Real Estate Developers: Estate Planning or Integrated Planning in Real Estate Development
Land Developers and Real Estate Developers have to plan a lot, but how often do they consider estate planning in their business plan?
At Durfee Law Group, estate planning for our clients often includes business and tax planning. These items all together make up what we call integrated planning.
That’s something land developers know about. We recognize there’s a lot to it when it comes to a development project. From feasibility and design to financing and construction, it takes a lot for real estate developers to see a project through. Not to mention the team of professionals they have to put together, which typically includes a land use attorney, surveyors and engineers.
Why throw an estate planning attorney into the mix?
Real Estate Liability Issues
Well, for one thing, it matters how real estate developers own their property. If you as a real estate developer purchase land or real estate in your personal name, you are personally liable if something goes wrong.
If you purchase a property in the name of an LLC, then you separate your personal liability from your professional liability. It’s important to properly structure the LLC in order to receive maximum protection. This may include creating trusts, and additional LLC’s and integrating them into your overall plan. We can help you do that.
Can your business partner expose you to liability?
In a related matter, if your partners (assuming you have them) do not own their property in an LLC, you may possibly be exposed to their liabilities. This can become especially problematic when you have lawyers who are predatory and opportunistic. Developers who have proper planning in place escape the wolves. Those who don’t get devoured. That means they pay out millions of dollars in settlement money. We’ve seen it happen to those who have not properly planned.
What about your heirs? Can what you do affect them?
A challenge your heirs could face without your proper planning is probate. If you have property in your name when you pass away, your heirs will likely have to probate the estate. This means they will have to go to court to get your assets transferred to them. If you personally own multiple properties in multiple states, you have to open probate in each state, which can turn into a time and expense nightmare.
This may also be true for your business if you do not have a succession plan. A succession plan usually determines what will happen to the business when you’re gone or ready to retire. If you do not have a succession plan and you own the business personally when you pass away, it will likely need to go through probate.
What if you didn’t have a plan to develop a site?
Think of integrated planning in this way. What if, as a developer, you decided to just go out and develop a site without a plan. A sort of “we’ll figure it out as we go” mindset. You hired subcontractors and told them to just get to work with no blueprints or directions. What would happen?
It’s possible that everything would go smoothly in a perfect world. However, the more likely scenario is that you would have framed houses without foundations and insulation but no wiring. The bigger the project the bigger the mess without proper planning. Wouldn’t you agree?
The same is true when it comes to integrated planning. Without a plan linked together with your estate, business and tax considerations, you’re at greater risk of something going wrong. Risk management would be out the window.
There was once a 10,000 square foot house selling for dirt cheap. Why? It had started out as an 1,100 square foot house. The owners added each subsequent part piecemeal without a plan. The result? In order to get to the back part of the house, the “great room”, you had to walk through a few bedroom closets.
If that’s not enough, in the center of the great room, which, admittedly was a nice room, there was an iron spiral staircase. Anyone who has been to this house knows where this leads. “What’s that room at the top of the stairs,” you ask. “That’s the boys room,” comes the reply. As you climb the iron staircase, a toilet becomes visible in the middle of the room at the top of the stairs. No enclosure. Just a toilet in the middle of the room. It’s important to plan.
If you’re a real estate developer and you have questions about whether you are at risk, we would be glad to speak with you. Our initial consultation is free. Please give us a call at 480.324.8000. We look forward to meeting with you.