IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Jeffrey Bryan. Mr. Bryan is a senior business broker at IBA (www.ibainc.com):
Should You Include Owner Occupied Real Estate with Your Business in One Sale Package
A common question asked to my colleagues and I at IBA as professionals with the capability to sell both business and real estate assets for entrepreneurs is as follows:
“Should I sell or lease my owner occupied commercial real estate to the business buyer?” Sellers quite often have a developed opinion themselves on this matter prior to asking the question.
Should they sell both the business and the real estate to diversify their financial portfolio?
Should they hold the real estate and lease it to the new owner for passive income and potential appreciation? Commercial properties always appreciate over time, right? Often not always.
There are advantages to both leasing or selling your business occupied real estate. First and foremost, if you are facing this decision “to lease or sell?” you probably made a very smart decision years earlier to owner occupy your real estate. Bravo and congratulations most business owners in your position will not be in this status.
LEASING THE REAL ESTATE
- Easy entry into the landlord experience. You know the property and it’s a great way into the landlord-tenant marketplace.
- Continued appreciation of real estate value. Most owners that make the decision to lease, have this as their primary motivation, they believe in the long-term appreciation potential of the real estate.
- Monthly stable income (mailbox money).
- Marketing the property as a 3rd Party Investment. Once the tenant has paid in a timely manner for at least a year, the real estate will have an investment value on the secondary marketplace with a tenant in place.
SELLING THE REAL ESTATE
- Obviously, you get paid twice at closing, and all your assets are not tied up in one asset group. You have all the proceeds of both transactions to invest and diversify, commonly for retirement, legacy, and philanthropy.
- Seller doesn’t have to be a landlord. This situation gets enhanced in complexity when there is also a seller note. Are you aggressive about collection if rent or a payment is late? Are you negatively impacting an asset value by taking an aggressive collection posture? None of these potential issues exist if you sell the property.
- Favorable tax benefits of selling your property when sold together given current tax law. If you want to learn more contact me and I can connect you a knowledgeable party in this area.
- Flexibility in your asset value allocation between business and real estate creates deal structure and financing advantages both for the buyer and seller. Business finance deals typically carry 10-year amortization, while real estate often benefits from 25 year note terms (SBA and conventional financing examples). Moving value from the business to the real estate can help a buyer’s debt structure and lower the interest rate. There can also be deferred capital gains from a seller’s note (backed by real estate).
- There are scenarios where the physical assets of the business make it critical that the buyer acquires the real estate. Think of a concrete precast facility where the physical plant has millions of dollars invested in batch tanks and production lines. There may be conforming uses that change over time, and necessitates continued use of the property. Think of an auto wrecking or tow yard, in a city that no long supports “open storage” uses, that site is now more valuable as the wrecking or tow facility due to it’s continued conforming use.
- Non-conforming uses are the flipside. I have sold Dog Boarding & Kennel facilities that no longer meet jurisdictional requirements, but as long at the “continued” non-conforming use is maintained, the business is allowed to operate regardless of a change of ownership.
- Specialty properties (gas stations, auto repair, construction equipment storage yards, certain types of manufacturing, or other uses) that occupants must adhere to environmental best practices should be sold with the business that could cause contamination. As a seller you wouldn’t want to sell a business with leased property, without ownership’s incentive to adhere to strict environmental compliance.
- Potential for Seller financing to the buyer of the business, with security of a deed of trust to back the promissory note. Seller financing can give a seller an installment payment element to defer tax liability over time (mailbox money).
- A 1031 Exchange is a great way to defer the proceeds and move real estate value into other like-kind real estate investments. The tough part of a 1031 Exchange are the time restrictions of identifying the property (45-day identification window), 180 days to close on the property.
- Diversification From a wealth preservation perspective advisors often coach their clients to spread their investments across multiple investments. Business owners often have much of their retirement vested in their business, this is compounded by ownership of their owner occupied commercial real estate. If their business suffers a dramatic revenue loss (like many did in the Great Recession or Covid-19 in 2020), it can take a decade for the loss to recover. Who would have thought dental properties or medical offices would be a bad investment? Ask dentists or doctors that owned their buildings during the Covid pandemic? Exiting from the business and real estate allows Sellers to diversify from both their business and their real estate risk associated ownership. “They don’t have all their eggs in one basket anymore.”
Which lane do you choose? A favorite sales strategy of mine has been to coach indifference. As a Seller, why not go to market and let the market decide? Offer the business for market price, with the real estate available for sale or lease.
One pool of buyers will have the buying power, capital and foresight to buy both business and real estate.
Another pool will be stretching to their max just to pull off the business purchase and will buy the business and lease the property.
I am currently watching the (Let the market decide) scenario play out in a current listing. We have taken 8 meetings with buyers split down the middle to “Buy” or “Lease” the commercial real estate. Probably the strongest unspoken theme is that the Seller believes in the future value of the real estate enough to keep owning it. This has the effect of making the Buyer want to accomplish both purchases if their buying power is strong enough and it generally affirms the Seller’s asking price. After all, why would a Buyer pass up the opportunity to own the real estate outright, build equity in the property versus “burn” the dollars, and fix their occupancy costs.
As you can probably surmise from the list of advantages being a landlord does not often outweigh the advantages of selling business occupied real estate. None-the-less I have seen both outcomes numerous times in my nearly two decades as a business sale intermediary and commercial real estate professional. One of the biggest advantages of owning your real estate, is that YOU control your path. You don’t have an outside landlord controlling your destiny, deciding whether to assign the lease when you want to exit the business. All investment purchases, whether real estate, stocks, or businesses, should be entered with an exit strategy.
If you have questions relating to the content of this article or the process associated with selling a business with or without real estate, Jeffrey Bryan would welcome the opportunity to talk with you. Mr. Bryan is licensed to sell businesses & real estate in both Washington and Oregon. Mr. Bryan joined IBA in 2007 and specializes in the sale of automotive, marine, and construction companies. Mr. Bryan can be reached at (425) 454-3052 or jeff@ibainc.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.