A divorce can force business owners to answer a question they may never have expected to face. What happens to the property on which the business depends? Commercial real estate can be particularly difficult to address because its value is often intertwined with an operating business, rental income, financing and long-term investment plans. Dividing that property without disrupting the business or damaging its value requires careful planning.
The first question is usually whether the property is marital or separate. Under Ohio law, property acquired during a marriage is generally considered marital property, while property acquired before marriage may qualify as separate property. The analysis, however, does not necessarily end there. Appreciation in separate property that results from the labor, money or contributions of either spouse during the marriage may itself be marital property. Passive appreciation may remain separate because it is not the result of either spouse’s efforts or marital contributions, but instead occurs due to external market forces such as changes in real estate values, inflation, or neighborhood development.
Consider a spouse who owned a commercial building before getting married. If the building increased in value because the surrounding neighborhood became more desirable, that increase may be treated differently from appreciation attributable to renovations, management efforts or marital funds used to reduce debt. Determining how much of the property’s current value is marital may require tracing financial records and obtaining an expert valuation.
Business owners should also understand that the name on the deed does not necessarily decide the issue. Under Ohio law, the way property is titled does not, by itself, determine whether it is marital or separate property. Holding commercial property through a limited liability company or another business entity also does not automatically place its value beyond the reach of a divorce proceeding. The ownership interest, source of the funds used to acquire the property and activity involving the property during the marriage may all be relevant.
Valuation creates another challenge. Commercial property cannot be divided as easily as a bank account. Its value may depend on rental income, leases, vacancy rates, debt, repairs and market conditions. A property may have significant value on paper while producing relatively little available cash.
The situation becomes even more complicated when the property is essential to an operating business. Selling a building simply to divide its value could disrupt operations, force a relocation and create tax or transaction costs. Ohio law allows courts dividing marital property to consider factors including liquidity, tax consequences, sale costs and the economic desirability of keeping an asset intact.
For that reason, protecting commercial real estate often requires looking beyond the property itself. A business owner who wants to retain a building may need other assets to compensate a spouse for his or her share of its value. Cash, investments or other property may be used to structure a settlement. Refinancing may also provide the funds necessary for a buyout.
Documentation can be just as important as valuation. Owners should keep records showing when the property was acquired, how the purchase was funded, what debt existed at the time of marriage and how improvements were paid for. Separate property may retain its separate character, but the owner must generally be able to trace it. Incomplete records can make that significantly harder.
Planning before a dispute arises can provide additional protection. Prenuptial agreements may address how commercial real estate, business interests and future appreciation will be treated if a marriage ends. Ohio also permits postnuptial agreements when the applicable legal requirements are satisfied. Business owners with partners should also consider whether operating or partnership agreements contain transfer restrictions, valuation procedures or buyout provisions designed to prevent a divorce from disrupting the entire business.
Commercial real estate does not necessarily have to be sold when a marriage ends. In many cases, preserving the property and the business connected to it may be in everyone’s economic interest. The key is understanding how the property was acquired, how its value developed, how it is financed and how it fits into the larger marital estate.
Commercial property is usually acquired with a long-term plan in mind. Careful documentation, realistic valuation and advance planning can help prevent divorce from turning that investment into a short or long-term financial burden.
This article originally appeared as a column for the Cleveland Jewish News.