A liability is defined as anything — typically money — a person or company owes. In commercial real estate investing, a liability is generally called “commercial real estate debt.” Other examples of liabilities include loans, mortgages, deferred revenues and accrued expenses. For example, when you are past due for a payment on your credit card, that debt is a liability.
There are two general types of liabilities: current and noncurrent. Current liabilities are generally expected to be concluded (or paid) in 12 months or less, and noncurrent liabilities are generally expected to be paid off in 12 months or longer. In commercial real estate, the money you owe on a mortgage for your property is a liability. This is a great example of a longer-term liability, as it acts as an obligation between you and the former owner for you to pay off your debt long-term.
In business deals, a seller wants to see that a company or individual can pay current liabilities (those due within a year) with cash. For example, if you own commercial real estate, you want to be sure a storefront renting from you can pay their monthly rent on time for the year. For longer-term liabilities, such as mortgages, the lender wants to see that you’re making enough of a profit that you can pay off your debt within the allotted time of your mortgage — 15 years, for example.
Expenses are listed on a company’s balance sheet, and liabilities are listed on the company’s income statement. Expenses are the cost of doing business (electricity, payroll, etc.), while liabilities are the debts a company owes. Expenses are debts owed that can be paid immediately with cash. If you delay the payment, that creates a liability.
Other Helpful Terms
Real Estate Liability Assessment
This is a type of assessment that lenders, property owners, or prospective buyers facilitate to estimate the level of risk associated with investing in a property or buying a property.
Commercial Premises Liability
In certain states, if you own commercial real estate, you have a responsibility to ensure that people entering your property will not be harmed on the property. Common claims in commercial premises liability include building defects, negligence, and slip and fall accidents.