Real property law in the United States is primarily derived from the common law of the states and has been modified over time by statute. Certain aspects of real estate law are governed by federal law. For example, federal law makes discrimination in real estate transactions on account of race, colour, religion, sex, national origin, familial status or disability illegal. Environmental issues affecting real property are typically governed by federal law. US courts have also shaped real property law through the interpretation of statutes and common law, to address various issues such as eminent domain, zoning and landlord-tenant disputes.

While typically volatile, the US real estate market is currently affected by various macroeconomic factors.

The Residual Effects of Inflation

While the rate of inflation in the United States has decreased to about 2.4% as of January 2026 – its lowest level since May 2025 – the inflation-affected costs of goods, labour and real estate prices remain high. As a result, rental prices remain high as well. The increased cost of labour and materials has also impacted the costs of owning and operating commercial real estate. Further, these factors, along with the cost of financing generally, have affected the ability of commercial tenants to operate profitably while paying the rents and other expenses that landlords require. The combination of these negative factors has had a general impact on the commercial real estate market, which, ironically, has somewhat countered the general upward inflationary pressure on the economy.

Moderately High Interest Rates

The federal funds rate currently sits at a target range of 3.5% to 3.75%, following three consecutive quarter-point cuts in 2025. Mortgage rates have declined meaningfully from their recent highs, with the average 30-year fixed-rate mortgage at approximately 6% as of February 2026 – down from 6.85% at the same time last year. While this has led to a notable improvement in affordability, rates remain historically elevated relative to the pre-COVID-19 pandemic era.

Geopolitical Issues

Key construction materials remain subject to significant Section 232 tariff duties, including a 50% tariff on steel and aluminium, a 50% tariff on copper, and a combined duty of approximately 45% on Canadian softwood lumber – which accounts for roughly 71% of US lumber imports. While the impact on residential construction costs has been more moderate than initially feared, the industry continues to face ongoing cost pressures in 2026. The tariff landscape shifted on 20 February 2026, when the Supreme Court ruled 6-3 that President Trump’s IEEPA-based tariffs were unconstitutional – though Section 232 tariffs on key construction materials remain fully in force. The Trump administration responded swiftly by imposing a new 15% temporary global import surcharge under Section 122 of the Trade Act of 1974, effective 24 February 2026, adding further uncertainty to the trade landscape.

Low Residential Inventory

While national housing inventory grew approximately 10% year-over-year through early 2026, the market remains below pre-pandemic levels by roughly 18%. The picture is highly regional: nine states – including Texas, Florida, Arizona and Colorado – have surpassed pre-pandemic inventory levels, while much of the Northeast and Midwest remains comparatively tight.

Low Vacancies in Multi-Unit (Rental) Properties

The rental market has undergone a notable shift. The national multifamily vacancy rate reached 7.3% at the start of 2026 – a record high going back to at least 2017 – driven by a surge in new apartment deliveries coupled with softer demand. Nationally, rents have declined for the sixth consecutive month in January 2026. However, the picture varies significantly by region: urban vacancy rates (7.6%) are rising faster than suburban rates (6.9%), and “Sun Belt” cities such as Austin and Atlanta continue to face significant oversupply, while many Northeast and Midwest markets remain comparatively tight.

Office Space

Office vacancies remain elevated, but are showing meaningful signs of recovery. The national office vacancy rate ended 2025 at approximately 18.4%, down 140 basis points year-over-year, with 17 of the top 25 US markets recording vacancy decreases over the course of 2025. The market remains bifurcated: demand is concentrating in high-quality, amenity-rich space, while older and less well-located buildings continue to struggle. Hybrid work remains a structural feature of the market, though net absorption turned positive in the second half of 2025, marking the strongest back-to-back quarterly performance since the pandemic.

Retail Space

Retail fundamentals remain strong so far in 2026, with robust leasing activity, rising rents and scarce new supply keeping quality space at a premium, despite ongoing margin pressures for many tenants. The sector continues to outperform its office counterpart, though performance remains heavily location-dependent. Online purchasing continues to be a competitive factor, particularly for commodity retail, while experiential and necessity-based retail remains resilient.

Blockchain Developments

Blockchain offers transparency for real estate transactions, but adoption thus far has mainly been for retail trading. Major firms such as BlackRock offer Bitcoin exchange-traded funds (ETFs) for easy trading access – though notably Vanguard does not, having declined to offer such products. Bitcoin reached an all-time high of over USD126,000 in October 2025, before pulling back significantly. By early 2026, Bitcoin had declined roughly 50% from that peak, with prices trading in the mid-to-upper USD60,000s amidst continued volatility (although historically Bitcoin has experienced numerous deep pullbacks of this nature).

National Association of Realtors Settlement

The National Association of Realtors (NAR) settled a landmark antitrust lawsuit in March 2024, which accused real estate brokers of artificially inflating sales commissions. As part of the settlement, sellers are no longer automatically responsible for paying commissions to both their own agent and the buyer’s agent, and a seller’s agent can no longer specify on a Multiple Listing Service (MLS) how much the buyer’s agent will be paid. Instead, commissions to a buyer’s agent are negotiated separately, and buyers must sign a written agreement with their agent before touring a home. These changes took effect on 17 August 2024 and are now fully embedded in industry practice. Somewhat counterintuitively, commission rates have not fallen as hoped – they have actually risen slightly, averaging 2.43% in 2025, as sellers in a slow market continue to offer buyer agent fees to attract purchasers. The settlement has also emboldened state legislatures to enact their own broker fee laws, with Massachusetts already having done so, and other jurisdictions expected to follow.

Institutional Investors in Residential Real Estate

Institutional investors in the United States own hundreds of thousands of single and two-family homes – a figure that some estimates suggest could grow to 40% of the single-family rental market by 2030. 

In response, Governor Hochul signed Assembly Bill A3009C into law on 9 May 2025, which imposes a 90-day waiting period on the purchase of one- and two-family residences for certain institutional investors, restricts the use of certain tax deductions for such investors, and requires the Secretary of State to provide public notice when creating cease-and-desist zones. The 90-day waiting period and cease-and-desist zone provisions took effect on 1 July 2025, while the prohibition on tax deductions took effect immediately upon signing. The law applies to entities that own ten or more single or two-family residences, act as fiduciaries for pooled investor funds, and have at least USD30 million in net value or assets under management. 

New York is not alone – a revised federal “Stop Predatory Investing Act” was reintroduced in the US Senate in March 2025, which would deny interest and depreciation deductions to taxpayers owning 50 or more single-family properties, and other states are considering similar legislation.

Property rights come in various forms.

• Fee simple ownership – full ownership rights over the property, including selling, leasing, devising or mortgaging the property.
• Leasehold ownership – exclusive rights to possess the property for a set term. Leaseholds are governed by a combination of contract law and state-formulated landlord-tenant statutes, which typically include protections such as rules governing eviction procedures and security deposits. In many states, a leasehold interest can also be assigned or subleased unless the lease prohibits or restricts it.
• Occupancy interest (licence) – permission to use the property for a specific purpose. Unlike a lease, a licence generally does not create a property interest and can often be revoked by the property owner.
• Easement – a non-possessory interest allowing another to use the property for a specific purpose, which typically “runs with the land” and can be transferred.

States have enacted real property laws that set forth the requirements necessary to transfer title to real property. Typically, a transfer of ownership is completed upon the delivery of the deed by the seller and acceptance of the deed by the buyer. The recording of the deed is essential to protect property rights of the transferee, as unrecorded deeds may be deemed void against subsequent bona fide buyers. Local governments set the recording rules and procedures.

Many states and local governments have enacted laws that impose a transfer tax (known as a deed, stamp or recording tax) on the sale of real estate. Some jurisdictions impose additional taxes, such as “mansion taxes”, which are based on the selling price of residential properties.   

Title to real estate may also be transferred pursuant to the common law principle of adverse possession, in which a trespasser may claim title to another’s land, or portion thereof, if certain conditions are satisfied. The conditions, typically set by state statutory law, generally require that a trespasser occupy the property in an “open and notorious” manner for a defined period of time. Additionally, many states have property condition disclosure laws in connection with the sale of residential properties. 

While the general transfer rules apply across property types, certain categories are subject to additional requirements. Federal law requires lead-based paint disclosures for pre-1978 residential homes, and many states impose additional disclosure requirements for residential sales. Buyers of industrial or commercial properties should also be aware of potential liability for pre-existing environmental contamination under federal and state law.

A lawful transfer of title to real estate is typically effected by first entering into a written contract of sale. Most US states have a so-called “statute of frauds”, which requires that agreements pertaining to the sale of real property be in writing and signed by the parties.

It is common practice for buyers of real property to obtain title insurance which insures the buyer against loss, in the event that the seller did not have marketable title at the time of the transfer. It also protects the buyer from incurring expenses in connection with any lien that may have been recorded prior to the buyer recording the transferred deed.

A contract for the purchase of commercial real estate typically provides for a due diligence period in which the prospective buyer may engage in the following activities:

• inspection of the physical property, including an environmental inspection;
• review of financial information pertaining to both income generated by the property and the costs and expenses of operating the property;
• review of tenant leases and other rights of occupancy, such as a licence or easement;
• obtaining a title search and survey;
• reviewing local zoning and land-use regulations; and
• judgment and lien searches.

Sellers often require prospective buyers to sign non-disclosure or confidentiality agreements before providing the buyer with documents and financial information during the due diligence period.   

Representations and Warranties

Commercial properties are frequently sold in an “as is” condition and without representations or warranties regarding the state of title or the condition of the property. During a due diligence period, typically provided as a purchase agreement applicable to real property, a prospective buyer usually purchases a title report to ensure that the seller has marketable title and to learn of any encumbrances or defects affecting the property. Prospective buyers may also retain professionals, such as engineers, architects and environmental analysts, to assess the property’s condition. 

In commercial property transactions, a seller will, however, typically make the following contractual representations: 

• that it has the lawful authority to enter into the transaction;
• that the “rent roll” and lease schedule (usually included as exhibits to the purchase contract) are true, complete and accurate, and that there are no obligations between the owner and tenant except as set forth in the leases or any amendments or modifications thereto;
• whether there is any default, dispute, threatened claim or litigation affecting the property or the obligations of the seller; and
• the status and extent of any financing affecting the property.

When the sale of real estate involves transferring leases, the buyer generally requires the seller to obtain “estoppel certificates” from the tenants, which serve to confirm the terms and current status of the leases and bar the tenants from asserting any claims that contradict what is stated in such certificates. 

Buyer’s Remedies Against Seller for Misrepresentations

In commercial real estate, if a buyer discovers a material misrepresentation before the closing, the buyer can terminate the contract and seek damages. If the buyer discovers a material misrepresentation after the closing, and if such representation survives (such survival rights are often provided for under the contract), the buyer can seek damages, equitable relief, or, in limited cases, rescission of the transaction. Although representations and warranties made by the seller may not survive closing, the parties can negotiate for some to last for a limited time period, frequently up to one year.

Representation and Warranty Insurance

The purchase of representation and warranty insurance is uncommon, except in large real estate investment trust (REIT) share sale transactions and in mergers and acquisitions (M&A), where the damages that may result from a misrepresentation justify the premium costs, which are typically substantial.

Land use and tax law are two of the most important areas of law for an investor to consider when purchasing real estate. Investors need to have a comprehensive understanding of applicable regulations affecting the use and development of the property they are acquiring. Additionally, investors should be aware of any pending or potential changes to the applicable zoning codes, such as whether an area may be “up-zoned”, so that future developments may be larger than what is currently permitted. 

It is also important to understand which federal and state tax laws apply to the investment property, how they are calculated, and whether there are any “caps” on incremental increases, as tax expenditures directly affect investment returns. Investors should also consider whether the property benefited from any deferred taxes based on a land-use exemption, and whether the property, if acquired, would continue to be eligible for such exemption. 

Buyers of commercial real estate can be held liable to remediate contamination that arose prior to acquiring the property, though they can take measures to avoid such liability. 

Buyers should hire professionals to conduct a Phase I Environmental Site Assessment during the due diligence period, in which current and historical uses of the property are analysed to assess whether or not such uses may have contaminated the soil or groundwater beneath the property, as may occur with gas or service stations.

It is often recommended that a Phase II Environmental Site Assessment be conducted, in which soil and water samples are taken to be analysed for contaminants. If contamination is discovered, the property owner is responsible for the remediation costs pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), which is the main federal statute that regulates remediation of hazardous substances that pose a threat to the environment and to public health. Conducting a Phase I Environmental Site Assessment prior to closing can be done to comply with the requirements of CERCLA’s safe havens for bona fide prospective purchasers and innocent landowners, in which liability for remediation costs can be reduced or eliminated. 

In addition to CERCLA, many states have enacted their own environmental cleanup statutes that may impose additional or stricter liability on property owners, and buyers should ensure that they understand the applicable state law requirements in the jurisdiction where the property is located.

A prospective buyer can ascertain the permitted uses of a parcel of real estate by examining the property’s certificate of occupancy (or comparable instrument) and by researching the applicable zoning code and land-use regulations. 

It is common for developers to enter into specific development agreements with relevant public authorities in order to facilitate a project. For example, a developer may agree to contribute to a fund to help pay for investments in public infrastructure. These agreements can help developers obtain the necessary “buy-in” from elected officials and community groups needed to proceed with a project.

Federal, state and local governments have the right to exercise the power of “eminent domain”, which permits the government to “take” private property, provided that the property is used for a public purpose or to benefit the public. The Fifth Amendment to the United States Constitution requires the government to provide “just compensation” to private property owners for the “taking” of their land. Jurisdictions differ as to what qualifies as a public use.

Most states, counties and municipalities tax real estate transfers based on a percentage of the purchase price.

Sellers typically pay the transfer taxes, but the parties may agree otherwise. Negotiations with respect to this issue are common. Certain types of transfers, such as transfers made pursuant to bankruptcy proceedings, may be tax-exempt. Some states also impose a transfer tax for indirect transfers, such as when there is a transfer of a controlling interest in a company that owns real property, and because of this the parties themselves may agree on how the tax liability will be allocated among the parties.

Foreign investors can generally acquire real estate without restrictions; the USA PATRIOT Act prohibits US individuals and businesses from entering into real estate transactions with certain individuals, entities and foreign governments. The US Treasury Department’s Office of Foreign Assets Control maintains a list of such restricted parties. Several other federal laws and regulations apply to foreign investments in real estate, including but not limited to:

• the Foreign Investment in Real Property Tax Act (which imposes withholding and tax reporting obligations on dispositions of US real property by foreign sellers);
• the Agriculture Foreign Investment Disclosure Act of 1978 (which requires foreign persons to report acquisitions of US agricultural land to the US Department of Agriculture); and
• the Tax Equity and Fiscal Responsibility Act of 1982 (which tightened withholding and reporting requirements on payments to foreign persons, including income from US real property).

These laws generally impose reporting or disclosure requirements in which foreign investors report the real estate transaction to the appropriate federal agency by submitting information returns. Additionally, some states prohibit foreign investors from purchasing land, and others limit the amount of certain types of land that can be acquired. 

The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) expanded the reach of the Committee on Foreign Investment in the United States (CFIUS), which is vested with the authority to prohibit foreign investments that it determines would adversely affect national security. CFIUS now has the authority to review the purchase or lease of controlling and non-controlling interests in real property acquired by foreign persons located in close proximity to sensitive government facilities, such as military bases and airports. If the parties to a real estate transaction believe that the transaction falls within CFIUS’s purview, they should, but are not required to, file notice with CFIUS to seek its approval. 

The commercial real estate private lending market is substantial, with about USD4.75 trillion in outstanding commercial and multi-family mortgage debt. The sources of capital are diverse and encompass traditional lenders, such as large financial institutions, as well as private debt funds, REITs and other specialised real estate lenders.

Private debt funds, which provide capital and loans to real estate investors, are funded by capital raised from institutional investors such as pension funds, endowments, family offices and sovereign wealth funds. Interest received from the debt is then distributed to the fund’s investors. Private debt funds grew in prominence following the 2008 financial crisis, during which traditional lenders retrenched, and more stringent rules were created, to apply to borrowers.

REITs are publicly traded companies set up to own and operate large commercial properties. REITs are funded through the sale of securities to investors. Equity REITs own and operate properties directly, while mortgage REITs function as lenders, by providing financing secured by real estate. Both types of REITs raise capital through the sale of securities to investors. REITs may be publicly traded or privately held.

For larger portfolio or corporate acquisitions, other structures may be used, including commercial mortgage-backed securities, syndicated loans, and mezzanine financing or preferred equity to bridge gaps in the capital structure. Where the target acquisition is a company holding real estate, rather than the real estate directly, leveraged buyout structures more typical of M&A transactions may also be employed.

Lenders typically require commercial property owners and developers to grant a mortgage or deed of trust over the property being acquired or developed as collateral on the loan, and will commonly take an assignment of leases or rental income, along with other assets. The borrower may also be required to provide a personal guarantee, meaning that the borrower, or the borrower’s principal(s) or a third party, will be personally responsible for the debt, if the collateral is insufficient to cover it.

Foreign lending activity is generally not restricted in the United States; however, foreign lenders may be required to obtain licensure in the states where the lending activity occurs. Depending on the circumstances, national security clearance may also be required.

The recording of a mortgage usually requires the payment of mortgage fees and taxes, which vary from state to state. For example, in New York City, the mortgage recording tax requires purchasers to pay 1.8% on mortgage amounts under USD500,000 and 1.925% on mortgage amounts exceeding USD500,000.

In order for a security interest to attach to collateral, the debtor entity must enter into a security agreement with the lender and provide proof that it has clear title to the collateral. The mortgage or deed of trust must then be publicly registered where the land is located in order for the lender to establish the security interest in the real property.

When a borrower is in default of a loan secured by a mortgage on commercial property, the lender may pursue a “foreclosure” of the mortgage. The foreclosure process varies from state to state. In New York, for example, all foreclosures are judicial foreclosures (requiring a lawsuit to be commenced).

In many states, liens follow the “first in time, first in right” rule, meaning that whichever lien is recorded first will have priority when the funds from a foreclosure are paid. However, there are exceptions – for example, judgment liens typically have a lower priority than mortgage liens. Also, state law may prioritise certain types of liens, such as tax liens. Parties may also agree that certain liens may be or become “subordinate” to certain other liens (see 3.7 Subordinating Existing Debt to Newly Created Debt). Foreclosure actions may take about 15 months to be concluded.

There is an active market in the USA for non-performing notes (NPNs), although the size of the market varies and is spread among institutional buyers, hedge funds, private equity firms and institutional investors. NPNs are typically acquired at steep discounts, to be renegotiated, foreclosed upon or resold.

When a new creditor wants to become the senior lender, the existing lender must consent to “subordinate” its superior claim, which is achieved through a subordination agreement defining the creditors’ priority. While subordination may seem disadvantageous, it can be advantageous, such as when a lender agrees to subordinate its mortgage to a construction loan to improve the property’s marketability. These arrangements are frequently negotiated and agreed upon in advance. Some buyers consolidate and extend existing and new debt (“consolidation and extension”) over the property.

Generally, a lender cannot be so liable, provided that it does not participate in the management of the property or participate in, create or make the environmental issue worse, and that it obtains an exemption under CERCLA.       

A borrower’s insolvency does not typically affect the validity of a mortgage granted to secure an obligation (although in a sophisticated commercial development transaction a lender could require a borrower to maintain solvency for development to continue). However, the filing of a bankruptcy petition has the immediate effect of staying the foreclosure process. A lender can seek relief from the automatic stay to enforce its security interest, if it shows “cause”, such as the debtor having no equity or uninsured property. If granted, the lender can proceed outside the bankruptcy.

States and municipalities typically leverage taxes on newly recorded mortgages. See 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security for an example of the recording taxes imposed by New York State and the City of New York. Mezzanine loans, unlike traditional mortgages, are secured by a pledge of equity interests in the entity owning the real estate rather than by a direct lien on the property. As a result, they are generally not subject to traditional mortgage recording taxes in most jurisdictions.

First introduced in January 2020 and reintroduced in every legislative session since – most recently in early 2025 as S318 in the Senate and A407 in the Assembly – the Mezzanine Debt Bill would impose a mortgage recording tax-equivalent on the creation of mezzanine debt and preferred equity investments secured by New York real estate. If passed, the bill would require a secured party to pay the applicable tax prior to having the right to enforce its security interest. The bill has consistently failed to advance out of committee due to significant industry opposition, and remains pending as of the date of this publication.

Local governments typically enact zoning codes to regulate the use and bulk of individual parcels of real estate as well as building construction. For example, “Bulk Provisions” set height, setback requirements and lot coverage limitations for buildings on individual parcels of land. Many states and local governments use model building codes from the International Code Council to establish minimum construction-related standards and procedures. Local jurisdictions may adopt regulations that are stricter than model building codes to protect against known environmental hazards, such as earthquakes or hurricanes, or to meet stricter energy efficiency goals. Local governments frequently also designate landmarks and historic districts to regulate building design and appearance.

Some localities have formal processes in which the public’s input is included in the decision-making process with respect to proposed zoning changes, disposition of government-owned real estate, and site selection for capital projects (sanitation garages, fire houses, libraries, etc). Localities sometimes enact development plans to achieve specific purposes, such as enhancing public access to parkland or limiting the proximity of certain types of businesses (such as bars) to schools or religious institutions. Additionally, jurisdictions typically have independent review boards or appeals boards that have authority to grant a property owner a variance or special permit to either develop or use a parcel of land in a manner that does not conform to local land-use regulations         

It is common practice for developers to enter into agreements with local governmental authorities or agencies to facilitate the approval of their proposed development projects. Agreements may provide that a developer will make improvements to public transit infrastructure, create privately owned public spaces or construct public-housing units in exchange for the right to “overbuild” the property. If a development complies with zoning codes, it can proceed “as-of-right”; if not, a developer may apply for variances, special permits or seek modifications to the zoning code in order to proceed, which typically involves a public hearing.

One method utilised by developers to build larger projects than the zoning allows is to acquire “air rights” from other properties to increase the allowable building size of their project. Air rights typically exist when the available buildable square footage of a “lot” is not fully utilised by what has been built, with the undeveloped square footage constituting the so-called air rights. These air rights are frequently sold or transferred to the developer. Permits or certificates, including a Certificate of Occupancy (COO), are required to use and occupy a building (see 7.7 Requirements Before Use or Inhabitation). Inspection(s) by the local building department and the resolution of any open issues are required before their issuance. Property owners that open their buildings to the public without obtaining the necessary permits or certificates may be subject to fines and penalties as well as other actions, although they sometimes do so for timing or other economic reasons or exigencies.

Third parties such as neighbouring property owners or community groups can object to real estate developments, often by challenging zoning, land use or environmental compliance. Objections are commonly raised during public hearings, by suing to stop approvals, or by proving “particularised harm”. Common grounds include violation of zoning laws, noise, traffic and environmental issues. Decisions made by local land-use boards and legislative bodies regarding zoning and land use are generally appealable by commencing a judicial action within the appropriate locality. However, jurisdictions typically establish high standards of review on appeal, such as whether a determination was made in an arbitrary or capricious manner or whether it was “fairly debatable” and supported by substantial evidence. 

Real estate investments in the USA may be held in virtually any type of legally recognised business entity. Entity structuring has three main components: compliance, legal and tax.

In the authors’ experience, most real estate owners or investors prefer using either a limited liability company (LLC), a “subchapter S” corporation or a limited partnership as their entity. While these entities offer similar benefits, certain nuances apply. Choosing the type of business entity to be utilised should be explored with knowledgeable professionals such as an attorney and an accountant.

LLCs are popular among real estate investors for their “pass-through” taxation, limited liability, asset protection and flexibility in operations and profit distribution. However, they also offer easier transferability of ownership compared to other entities, and have minimal record-keeping requirements. These benefits enhance their popularity.

S corporations are tax-designated entities under the Internal Revenue Code, suitable for real estate investors aiming to quickly profit from property flips. They also offer limited liability and asset protection, but have limitations compared to LLCs, such as a 100-shareholder limit and a single class of stock. S corporations also require more formal management and record-keeping than LLCs and limited partnerships. 

High-end commercial real estate investments are often structured as limited partnerships, with a general partner (GP) managing the partnership and limited partners (LPs) contributing capital but not participating in management. The GP has unlimited liability and, even though it is frequently an entity, this is an obvious disadvantage. LPs are only liable for their invested capital.

Limited liability limited partnerships (LLLPs) are a newer type of business entity that shields the general partner from personal liability, but are not yet widely used or recognised in all states. With 31 states and some territories allowing LLLPs, there is less legal precedent for LLLP-related litigation, making outcomes currently less predictable.

While other entity types (C corporations or general partnerships) may be used for owning real estate in the USA, they are less commonly utilised than the types of entities discussed above, although C corporations are typically used when the “investor” is a 401(k) retirement fund. 

LLCs are formed by filing a Certificate of Formation (or Articles of Organisation) with the state’s Secretary of State (or similar agency) and paying a fee. They are governed by an Operating Agreement, which is entered into by the entity’s “members” and covers a broad range of issues including economic rights, management and member rights (such as transferring interests or setting forth the rights or obligations of the members in the event of death or disability).

If the LLC has a single member, the member manages the entity. If the LLC has multiple members, the entity may grant one member “day-to-day” control over the business (the Managing Member), or the entity may be “manager managed” where the entity is either managed by a non-member manager or by a board of directors or board of managers, which may delegate day-to-day authority to officers, as with a corporation. 

Corporations, including S corporations, are typically formed by filing a Certificate of Incorporation (or Articles of Incorporation) with a state’s Secretary of State (or similar agency) and paying a filing fee. They are governed by by-laws for directors and shareholders, and often require annual (or more frequent) meetings of the shareholders or directors. Corporations frequently have more than one class of stock, such as voting or non-voting “preferred” shares.

Limited partnerships are formed by filing a Certificate of Limited Partnership with a state’s Secretary of State (or similar agency) and paying a filing fee. Limited partnerships are governed by a limited partnership agreement that outlines each partner’s roles and responsibilities, as well as how they share in the profits and losses of the business, which results in tax ramifications for the partners.

REITs invest in real estate, leasing and collecting rental income. REITS are subject to complex tax rules and regulations, and they may provide significant tax advantages for their investors. A REIT must be formed as an entity that is taxable (federally) as a corporation.

A REIT must be governed by directors or trustees, and its shares must be transferable. Investors receive profits in the form of dividends or as “appreciation”, upon the disposition of assets purchased by the REIT. REITs are real estate investment vehicles commonly utilised throughout the USA, and they can be classified as either public or private, traded or non-traded. Publicly traded REITs, which are regulated by the US Securities and Exchange Commission (SEC), are relatively easy to liquidate. Private REITs, which are not traded on the securities markets, are therefore generally less volatile, but are not as easy to liquidate. Private REITs may sell securities to qualified institutional investors and to sophisticated so-called “accredited” individual investors. Investing in US REITs can be a beneficial investment approach for certain foreign investors, who may benefit from investing in US REITs as they may receive ordinary dividends, capital gains and return-of-capital distributions. In addition, through sophisticated tax planning, they may reduce their US tax liability.

Some states have no minimum capital requirement for business entities, while others may require a small amount, as low as USD1,000. There is no minimum capital requirement specifically for real estate entities. However, lenders and other third parties may impose their own capital requirements. Inadequate capitalisation of the entity could expose its owners to personal liability, by piercing of the “corporate veil”, although litigation is required to achieve such a result.

State laws govern LLCs, corporations and limited partnerships, setting default rules for governance and operations, unless the entity’s owners have provided otherwise in their governing agreements. For example, state laws may require that a certain minimum voting percentage – such as 66% or two thirds of votes – be met for the entity to approve certain matters or transactions.

As stated previously, LLCs provide their members with a great deal of flexibility with respect to how the entity is structured, managed and operated, whereas S corporations (and C corporations) have stricter governance requirements and offer less flexibility. In limited partnerships, the GP(s) provides the governance and management function, while the LPs typically have limited voting and control rights over the entity’s affairs.

In 2024, a new federal law, the Corporate Transparency Act (CTA) was enacted in order to enhance transparency in business ownership and to combat illicit activities such as terrorism financing and money laundering. Under the CTA, business entities were to be required to disclose information to the federal government regarding their beneficial owners. However, the enforcement of the CTA has been delayed several times as a result of court decisions, and on 2 March 2025, FinCEN, a regulatory body of the US Treasury Department, announced that it would suspend enforcement of the CTA against US citizens and domestic business entities. While the US Court of Appeals for the Eleventh Circuit reversed the ruling of the district court and held that the CTA is a constitutional exercise of Congress’s authority under the Commerce Clause in December 2025, FinCEN’s administrative rule which exempts most domestic US entities from filing under the CTA still remains in place.   

Beginning 1 March 2026, FinCEN required real estate professionals to report non-financed residential real estate transfers to legal entities or trusts (as opposed to individuals), in an effort to target potential money-laundering schemes. The reporting person, usually a settlement agent or an attorney, was required to file a “Real Estate Report” which disclosed details regarding the purchasing entity, beneficial owners owning at least 25% of the entity, signers and the seller. However, on 19 March 2026, a federal Texas court ruled that FinCEN exceeded its authority under the federal Bank Secrecy Act, essentially vacating the federal anti-money laundering rule for residential real estate and enjoining its enforcement nationwide. The following day, FinCEN issued updated guidance stating that, in light of the court’s decision, compliance with the Residential Real Estate Reporting Rule is presently suspended, pending further developments including appellate review of the case or additional regulatory guidance. 

Forming and organising a business entity in the USA varies by state, costing several hundred dollars for filing documents and for using a filing agent. Some states such as New York require publication of formation documents, which adds further filing costs. Maintaining an entity involves the filing of annual reports, the payment of additional small filing fees, and franchise taxes, with accounting compliance costs varying based on entity type, income, assets and the entity’s state of operation. Attorneys and accountants typically charge for their services in forming, filing and advising in connection with these matters.

The most common arrangements to occupy and use real estate for a limited time without buying it outright include:

• leases;
• ground leases;
• subleases;
• licence agreements; and
• easements.

A lease is a contract outlining the terms under which the tenant or lessee is permitted to use and occupy the premises, and which provides that the landlord will receive regular payments of rent for a specified period of time (typically, monthly). Commercial leases are commonly used to rent retail space (stores, restaurants, etc) or to occupy an office, warehouse or industrial space.   

A ground lease (or land lease) is an agreement in which a tenant is permitted to develop a parcel of real property during the lease period, after which the land and all improvements are turned over to the property owner. Typically, ground leases involve leasing land for a long period, often between 50 and 99 years, to a tenant who will develop, construct and operate a building on the property during the lease term. Ground leases are typically financed by tenants in a manner similar to how property owners utilise mortgage financing.

A commercial sublease is an agreement between a commercial tenant, which has a lease with the landlord, and a subtenant. In a sublease, the tenant (sublessor) rents out part or all of the leased space to the subtenant (sublessee), on either a short-term or long-term basis (but the term may not exceed the remaining term of the tenant’s lease with the landlord), and the tenant-sublessor remains responsible for fulfilling its obligations under the original lease with the landlord, even if the sublessee defaults. A sublease differs from a lease assignment in that the assignee of the lease “becomes” the tenant, whereby with a sublease the sublessor “remains” the tenant.   

While a lease grants possession of real estate, a licence grants only the right to engage in specific activities, typically for a limited (sometimes brief) period. Examples of licences include the right granted to a vendor to sell its product(s) on the licensor’s property, or the right to hold an event such as a concert or to place a vending machine(s) on the licensor’s property.

An easement is a legal right that allows the holder of the easement to use property that it does not own or possess, for a specific purpose. For example, an easement may allow a utility provider to enter onto a property in order to install or maintain electrical infrastructure. Some easements are said to “run with the land” so that they continue, or “run with the land”, upon the property’s transfer. Other easements are referred to as being “in gross”, meaning that the easement is “personal” to the easement holder and does not “run with the land” upon the property’s transfer. 

Commercial leases generally include absolute leases, gross leases, net leases, percentage leases, variable leases and ground leases. Absolute leases are long-term agreements where tenants pay all operational and maintenance costs related to the property, including structural maintenance and repairs. Gross leases, which are typically described as either “full-service” or “modified”, are primarily used for office or retail space. In a “full-service” gross lease, the tenant receives one invoice covering the base rent, utilities, insurance and tenant’s share of taxes and common area maintenance costs, and the landlord pays all such amounts to third parties, as necessary. A “modified” gross lease typically occupies the middle ground between a gross lease and a “triple net” lease, where the tenant pays base rent, utilities and a portion of operating costs.

“Triple net” leases are long-term agreements where tenants pay most operational and maintenance expenses for commercial buildings, warehouses or industrial spaces. Landlords are typically responsible for external structural repairs.

In a “double net” lease, the tenant typically pays the landlord the base rent together with the tenant’s pro rata share of real estate taxes and insurance, and the landlord is responsible for paying the costs of maintaining the building’s common areas and making structural repairs. 

In a “single net” lease or “net lease”, the tenant pays the landlord the base rent and the tenant’s pro rata share of real estate taxes, and the landlord is responsible for paying the various other building expenses and making structural repairs.

In a “percentage” lease, which may be used for a retail business, the tenant pays a lower base rent plus a percentage of gross revenues earned at the demised premises.

In a “variable lease”, the rent structure changes over time. For example, in an index lease, the base rent amount is tied to a particular “index” such as the Consumer Price Index, whereas in a “graduated lease” the base rent increases according to a predetermined schedule.   

In a ground lease (see 6.1 Types of Arrangements Allowing the Use of Real Estate for a Limited Period of Time), a tenant is permitted to develop a parcel of real property during the lease period, after which the land and all improvements are turned over to the property owner.

Rents and lease terms in commercial leases in the USA are freely negotiated without regulation, unlike some residential leases, which may be subject to state or local regulation (such as “rent control” or “rent stabilisation” in New York City). During the COVID-19 pandemic, federal and state governments implemented eviction and foreclosure moratoria to protect tenants. COVID-19-related government regulations varied widely by jurisdiction (states) and between residential and commercial tenants; however, most such regulations have expired as the pandemic subsided, although some court dockets relating to landlord-tenant disputes remain backlogged.

As commercial leases in the USA may be 80 pages or even longer, it is difficult to summarise their terms here. However, three important issues are identified and discussed as follows.

Length of Term

Commercial leases often have terms of between five and 20 years. Although the term negotiated will vary based on the property type and class, its location and the landlord’s requirements, retail tenants (which are often franchised businesses) typically require an initial term of not less than ten years (as it is common for franchise agreements to have an initial term of ten years). Many franchises also include renewal provisions, so the franchisee (tenant) will also seek lease renewal terms to match. The authors seek to include a provision in the lease so that the term(s) of the lease and the terms(s) of the franchise agreement will commence and expire on the same day as each other. Commercial tenants have no right to renew the lease unless such a right is negotiated and reflected in the lease as an “option”. A franchisee’s (tenant’s) ability to secure one or more renewal lease terms also provides significant value to the franchisee/tenant if it chooses to sell its business and seeks to assign the lease to its buyer.   

Maintenance and Repair

Commercial leases typically make tenants responsible for maintaining and repairing the leased premises, while landlords are responsible for making exterior and structural repairs. For multi-tenant properties, landlords usually maintain the common areas and then charge their tenants for the maintenance costs based on each tenant’s “proportionate share” of the rentable total square footage of the building.

Frequency of Rent Payments

Rent payments are generally paid on a monthly basis throughout the entire term of the lease, and they are usually due on the first day of each month. Most leases provide for the payment of late fees if the rent is not received by a certain date (ie, the fifth day of the month). Sometimes ground leases call for a significant “up-front” rent payment when the lease commences, followed by scheduled rent payments throughout the term (frequently, made annually). 

The rent payable will rarely remain the same during the term of the lease. It will usually increase.

In commercial leases, base rent is negotiated prior to entering into the lease, and the lease typically contains a schedule of base rent due under the lease. As commercial leases usually have an initial term of between five and 20 years, it is common for rent increases to be implemented on a percentage basis (eg, between 3% and 5% of the then-applicable amount), and frequently on an annual and cumulative basis.

If the lease provides for one or more options to renew, increases to the base rent are often negotiated in advance and set forth in the lease. However, sometimes the landlord does not want to negotiate the new base rent for a renewal term (which may commence many years in the future) at the time that the lease is entered into, and requires that the new rent be “fair market” as determined prior to the effective date of the renewal period. Such lease provisions often provide that, if the parties are unable to agree on the “fair market” rent, they will use a neutral mediator to help them reach an agreement, and that if the issue remains unresolved an arbitrator with local real estate industry experience will determine the “fair market” rent after reviewing both sides’ evidence.

Some leases utilise so-called “baseball arbitration” where the landlord and tenant each submit their evidence, which may include an “expert’s report”, and its “number” as to what the rent should be; the arbitrator selects one side’s number as the “fair market” rent, as opposed to awarding a “compromise” between the two proposed numbers. Utilising “baseball arbitration” incentivises the parties to be reasonable or risk losing the arbitration. The lease may authorise the arbitrator to award attorneys’ fees, expert fees and costs to the successful party in the arbitration.

No states in the USA charge value-added tax (VAT) on rent. However, certain local jurisdictions impose sales or occupancy taxes on base rents, particularly if the lease exceeds a certain length of time.   

When signing a commercial lease, the tenant usually pays the landlord the first month’s rent and a security deposit. This deposit serves as “security” for the landlord in case the tenant defaults on payments that are due under the lease or damages the property without repairing it. The deposit amount is usually negotiable, but not always, and it often ranges between two to six times the monthly base rent. The security provisions may be negotiated in various ways, so that (for example) the security could increase as rent increases over the term, or, conversely, the amount of the security could decrease as time passes.

In many commercial leases, landlords maintain common areas such as lobbies, parking lots (repairs, snow removal) and gardens (landscaping), and charge Common Area Maintenance (CAM) fees to tenants, based on their proportional share of the total leasable space. However, some leases include these CAM expenses in the tenants’ base rent.

Most commercial leases provide that the tenant is responsible for arranging and paying for its utilities and telecommunications services (other than for water, for which the landlord may bill the tenant based on the tenant’s usage of water as read by a “meter”). Usually, most utility costs for the common areas of the building are billed to the tenants (in addition to the base rent), based on their respective proportionate shares of the total leasable space in the building.

There is no standard answer as to who is responsible for paying real estate taxes under commercial leases, because this will vary depending on the type of commercial lease. However, in many commercial leases, which are “modified gross” leases, tenants are required to pay their “proportionate share” of real estate tax increases over a negotiated “base year” as opposed to the full amount of real estate taxes. For example, if the tenant occupies 20% of the total rentable space in the building, the tenant’s proportionate share is 20%, so that, if the increase in taxes over the base year after the tenant’s first year in possession (often the first year of the lease) was USD100,000, the tenant’s proportionate share of the real estate taxes would be USD20,000. Notwithstanding the above, in many “net leases” (eg, “absolute” leases, “triple net” leases, “double net” leases and “single net” leases), the tenant is obligated to pay all of the real estate taxes, whereas the landlord is responsible for paying some of the other operating expenses, depending on the type of net lease (except that in “absolute” and  “triple net” leases, the tenant is responsible for paying all of the operating expenses, including taxes).     

With respect to residential leases, the owner/landlord usually pays all the real estate taxes assessed on the property.

While landlords purchase and maintain their insurance with respect to the property, it is standard for commercial leases to require each tenant occupying a portion of the property to purchase and maintain – at its own cost and expense – specified levels and types of insurance. Where a single tenant occupies the entire property and is responsible for the various operating costs of the property – for example, under a so-called “triple net” lease – the tenant, and not the landlord, is responsible for purchasing and maintaining all required types of insurance. General liability insurance typically provides coverage for claims arising out of bodily injury or property damage suffered by third parties. Some general liability policies include a specific endorsement that provides limited coverage for fire damage to the leased premises, but this is typically limited and generally does not cover all types of damage or perils (eg, floods, earthquakes, etc) to the leased premises.

Commercial tenants are usually required to purchase and maintain business interruption insurance. During the COVID-19 pandemic, however, insurers took the position that losses attributable to government-mandated shutdowns were not covered under their business interruption policies. In most litigations throughout the USA, courts largely sided with insurers’ decisions to disclaim coverage under tenants’ business interruption policies.

Commercial leases typically contain a “use” clause which describes the tenant’s permitted use of the premises. The scope of this clause is negotiated between the parties and is frequently influenced by their respective bargaining strengths. Leases usually specify certain prohibited uses or activities. Local land use and zoning laws may impose further restrictions on the tenant’s use of the premises. Retail tenants in a shopping mall or strip centre may seek to negotiate an “exclusive use” provision, where the landlord agrees not to lease other premises located in the shopping mall to a competing business. Sometimes, with a financially strong tenant (such as an “anchor” tenant), the tenants’ exclusive use provision may extend to surrounding locations also owned by the landlord.

Commercial leases typically require the tenant to obtain the landlord’s written consent before the tenant is permitted to alter or improve the demised premises. Usually, leases also require that all plans, drawings and specifications be submitted to the landlord for its approval, and that the tenant ensures that all work be performed in a good and workmanlike manner and be free from defects. Tenants may try to negotiate that the landlord’s granting of consent will not be “unreasonably withheld, conditioned or delayed”, rather than being at the landlord’s “sole discretion”.

Residential tenancies (apartment rentals) in urban areas are often regulated in various ways according to state and local jurisdiction, including with respect to rent control or rent stabilisation, requiring lease renewals, prohibiting discriminatory practices, and imposing health and safety rules. Commercial leases are subject to common law, including “nuisances”, as well as a variety of regulations including (for example) building codes, zoning laws, land-use regulations, and health and safety laws, all of which vary by jurisdiction. Also, the Americans with Disabilities Act (ADA), a federal civil rights law that prohibits discrimination against individuals with disabilities, guarantees accessibility to buildings and public properties, including commercial properties and multi-family residential properties.

During the COVID-19 pandemic, various eviction and foreclosure moratoria were put in place to protect both residential and commercial tenants. However, virtually all pandemic-related regulations to assist tenants have expired. 

A tenant’s insolvency will usually enable the landlord to terminate the lease and commence proceedings to evict the tenant. However, if the tenant files for federal bankruptcy protection, an “automatic stay” is triggered and all creditors of the tenant – including the landlord – are required to immediately cease all collection enforcement or eviction efforts against the tenant. This notwithstanding, the landlord may be permitted to continue pursuing an eviction if it obtained a judgment of possession prior to the tenant’s filing for bankruptcy. Under the federal bankruptcy code, the commercial tenant must choose to either assume or reject an unexpired lease. If the tenant assumes the lease, it must continue performing under the lease and must pay any past due amounts. If the tenant rejects the lease, the landlord is permitted to take back possession of the premises, and it may make a claim for damages as provided for in the bankruptcy code.     

Generally, when a commercial tenant “holds over” after the lease expires or has been terminated, the tenant no longer has a right to continue occupying the leased premises, and the landlord can either bring a proceeding to evict the tenant or acquiesce for a period of time and continue collecting rent. Commercial leases typically provide for a significantly higher “holdover rent” (eg, 1.5 times or even twice the amount of base rent) which applies after the lease has expired or has been terminated. This strongly incentivises tenants to vacate the leased premises upon the expiry or termination of the lease. Landlords also seek to protect themselves against a “holdover” tenant through their enforcement of any personal guarantees (which are commonly provided by the tenant’s principal(s)) that have been executed in connection with the lease.

Most leases provide that the tenant cannot assign the lease or sublease any portion of the premises without the landlord’s prior written consent. Landlords usually condition their consent on the assignee:

• being bound by the terms of the lease;
• having a certain net worth; and
• providing a personal guaranty (of some kind) by its principal(s).

An issue often arises as to whether or not the tenant and the lease guarantor(s) will be released from their respective obligations once the assignment takes effect. Tenants often seek a modification providing that the landlord’s consent to a lease assignment will not be “unreasonably withheld, delayed or conditioned”. Tenants may also negotiate a revision providing that the landlord’s consent is not required for certain transfers (ie, transfers between existing principals, to a principal’s family member or to an affiliated entity). Some franchisors require their franchisees to include a provision in a lease rider indicating that the landlord will be deemed to have consented to an assignment (or sublease) of the lease to the franchisor, its affiliate or another franchisee (either existing or newly approved). Franchisees (tenants) may also wish to negotiate with the landlord to include such a provision in the lease (to simplify the lease assignment process when they seek to sell their franchised business) even where the franchisor has not required or sought to include such a provision in the lease.

Generally, a landlord will terminate the lease when the tenant fails to cure a default, whether monetary or otherwise. Leases commonly provide that the landlord may terminate the lease without the tenant having an opportunity to cure the default, upon the occurrence of certain triggering events, including (for example) if the tenant files for bankruptcy, is insolvent or permits an illegal activity to be conducted at the leased premises. Leases may also permit either or both sides to terminate the lease if a casualty occurs to a significant portion or the entirety of the leased premises, and if the leased premises are incapable of being restored within a defined time period. 

Leases do not typically require registration or execution formalities (unlike other real estate documents, such as deeds). Most states do not require that a lease (or memorandum of lease) be recorded as a public record, although many states permit such publication. However, landlords sometimes prohibit the tenant from recording the lease (or a lease memorandum) because the landlord does not want its lease (or its key terms) to be publicly available.

If the landlord terminates the lease in accordance with its terms (eg, following a default that either was not timely cured or was not curable), the landlord may commence a court proceeding to evict the tenant. The process for evicting a tenant varies widely depending on the jurisdiction and whether the tenancy is residential or commercial. (The eviction process for commercial tenancies moves much more quickly.) While many jurisdictions passed eviction moratoria (and sometimes even foreclosure moratoria) during the COVID-19 pandemic, virtually all such tenant protections have expired as of the writing of this article.

No federal, state or local government has authority to terminate a lease that is entered into by private parties. However, governmental authorities may have a right of eminent domain that permits them to “take” property for public use and pay “just compensation” to the owner. As a “taking” would render moot any lease at the premises, leases typically provide for their termination, with no further obligation by either side, under such circumstances.

In the event of breach and termination, landlords’ remedies vary based on the applicable jurisdiction. For example, a landlord’s potential “double recovery” of rent (ie, for the unexpired portion of the lease and collecting rent after it has re-let the premises) will vary based on applicable law, and may be permitted where (for example) the prematurely vacating tenant chooses not to engage in the discovery process in the litigation (to find out whether the landlord has re-let the premises). Landlords are often precluded from using “self-help” to evict tenants (for example, by locking the tenant out), as opposed to going through the court eviction process. Self-help evictions are illegal in most states and usually result in a lawsuit by the tenant. Landlords who engage in self-help evictions can face damages, fines, criminal charges and possibly jail time. 

As discussed in 6.8 Costs Payable by a Tenant at the Start of a Lease, landlords typically require tenants to tender a security deposit (usually “cash”, but sometimes a letter of credit is utilised) when the lease is being entered into, in order to protect the landlord against a tenant’s failure to meet its obligations, including the payment of rent and additional rent. The amount of the security deposit is usually negotiable, but not always, and it often ranges from two to six times the monthly base rent. Often, the amount of security increases as the rent increases over the term of the lease, but in some leases tenants are able to negotiate for the security to decrease over time.

Various structures are used to price construction projects. They include the following.

Fixed Price

General contractors may agree to complete the project for a predetermined fixed price, regardless of any additional costs or changes to the work. Construction lenders like to see fixed-price contracts as a part of the properties they are financing.

Cost-Plus

Under a cost-plus pricing structure, the general contractor is typically reimbursed for the costs of the project, plus a percentage above cost (the “plus” portion may also be a fixed fee rather than a percentage). Cost-plus pricing structures are usually utilised when the scope of the project is unclear, or if numerous project changes are anticipated.

Time and Materials

This structure is often used for small projects and where the amount of work is unclear. The general contractor is paid for the actual cost of labour and materials, plus an additional fee or percentage for the general contractor’s profit.

Unit Price

This cost structure is frequently used for projects with repetitive units of work (eg, roads or utilities), but can also be used for apartment projects or the development of a housing project of similar homes or structures. The general contractor may be paid based on a square footage or “per unit” basis.

Guaranteed Maximum Price

Guaranteed Maximum Price (GMP) structures are typically used for well-defined projects, and it provides certainty for the owner while incentivising the contractor to manage costs efficiently. Under this pricing structure, the general contractor agrees to be reimbursed for the actual cost of the project, plus the general contractor’s profit, up to a maximum “capped” price. GMP contracts often include a savings-sharing provision, whereby any costs saved below the capped price are split between the owner and contractor, further aligning both parties’ interests in managing costs efficiently.

Responsibility for design and construction of a project can be handled in a variety of ways, but the following methods are most common.

Design-Bid-Build

This is the traditional method of construction where the owner hires an architect or engineer to design the project. General contractors then bid on the project. The lowest bidder typically gets the assignment and is responsible for completing the project according to the plans. Other factors, such as the general contractor’s reputation (good or bad) may, however, play a part in the selection process.

Design-Build

This is when the owner hires a single design and construction firm to complete the project. A key benefit of this method is that it can reduce costs and accelerate the work schedule by overlapping the design and construction phases, rather than completing them sequentially.

Construction Manager at Risk

This is a project delivery method where a construction manager oversees the project from start to finish and takes on a significant portion of the project’s risk by providing a guaranteed maximum price. The construction manager is involved early in the project and is responsible for providing input and feedback during the design phase – such as cost estimating and constructability reviews – while the architect or engineer leads the design phase. After the design phase is completed, the construction manager steps into the role of a general contractor and completes the project.

Integrated Project Delivery

The Integrated Project Delivery (IPD) approach is used in highly complex projects in which the owner, architect, general contractor and other parties work collaboratively to develop the design and construction plan. What distinguishes IPD from the other methods is the challenge of co-ordinating multiple parties under a shared-risk, shared-reward agreement, which requires a high degree of trust and collaboration between all of the parties involved.

Various devices can be used to manage and mitigate construction risk in a project, all of which may be subject to various legal limitations and exclusions. Examples are as follows.

Contractual Indemnification

This provides for one party to defend, indemnify and hold harmless the other party from certain losses or damages; for example, a contractor may be contractually bound to indemnify the owner from personal injury suits brought by workers and subcontractors related to the contractor’s negligence.

Warranties

These are promises made by one party to the other party regarding the quality or performance of the workmanship and materials used in the construction; for example, a contractor may warrant that its work will be free from certain defects and maintain a certain quality for a period of time following the completion of the work.

Limitations of Liability

These provisions limit the amount of damages that one party can recover from another party; for example, the contractor’s liability for the owners lost profits or business interruption may be limited to a defined amount or paid in a certain manner.

Damage Waivers

These typically provide for one or both parties to waive their right to recover certain types of damages arising from a breach of contract or other event. In construction contracts, damage waivers most commonly take the form of a mutual waiver of consequential damages – such as lost profits or business interruption – agreed upfront by both parties. This limits each party’s exposure to direct damages only, providing greater cost certainty for both sides.

Schedule-related risk is a significant issue for construction. However, there are various ways to mitigate the risk.

Construction agreements typically contain liquidated damages provisions in which the owner may receive stipulated compensation if the project is not completed by the date called for, together with additional costs and expenses that have been incurred by the owner as a result of the delay. The general contractor may however seek such protections from its subcontractors.

Parties may also build in stipulated rights to extend timeframes under certain circumstances with or without additional compensation. For example, if certain unforeseen site conditions occur (eg, bad weather or “labour strikes”, or even pervasive illness delaying construction, such as COVID-19), the contractor may have the right to extend its deadlines.

The parties can also avoid delays through regular communication, during which they devise contingency plans, such as reallocating resources and adjusting schedules, or even modifying the scope of the work.

The following are typical examples of additional security provided by contractors.

Performance or Completion Bonds

These are a form of surety bond that guarantees that the contractor will complete its contractual obligations, including the completion of the project. If the contractor fails to do so, the surety company will cover additional costs required for the developer to finish the project.

A Letter of Credit

This is a financial instrument issued by a bank that guarantees payment to the project owner if the contractor fails in its performance. In the event of a default, the owner may draw upon the letter of credit to pay for the project’s completion, as needed.

Parent (or Third-Party) Guarantees

These are provided by the contractor’s parent company (if it has one) or by a financially responsible third party, to guarantee the performance of the contractor.

Escrow Accounts

Escrow accounts may be used to hold funds by a third-party escrowee until the contractor meets certain conditions or milestones, after which the funds are released to the contractor.

Third-Party Surety

This is a company that guarantees the performance of the contractor on behalf of the project owner. In the event of a contractor default, the surety is obligated to step in and make certain that the contractor’s obligations are fulfilled, either by completing the work, hiring a replacement contractor or compensating the owner for any resulting losses.

Contractors and designers will likely file “mechanics liens” to preserve their right to obtain compensation if the owner fails to pay their fees. In the commercial context, mechanics liens are typically filed by contractors who have not been paid for work related to the project.

Mechanics liens create a “cloud on title”, which appears as a matter of public record and may impair the ability of the owner to sell, transfer or mortgage the property until the debt is paid and the mechanics lien is discharged or “bonded” by the contractor – frequently a precursor to litigation.

Some contracts include “lien waiver” provisions, requiring a contractor or subcontractor to waive their lien rights in exchange for payment. There are different types of lien waivers – conditional and unconditional, and partial and final – which are commonly used at each stage of construction as a condition of receiving progress payments. 

A Certificate of Occupancy (COO) must be issued by the local or municipal authority before the project can be used for its intended purpose. The issuance of a COO is subject to various requirements such as an inspection or review of final plans prepared by a licensed architect or engineer. For example, in New York City, building permits must first be obtained prior to commencing any work on the project. Then, at various stages of the construction work, components of the project – such as the structural build, plumbing installation, electrical systems and elevator (if applicable) – must be inspected and “signed-off” prior to the issuance of a final COO. Frequently, the project’s “expediter” (often an architect) will seek to help shorten the timeframe in circumstances where the issuance of the COO has been delayed.

The United States does not impose VAT on the purchase and sale of real estate. Certain jurisdictions impose a sales and use tax on commercial leases, as more fully discussed in 8.3 Municipal Taxes.   

There are two commonly used methods to mitigate transfer taxes in connection with the acquisition of large real estate portfolios. One technique is to sell equity interests in the entity that owns the real estate as opposed to transferring the real estate outright.  However, this option is not available in states that impose transfer taxes on such indirect transfers of a controlling interest in an entity owning real estate and where a controlling interest is transferred. Where states and local governments impose a mortgage recording tax, the use of a Consolidation, Extension and Modification Agreement (sometimes in connection with a “spreader” agreement in order to have the mortgage cover multiple parcels) may be used to reduce mortgage recording taxes. This occurs by giving the borrower a credit for previously paid mortgage recording taxes and including the existing mortgage with the new financing (consolidation), rather than paying off the existing mortgage and including the amount of the prior mortgage in the new mortgage (presumably for a larger amount), on which a recording tax must be paid. 

Some jurisdictions impose taxes on commercial leases. For example, New York City imposes a 6% “commercial rent tax” on businesses renting space in Manhattan (below 96th Street) with an annual rent of USD250,000 or more, resulting in a 3.9% effective rate after a 35% reduction in base rent. While Florida used to impose a statewide commercial sales and use (rent) tax on tenants of 2% on the total rent charged under a lease or license to use commercial real property, this tax was abolished for rental payments covering periods on or after 1 October 2025 (rent payments made for periods prior to 1 October 2025 remain taxable, even if paid later). The prior tax, however, remains in effect, with respect to certain specific, non-commercial or specialised rentals, including short-term residential rentals (less than six months), parking or storage for motor vehicles, boat docks/storage and aircraft hangars.

There are three primary types of withholding taxes that apply to foreign investors.

• The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which imposes a tax on gains from the sale of real property by foreign sellers, requires that the buyer serve as a “withholding agent” to retain and remit 15% of the purchase price paid to the seller to the Internal Revenue Service (IRS), unless the seller provides proof of its non-foreign status, typically by providing a sworn Affidavit of Non-Foreign Status from a principal of the seller.   
• Any US partnership that generates income in connection with a US trade or business (“effectively connected income” or ECI) must pay a withholding tax on any ECI that is allocated to a foreign partner. The tax withholding rate is 21% if the foreign partner is a corporation and 37% if the foreign partner is a non-corporate taxpayer. Also, a buyer of an interest in a partnership that is engaged in a US trade or business is required to withhold 10% of the purchase price paid to the foreign seller. 
• Foreign individuals must pay federal income tax on long-term capital gains at a preferential maximum rate of 20% if the real property was sold after a holding period of at least 12 months, or a maximum rate of 37% if such property was held for less than 12 months. Foreign corporate sellers are subject to income taxes equal to 21% of the gain from the sale of the real property, regardless of how long the property was held. Foreign corporations may also be subject to a “branch profits tax” at the rate of 30% (or less, if provided in an applicable treaty) of the after-tax earnings from a US trade or business, to the extent that such earnings are not reinvested in the US branch assets.   

For rental income, a 30% withholding tax on gross rental payments is typically required, though this can be reduced by electing to treat the income as effectively connected with a US trade or business.

As an incentive for the ownership and development of real estate in the United States, the US tax code provides owners of real estate with certain tax benefits. 

• Real estate investors are permitted to deduct up to 20% of net (qualified) rental income through the Qualified Business Income (QBI) deduction. This deduction lowers taxable income for pass-through entities such as sole proprietorships, partnerships and LLCs provided the rental activity qualifies as a business. 
• Real estate investors are permitted to depreciate the costs of buying and improving a building (excluding the land, which is not considered a “depreciable asset”) in order to reduce taxable income over a period of up to 39 years. However, taking such deductions reduces the owner’s cost basis in the property, which becomes relevant, and is likely to result in increased capital gains taxes, when the property is sold. Through the use of cost segregation, a strategic tax planning tool, real estate investors may accelerate depreciation deductions, increasing immediate cash flow by reclassifying structural components into shorter-lived categories rather than the standard 27.5 or 39 years. 
• Section 1031 of the federal tax code permits owners of real estate held for investment to defer paying capital gains tax if the proceeds from a sale are reinvested in a “like-kind” property within a specified period of time. This tax benefit is particularly useful when selling heavily depreciated property. 

The federal tax code also provides for a capital gains tax exclusion in connection with the sale of one’s primary residence. The exclusion is USD250,000 of profit for an individual, or USD500,000 of profit for married couples, filing jointly.