Should The Real Estate Sell With The Business?

From IBBA's Spring Newsletter

Written by Stacy Cadieux, CBI Business Transition Consultant

There are many things to consider when selling your company, including whether to sell the real estate with the business. The business and the real estate are two separate assets; therefore, they should be considered separately. Today's market offers several options for aseller to maximize financial gain on their real estate. Before you sell your business, consider the following.

RENTAL INCOME

The best reason to lease your real estate is the earning potential. We generally see business properties have an annual return between 8-10% of the real estate value, depending on the area. In markets where real estate values are climbing, rental income with a sale of the property later is a great option. However, commercial properties can be designated as a special-use buildings, meaning that its highest value is as the current business. As an investment, special-use properties such as this can be a bit risky as suitability is limited to few business types. Selling the business but keeping the real estate puts you at risk in a situation where your tenant chooses to move their business. You could be left with an empty building that will require extensive remodeling to repurpose, as leasing to another like-kind business is usually not possible in these situations because the previous tenant has opened a new facility nearby. Be sure to consider all options before jumping into a longterm lease.

1031 EXCHANGE: TAX DEFERRAL STRATEGY

You should decide if your business would be as good an investment as would be a sister piece of property with a broader use. Moreover, the gain on the real estate sale is taxed as a capital gain. Unless there is a change in our tax structure, the capital gain tax will always be with us, and maybe at a higher rate. So why not take advantage of a 1031 Exchange? This allows you to sell a piece of property, reinvest the proceeds into a new property and defer the income tax from the sale. Properly structured, a 1031 Exchange becomes a valuable tax savings and wealth preservation tool. Be sure to seek the guidance of your CPA and a Qualified 1031 Intermediary.

SELL THE REAL ESTATE WITH THE BUSINESS

Be prepared to consider the buyers’ preferences. Most buyers who are interested in purchasing the business would like to buy the real estate. It is not uncommon to have a buyer backout because the real estate is not part of the purchase. Probably the greatest misconception is that the buyer can't afford to buy it all now. While this used to be accurate, it is not true today. There are many commercial lenders with funds readily available for qualified buyers to purchase the real estate along with the business. Moreover, with the current interest rates and favorable terms available today, the mortgage payment on the real estate is typically about the same as a rent payment would be.

CONSIDERING A SALE TO A THIRD-PARTY BUYER

One possible outcome may be that you sell the property to a third-party who then leases the property back to the buyer. The separate transaction can be seamless to the seller. This scenario could be a win-win for a buyer who does not want the real estate obligation and you still get the liquidity. Ultimately the decision to sell or hold your real estate depends on many factors. Honestly evaluate whether you want ongoing involvement as a property manager after the sale and the current real estate market in your area. Most importantly, assess your finances and long-term objectives for retirement.