Business Real Estate: Friend or Foe?
by John Stivers, CBI, M&AMI, BCI, BVS
Broker, President of Professional Business Brokers, Inc.
It certainly isn’t the first time I’ve heard it… “As a small business owner, is owning the real estate and building from which my company operates, an advantage or disadvantage?”
Let’s take a closer look at the pros and cons:
Liability: Generally, when asked, an attorney will recommend that you hold the title to your real estate in YOUR name, that it be kept separate from your business and organized under some sort of a corporate structure. This serves as a hedge against potential lawsuits bred by product or service problems within your corporation. The lawsuits will name the principals and the corporation. Typically, real estate is the asset with the highest ‘value’. By holding the real estate in your name, your spouse's name, a trust of some sort or any medium that allows an “arms-length” relationship between the owner and the corporation, your real estate will be better protected from being considered fair game.
Income: As the owner and tenant, you could lease the facilities to the corporation or yourself. But why would you want to do that? The rent that you pay yourself comes to you as ordinary income. This is a method that is often employed when an owner is trying to minimize W-2 wages and social security taxes. However, be careful as this is a favorable target for Florida’s Department of Revenue. The lease may be subject to Sales and Use Tax. Failure to collect and pay sales tax can create a huge liability that will stop the sale of your business in its tracks. If audited, the F.D.R. will look to see that you have a formal lease in place and that it is properly executed, that you charged yourself a Fair Market Rent, and that you charged, collected and paid sales tax. If not, you will be subject to fines; late filing fees, possible prosecution and you run the risk that they will “padlock” your business.
Sale: Assuming you have decided not to retain your property and lease it to the buyer to collect rent for retirement annuity, include it with the sale of your business. Whether you hold title to your business individually or through your corporation, including it with the sale will prove beneficial.
Value: If the building and real estate are an “operating assets”, in other words: a dedicated facility which enhances the operation of the business, then the real estate is valued as an asset of the business. As such, these properties are worth more than their stand-alone value. Example: A marina or a manufacturing facility with train tracks running through the building are examples of operating assets as these businesses cannot be easily moved. They contain physical features, vital to the functionality of the business. On the other hand, a retail store, bar, restaurant, etc. can be moved just about anywhere. As a non-operating asset, the real estate is valued separately by an MAI certified appraiser and added to the value of the business.
Sale-ability: When real estate and a business are offered together, it makes the sale of the business more desirable. Buyers look for the added asset value, stability and investment of owning the real estate. SBA lenders generally amortize the real estate portion of the transaction over 25 years and the business portion over 10 years. Combining the two, provides the buyer with a longer term amortization, thus affording the buyer a larger loan for the same, or lower monthly payment. Often times, the selling price of a business without real estate is artificially capped due to the maximum amortization of the 10-year SBA loan.
Bank-ability: Contrary to what the attorney's recommend, I always liked for the real estate to be owned by the same corporate entity as the business. This greatly strengthens the balance sheet with a significant asset, provides additional depreciation and makes borrowing money from banks and establishing trade credit, much easier. Just make sure that you carry enough business liability insurance to ward off the wolves!
Conclusively, if you have an operating asset, you might as well hold the title to it under your corporation. You are probably paying all of the insurance, taxes, etc. through the company anyway. When it is time to sell, include the real estate as part of the deal. You will be rewarded for your effort. If on the other hand, you have commercial property and buildings that have a wide variety of uses, you might want to hold those in your name and lease them to yourself or the buyer. This type of property will have a better long-term-investment value and is probably worth the extra hassle of charging and paying sales tax. Whoever performs your business valuation can tell you the impact, if any, of including or not including the real estate. Generally speaking, if it is not an operating asset and the business can be sold and funded over a 10-year amortization, with the business paying a Fair Market Rent, then keep it and enjoy the revenue stream.
John S. Stivers, CBI, M&AMI, BVS, BCI, Broker, President of
PBBI-Mr. Stivers founded PBBI in 1991.
Since the company’s inception, Mr. Stivers has had many
awards bestowed upon him. He received The Million Dollar Plus Award
provided by the Business Brokers of Florida in 2003 through 2006. He will
also receive the same award in 2007. Mr. Stivers was also given The
Million Dollar Club Award provided through the Florida Business Brokers
Association in 1995 through 1998 and then again in 2000. In 1998, Mr.
Stivers was awarded The Diamond Achievement Award for Sales of $10
Million or more. Mr. Stivers has earned the designations of Certified
Business Intermediary, Board Certified Intermediary, Business Valuation
Specialist, and is one of only two Merger & Acquisition Master Intermediary
in Brevard County. He is also a current member of the Florida Society of
Accountants and a Licensed Real Estate Broker. He graduated with honors from
Northwestern Military & Naval Academy and served in the United State Air
National Guard. You can contact John Stivers at
Jstivers@pbbi.com or at (888) 287-7763.
