Crafting Custom Real Estate Solutions for Your Unique Goals, Part 1
The owner-user real estate model has been thriving for decades. Business owners looking to control their occupancy and build their own real estate portfolios have done quite well through the years. I routinely speak with people who bought a piece of commercial real estate in the 70’s or 80’s for $30-40 per square foot. That same building today, which is still in good condition, is worth over $300 per square foot. Even after adjusting for inflation, the return on the buyer’s original 20% down payment is nothing short of phenomenal. There are literally hundreds of similar success stories, but you do not have to have purchased a property 40+ years ago to make the list. Those who made acquisitions as recently as 2011 have seen their property’s value more than double.
Following the Great Financial Crisis and now Post-Pandemic, real estate, while constantly changing, remains essential to most businesses. A frequent discussion I have is leasing versus owning and its noticeable that businesses prefer the latter. For those of you Baby Boomers on the cusp of retirement, the idea of selling and riding off into the sunset with a huge bankroll is exciting but refuse to do so because they are either tax adverse or do not know what they would do with the money if they cashed out. With all the FUD (fear, uncertainty & doubt) in the market, it makes good sense to evaluate all options and at least consider taking some chips off the table.
Scenario 1: For those not interested in disposing of their assets, but want access to their equity, refinancing is a viable option. Taking cash out of a property through the placement of new debt is not a taxable event and the cash generated can be used to acquire additional assets, improve the existing asset or for any other purpose. Refinancing is less attractive today than it was a few years ago but it’s still viable and only one variable among many. Refinancing will increase monthly occupancy cost, but for many, that cost will be lower than it would be in another property.
Scenario 2: Irrespective of refinancing, many decide to lease their buildings out for income. At today’s lease rates, this can be a good option but it’s not without risk. Holding the property entails leasing risks like vacancy, tenant default, management problems, deferred maintenance, functional obsolescence, and market pricing correction.
Scenario 3: Owner-users may be ready to access their equity by selling, but still want to operate their business without moving. In this case, a sale-leaseback transaction is a good option. You sell the property to a third-party investor and agree to lease the property for a period. You eliminate the risk of ongoing ownership but continue to operate the business without disruption. For those who are more tax averse owners, they can 1031 the sale proceeds into another income property, presumably with a lower risk profile that reflects their retirement plan.
In parts 2, 3 & 4, I will go into detail on strategies involving sale-leaseback, installment sales & 1031 exchange. It costs you nothing to stay informed but now, more than ever, it could be very expensive if you don’t. If you already own real estate or have a lease coming due and want to acquire a facility, I welcome the opportunity to continue the conversation. I’m here to help.