You have decided on the location from which your company operates. By the way, a great promotion! A limited liability company has been incorporated and owns the building. Presumably the members of the LLC are similar to those of the inmates.
You have agreed with the resident – your company – to pay the GmbH a monthly amount for the use of the address. In fact, you pay yourself. It's a beautiful thing! The owners of an LLC are granted tax benefits, such as: Such as asset depreciation, mortgage charges, property taxes, and utility charges. Over time, the LLC's investment increases.
Your occupying business pays rent in the same way as it would to a landlord who has no stake in the business. And because the owner of the property and the operation are synonymous – when business goes up and down – you can pay the rent yourself on a monthly basis. We are fortunate to have such a situation.
We own the building from which we conduct our brokerage. Every month Lee & Associates pays Orange – the owner – Taft Lee LLC – the owner – a dollar amount that is a nice return on our investment. However, we deferred rent increases during the term of our property, created reserves for a new roof and kept the rent in line with market conditions. We can do this because we are landlords AND tenants.
In general, a transfer of business or ownership results in a decision about commercial real estate. For example, if you acquire a competitor, will the property you own and live in adequately accommodate the marriage? Conversely, if you sell the company, does the buyer of the company have their own location? Does this turn your wealth into a surplus?
A choice to move your business out of a state will require some time to ease and convert equity in the property to buy your new location. In all cases, as you can imagine, a decision will be made by you. Keep the building or sell it.
If sale is chosen, one of the strategies used is a sale-leaseback. By definition, a sale-leaseback inserts an investor to replace LLC ownership. The group – your company – stays in the building and pays the rent to the investor in the leaseback.
With that in mind, let's discuss what can break most sale leasebacks.
The operating company cannot afford the market rent.
Notice. One of the reasons you own your business location is to offer flexibility during difficult times. Perhaps the amount that your company is allowed to pay is far below comparable rents. This happens because your two interests – business and construction – are being satisfied.
However, to maximize the value of your investment, you need to hedge this delta. Someone who buys your property – and relies on the rent – only has to do with the return on money. Therefore, the price an investor pays you is based on a formula known as the capitalization rate, or the cap rate.
A cap rate results from the net income (rent minus expenses) divided by the purchase price. The relationship is reversed: the lower the cap rate, the higher the price. But the higher the rent, the higher the price … in the frame. If the company housed cannot afford market rent, the amount to be paid by an investor will result in a lower value.
As a seller, you want to maximize your sales revenue, but not burden the business with unsustainable monthly rent. A real dilemma!
What to do with the proceeds
Owning your LLC with an affiliate that pays you is a clean investment. If you sell the property, where can you reproduce the return? Keep in mind that you will need to make a tax-deferred swap into another income property or face a hefty tax bill.
The three transitions mentioned above – acquiring a competitor, selling the company, or moving out of the state – could result in a sale-leaseback. However, each represents complexity.
Buying a competitor is easy, especially when you need more space. No lease back is required. You just sell the smaller one and exchange it for a larger one. Boom.
A business sale – especially if the business buyer doesn't need your property – is a challenge. You must fill a vacancy by selling or renting. The timing of an out-of-state move is great for a sale-leaseback. Point A is simply sold. A two-year lease is drawn up. Item B is bought and rented on short notice while you prepare to move your business. The lease ends at point A and the move to point B is complete.
More on that later.
Allen C. Buchanan, SIOR, is a Principal at Lee & Associates Commercial Real Estate Services, Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
source https://seapointrealtors.com/2021/07/31/2-things-that-derail-most-sale-leasebacks-orange-county-register/
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