Many businesses choose to own the real estate from which they operate for a wide variety of reasons.
The most common reason is to ensure the continued availability of the facility and to cap the associated costs. A particular type of business that employs this practice is a car dealership wanting to ensure the high visibility of its location, while avoiding the market fluctuations associated with retail rents.
Other businesses have facilities with characteristics unique to their industry, such as high ceilings, heavy duty floors, crane systems and storage yards. In this instance, it is more practical to build to their specifications than to modify existing properties in the rental pool.
Professional firms often throw off large cash flows and choose to invest in their real estate. Many long-term business operators have come across golden opportunities to buy their building from a distressed or retiring landlord. Several entrepreneurs have shared that they have earned as much money from their real estate investments as from running the business.
Today, a large number of successful baby boom entrepreneurs are planning to retire or pull back from their businesses. In fact, statistics indicate that many postponed their exit because of the Great Recession. The North American economy is back on much more stable footing, and Canadian entrepreneurs are facing the happy problem of planning the sale of successful businesses, as well as commercial real estate at record values across the country.
Some important questions are: Do they want to sell the business and the property together? And if the answer is no: Which one should be sold first? There is no generic answer to this question. Each situation is different. Failing to understand how the sale of the business will affect the value of the building is often an expensive mistake.
Another frequent mistake is to sell the business with a long-term lease for the property to the new operator. The purchaser understands he is negotiating with the building owner, and the vendor may make lease concessions that reduce the value of the building. Many new landlords come to appreciate the impact only after they are unable to sell the building for market value.
It is also important to understand how vacancy will impact the value of the property. Large, modern office buildings and distribution centres are only moderately affected by the owner operator leaving – it is relatively easy to replace them. Medium-sized facilities are often heavily discounted by the market without a strong, long-term tenant. Smaller buildings, on the other hand, typically achieve the highest prices when sold vacant to another entrepreneur. Remarkably, there is no obvious relationship between the sale price of a building and the cost of renting a similar property.
In my experience, it is crucial for the prospective entrepreneur vendor to establish a strong team in advance of any sale. This team should include a tax professional, a business broker and a real estate advisor experienced in selling and leasing commercial real estate.
Will Canadian commercial property values continue to climb? Should you sell your building before selling your business? Making such a decision is based on your individual circumstances. I can quantify the trade-offs you will be facing. Believe me: Your lawyer and the person who sold your house cannot.
About Steve O'Reilly
Steve is a commercial real estate professional with 17 years’ experience in the Greater Toronto Area. He focuses on investment sales and multi-location portfolios. He has successfully completed over 400 transactions.