I recently spent time with three business owners who have chosen to own the building from which their businesses operate.
The benefits are many, including the stability of the rent the company pays, appreciation, depreciation and pride in ownership. But our conversations focused on a downside to ownership like a rent subsidy and the impact this can have on the company’s value.
Therefore, I have endeavored to consider other downsides of ownership, which is the subject of this column. Let’s start with a rent subsidy and its impact on company value.
Some would argue that this – being able to charge the resident a low monthly payment – is actually an advantage.
In fact, one of the reasons for owning a building to house your business is to keep the rent stable and avoid the ebb and flow of a series of three- to seven-year leases. But in my three conversations, the price an investor would pay for the company was affected.
You see, all entrepreneurs are approaching an age where “what’s next” creeps into their consciousness. This often means selling the company. But if one of the cost elements — rent — is underestimated and the company can’t afford to bring that rent to market, the company’s value suffers.
Often one company is formed that owns the property and another that owns the business.
Typically, there is a synonymy between the two. Although Allen C. Buchanan LLC and operating company Allen C. Buchanan Inc. may own the properties with common ownership, they are two separate corporations with tax returns, business licenses, and regulatory and state registration requirements.
Since one “owner” receives payments from the other, and the “owners” back the same person, proper leases are rarely forged between the two. This lack of documentation can be particularly painful when an owner dies and their estate must now attempt to assemble documentation justifying the rent.
When a resident rents a space from an independent landlord rather than one with an interest in the business, a lease between the two parties will contain strict language regarding the maintenance, repair, and replacement of the building’s systems. Without such an arrangement, roof maintenance occasionally becomes an afterthought. Not a big deal unless a sale and lease back of the premises is being considered – in which case the buyer of the property will want an airtight roof and working air conditioning.
Lack of flexibility
When a company’s capacity exceeds the physical facilities of a building, real estate ownership can stunt growth. Should this need for additional space arise in a run-down market, will moving from one building to another be complicated? When the funding requires the building to be occupied by the business—as is the case with many SBA loans—a real dilemma arises. Sure, there can be a move and the old location can be rented out or sold, but it’s more complicated than simply moving at the end of a lease.
Equity is reined in. With the level of appreciation that has taken place in industrial real estate in SoCal, many owners are sitting with mountains of equity that, if tapped, could be used to hire employees, buy machinery or inventory, acquire a competitor, or go abroad to expand. But unless the property is sold or refinanced, the equity simply sits idle, offering the rent subsidy described above and a lower return for the owner than an alternative investment.
Allen Buchanan is a principal and commercial real estate agent with Lee & Associates, Orange. He can be reached at 714.564.7104 or email@example.com.
https://www.ocregister.com/2023/02/11/the-5-downsides-of-owning-your-building/ The 5 Disadvantages of Owning Your Building – Orange County Register