Building wealth

Many business owners don’t miss a trick when it comes to the details of their businesses, but for some reason, they overlook the benefits of owning the real estate their businesses occupy.

By owning their real estate, business owners in effect pay themselves rather than landlords for the space they need to do business, building wealth both from the business and from the business’ space needs, as well as from the business itself.

Owners can benefit several ways, including:

* Leveraging equity. If the owner borrows to purchase real estate (as most do), equity in the property will grow as the loan is repaid.

* Appreciation. In addition to equity growth from loan repayment, a business owner should also benefit from normal appreciation in real property, which can average 3 to 4 percent a year in Central Ohio.

* Tax advantages. Buildings can be depreciated for federal tax purposes. The owner can expense a portion of a building’s cost each year. This amount is a nontaxable expense that reduces the owner’s tax liability without affecting cash flow.

* Flexibility. Growing businesses can benefit by acquiring space to grow into as time goes on. By acquiring more land than they need, they have additional room to build. Or by acquiring more square feet than they need, they can lease space to others, ”banking” it until they need it for their own purposes.

Real estate purchases of this type generally are done in one of three ways.

Some businesses acquire the real estate directly in the name of the business. In other cases, an owner or group of owners creates a second entity (a limited liability company, corporation or partnership, for example) that acquires the property and leases it to the primary business. In this way, the primary business can expense its occupancy cost for tax purposes, and the ownership and tax benefits accrue to the owner group.

Finally, some individual small business owners buy their business property directly as individuals, realizing the same ownership and tax benefits.

There are a wide range of possibilities for financing a real estate purchase. Some of these are:

* Bank financing. Financing for acquisition or construction loans for improvements are available from banks. These loans are commonly done with both fixed and floating rates, and are frequently key components of business banking relationships. Banks generally offer significant flexibility when they structure these loans.

* Bond financing. Bond deals typically are fairly complex but can offer favorable rates. Taxable bonds can always be done, and depending on government programs in your area, tax-free bonds may be available as a part of job-creation programs. Bond financing usually is not an option for smaller businesses.

* SBA financing. Small businesses are, however, often eligible for SBA loans, sometimes at fixed rates and sometimes at floating rates. In these loans, the federal government offers loan guarantees that help start-ups or businesses with low capitalization get credit they ordinarily couldn’t obtain.

* Life insurance company loans. In the $500,000 and up range, loans often can be obtained from life insurance companies that hold them as part of their investment portfolios. Often, these loans can be obtained without the personal guarantee of the owner or owner group.

The entire area of real estate ownership may seem complex to a business owner at first, but there are a lot of resources to turn to for help.

A good place to start is with the relationship officer at the business’s bank. These officers typically have a broad view of the business and what the possibilities are. Other professionals who can help include commercial real estate brokers, accountants, attorneys and builders.

Business people, especially in small businesses, take on a lot of responsibility and late night and weekend work. Business real estate ownership is one way they can make sure they get maximum return for all that effort. Jay Shaw is vice president and manager, commercial real estate, for Fifth Third Bank, Central Ohio. He can be reached at 223-3070 or [email protected].