When planning an exit strategy,
business owners that own their
buildings might find it advantageous to sell their real estate holdings separately from the business itself. By implementing such a strategy, additional real
estate proceeds can be procured while the
company’s financial statements are fortified.
The current environment is favorable for
those looking to sell commercial real
estate holdings. A number of factors,
including the potential for above-average
returns, attract investors to corporately-owned real estate.
“The market for investment real estate is
experiencing a level of liquidity that we’ve
not seen before,” says Jim Vondran, an
investment properties specialist with CB
Richard Ellis.
Smart Business spoke with Vondran
about the benefits of selling a company’s
real estate holdings separately from the
business itself, why the market for corporately-owned properties is so robust and
who should be consulted prior to a sale.
Why should a business owner consider selling the company’s real estate holdings separately from the business itself?
Typically when a business is being sold,
the real estate assets are included as a part
of the sale. Unfortunately, when corporate
real estate is included as part of the business sale, the party selling the business
may have left a considerable amount of
money on the table. This is because when
the buyer is placing a value on the real
estate, they generally are looking at the
book value of the real estate, which may be
very different from what the potential market value of the real estate could be. In
most cases, the value of real estate with a
long-term lease in place is considerably
higher than the value the business is carrying the building on its books for. Selling the building in a separate transaction can help
the business owner to unleash that higher
value.
In addition to higher real estate proceeds,
what other benefits can be achieved?
There are multiple benefits above and
beyond just the increased proceeds via the
separate sale. The biggest one in a situation
involving a business being sold is how the
sale improves the company’s financial
health. The sale provides the company
with an infusion of cash without additional
debt being incurred. Also, the negative
impact of depreciation and interest on the
income statement is eliminated when the
building is sold. In addition to the benefits
on the company’s financial statements,
prospective buyers for the company may
prefer the flexibility afforded by being in a
leased facility when compared to being in
an owned facility.
What is the current environment for the sale
of corporately-owned real estate?
We’ve overseen the sale of a number of corporately-owned properties in the first
half of 2007 and investors’ appetite for
these types of properties remains healthy.
Investors are attracted to corporate real
estate in particular because it tends to provide a better return when compared with
other income-oriented investments like
treasury bills, municipal bonds and corporate bonds. As of today, the 10-Year
Treasury Bill rate is at less than 5 percent.
By contrast the cap rate for corporate real
estate with a ten year lease can range from
6 percent to 9 percent. In general, single-tenant, net leased assets tend to attract a
larger pool of investors, as they tend to be
more “hands-off” in nature when compared to a multi-tenant asset.
If a business owner is considering the sale of
their business, what steps should they take
in order to determine whether it makes sense
to sell their building separately?
If a business owner is contemplating the
sale of their business, they should consult
a commercial real estate professional that
specializes in the sale of income producing
properties and request that they provide a
disposition proposal that includes an opinion of value. This will help the company to
at least begin the discussion of whether or
not it makes sense to sell the building separately or include it as part of the sale of
the business.
In addition to contacting a qualified commercial real estate professional, the company or business owner should consult
their tax advisor to make sure that any
potential tax liabilities are fully considered.
JIM VONDRAN is an investment properties specialist with CB
Richard Ellis. Reach him at (513) 369-1325 or
[email protected].