By Josh Tew, Pintail Capital Partners
Many of our clients are successful business owners or service providers who owner-occupy commercial real estate. Typically, the business leases the real estate from a related but distinct legal entity that owns the real estate. Just as a home is often a family’s greatest single asset, owner-occupied real estate, managed astutely, has the potential to be a significant business asset. However, if mismanaged, its value will deteriorate.
Commercial real estate’s value is predicated upon the quantity and quality of its income stream. Assets with long-term, quality income streams are in high demand and prized by investors. Currently we are experiencing a seller’s market: there is simply more capital chasing investments than quality investment opportunities. With owner-occupied real estate, the business owner is both the landlord and the tenant, affording a unique opportunity to optimize value. The opportunity is most easily seized when planning for retirement, succession, or business growth.
There are several ways to realize this value. Many business owners are familiar with the concept of sale-leaseback, in which the business sells its owner-occupied real estate for a premium to an investor in exchange for a long term “lease back” from the business. This is a viable option for some businesses but is not the only way value can be unlocked and leveraged. Strategically structuring a lease may prove advantageous should the business owner retire, sell part or all of the business, or grow the business, especially when growing with outside capital. Formalizing a lease that protects the rights of the business and business owner while positioning the property for maximum value in the case of sale, appraisal, or refinance is the objective.
Now is this time to optimize your real estate investments. If you’d like to explore the value of your real estate and how a more effective lease structure could pay dividends, we would be pleased to work with you to develop an effective strategy.