member as a performance incentive. Fourth, remaining profits split between investors and sponsor according to agreed percentages. Each tier must be satisfied before distributions flow to the next, and the operating agreement should define how the waterfall resets (if at all) after a capital event like a refinancing or sale.

Major decision provisions identify actions that require unanimous or supermajority member approval rather than manager discretion. For real estate LLCs, major decisions typically include selling or refinancing the property, incurring debt above a stated threshold, entering into leases above a stated term or value, approving annual operating and capital budgets, making capital calls, admitting new members, and filing for bankruptcy. These provisions protect passive investors from unilateral actions by the managing member.

Transfer restrictions control whether and how members can sell, assign, or pledge their interests. Lenders typically restrict transfers without lender consent, and the operating agreement should include its own transfer restrictions (right of first refusal, prohibited transfers to competitors, restrictions on transfers that would cause adverse tax consequences).

Recourse Versus Non-Recourse and the Guarantor

Commercial real estate loans are structured as either recourse (the borrower and guarantor are personally liable for the full loan amount) or non-recourse (the lender's remedy is limited to the collateral, and the borrower has no personal liability beyond the property's value).

Most institutional commercial real estate loans are non-recourse, but they include non-recourse carve-out guaranties (sometimes called "bad-boy" guaranties) that convert the loan to full recourse if the borrower or guarantor engages in specified prohibited acts. Common carve-out triggers include voluntary bankruptcy, fraud, misapplication of rents or insurance proceeds, violations of SPE covenants, unauthorized transfers, and environmental liability. The guarantor is typically the individual or entity that controls the SPE borrower.

Understanding which acts trigger recourse is essential before signing the guaranty. A guarantor who inadvertently commingles the SPE's funds with a related entity's funds, or who files consolidated tax returns without realizing it violates the separateness covenants, can convert a non-recourse loan into a personal obligation worth millions of dollars.

Series LLCs for Multi-Property Portfolios

Instead of forming a separate LLC for each property, Texas owners can use a series LLC to hold multiple properties in separate series within a single master LLC. Each series maintains its own assets, liabilities, and bank accounts, and the liabilities of one series can't be enforced against any other series or the master entity. A separate article in this series covers series LLCs in detail, including the three conditions required for the liability shield under Texas Business Organizations Code § 101.602.

Series LLCs reduce formation costs ($300 for one filing rather than $300 per property) and generate one franchise tax report instead of multiple reports. But some lenders won't accept a series as a borrower because it isn't a separate legal entity, and not every state recognizes the series structure's internal liability barriers. For financed properties, a standalone single-asset LLC is typically required by the lender.

Entity Structure and 1031 Exchanges

Entity structure affects your ability to complete a 1031 exchange. Section 1031 requires the same taxpayer to sell the relinquished property and acquire the replacement property. If you hold a property in an LLC and sell the LLC interests (an entity sale), you haven't sold real property, and the transaction doesn't qualify for Section 1031 treatment. To preserve 1031 eligibility, the LLC must sell the property itself (an asset sale), and the exchange proceeds must flow through a qualified intermediary.

Multi-member LLCs that want to accommodate members with different exit strategies (some wanting to exchange, others wanting to cash out) can distribute the property to the members as tenants in common before the sale, so each member can independently decide whether to exchange or recognize gain. This "drop and swap" strategy requires careful tax planning and should be implemented well before the sale to avoid recharacterization.

Practical Recommendations

Hold each commercial property in its own single-asset LLC. Formation costs $300 in Texas and takes a few days. Liability isolation across your portfolio is worth the administrative cost.

If a lender requires SPE structuring, build the separateness covenants into the operating agreement from the start rather than amending after the loan is underwritten. Amending an operating agreement to add SPE covenants after the lender identifies deficiencies delays closing and creates unnecessary friction.

Include capital call, distribution waterfall, major decision, and transfer restriction provisions in every multi-member real estate LLC's operating agreement. These provisions are where partnership disputes originate, and they're cheapest to resolve at the drafting stage.

Understand your carve-out guaranty before you sign it. Know which acts trigger full recourse, and build compliance with those restrictions into the SPE's operating procedures.

Coordinate entity structure with your 1031 exchange strategy. If you anticipate exchanging the property, structure the ownership and the sale to preserve the same-taxpayer requirement under Section 1031.