Unlocking the Value of Owner-Occupied Real Estate
Many companies prefer to own real estate that is critical to their business operations. Some privately held companies choose to have the owner of the business purchase the real estate used for their business and lease it back to their company for tax reasons and asset diversification. Often, they have owned this real estate for many years. Thus, it most likely has appreciated in value. Net leased real estate assets with long term leases in place are in high demand today, as investors look for reliable cash flow, tax shelter and a hedge against future inflation. Now may be the time to consider unlocking some of the capital that is tied up in real estate to take advantage of this sellers’ market.
We were recently asked to advise a client that was preparing to sell one of their businesses. They also wanted to sell the real estate that the business occupied. Our job was to figure out how to maximize these sale proceeds. Should they include the real estate in the business sale or sell it as a separate asset?
The buyer of the business was a strong publicly traded company. They were willing to enter into a ten-year lease for the property with options to extend beyond that. Paramount advised our client on what the real estate would be valued at with a long-term net lease in place as well as to what market rent should be and other important lease terms. In turn, our client was able to compare this valuation to what the business buyer was willing to pay for the real estate. We determined that our client would maximize his return by separating the business sale from the real estate sale. Ultimately, our client entered into a long-term net lease with the entity that purchased the business. Shortly after closing on the sale of the business, Paramount listed the net leased real estate For Sale. We quickly sold the property for over asking price.
Does a Sale Leaseback Make Sense for Your Business?
If your company is occupying real estate that it owns but you want to unlock some of the value in the real estate to reinvest back into the business or use for other purposes, today is a great time to consider entering into a sale leaseback. You can structure a long-term lease for the property under terms that fit your business requirements, and then free up your equity through an investment sale transaction. With today’s low interest rates, cap rates on good investment real estate are the lowest we have experienced in decades. This translates into a higher sale price. Most businesses can deploy the cash received from the sale of their real estate back into their business. Thus, making a higher return on this capital then they would have leaving it invested in their corporate real estate.
Please feel free to reach out to a Paramount real estate professional to see if a sale leaseback makes sense for you.
Written by: Fred Hedberg, SIOR
Unlocking the Value of Owner-Occupied Real Estate
Tax Tips for Owners:
Real estate can be one of the most effective ways of mitigating high tax burdens. Depreciation and Section 1031 exchanges are two major ways that this can be accomplished. Depreciation is the reduction of the book value of an asset over time. Annual depreciation reduces net income, and can create “paper losses” while still producing positive cash flow. The Internal Revenue Code Section 1031 (commonly referred to as a 1031 Exchange) allows the taxpayer to defer paying capital gains tax under certain circumstances. The original asset is “exchanged” for a like-kind asset within a pre-determined time period. This may allow a property owner to reap the benefits of owning a more expensive property (higher rental income) without having to pay capital gains tax on the sale of the first property.
If you see a substantial increase in your property taxes, consider protesting the increase with the city. If you are considering protesting your property taxes, give your broker a call to explore the best strategy to approach. It may be as simple as getting an appraisal but there may be additional steps necessary for a successful outcome.
Tax Tips for Tenants:
If your lease doesn’t allow for you to appeal the property taxes yourself, contact your landlord and see if they are considering a tax appeal. Some leases allow you to file an appeal on your own if you occupy 100% of the building. There are a number of professionals in the area that specialize in this type of work. Be sure to choose an advisor that you are comfortable working with to accomplish your goal.
For more information,
reach out to one of our experienced professionals at:
Paramount Represents Seller in Plymouth Investment Sales Transaction
Fred Hedberg, Principal of Paramount Real Estate Corp was engaged in November 2020 by SJH Real Estate, a long-time client, to sell a NNN leased property it owned in Plymouth Minnesota. The owner of SJH Real Estate had recently concluded the sale of part of his business to SiteOne Landscape Supply LLC. SiteOne Landscape Supply LLC is owned by a publicly traded company that provides wholesale goods for green industry professionals. SiteOne has a market cap of $6 billion with over 500 facilities throughout the United States and Canada. As part of the purchase, SiteOne entered into a 10-year NNN lease with two-5 year options to extend for the property that was used to operate the business unit it had purchased. During negotiations, Fred advised SJH on the best way to structure the lease. He also advised on ways to maximize the value of the real estate and make it saleable in the future.
The property, located at 1205 Nathan Lane in Plymouth consists of 8.15 acres and a 17,580 square foot showroom/warehouse building. The property’s zoning allows for outside storage. Finding a property with zoning that allows for outside storage within the I-494/I-694 loop of this size is very rare and in high demand. The zoning, financial strength of the tenant, and the long term lease made this property very attractive to investors.
Paramount Real Estate Corp/TCN Worldwide started marketing the property For Sale on November 12, 2020. Fred contacted several local investment groups he thought might have an interest in this property. He received eight offers within two weeks, the majority of which were at full asking price or above.
Selecting a Buyer
The top five buyers were asked to submit their best and final offers. Three of the five buyers were at the same price or very close to the same price. The seller decided it would be in his best interest to close on a sale by December 31, 2020. Paramount advised the top three buyers to make one more final offer. They were also asked to provide evidence they could close by December 31. Upon careful review of the final offers and discussions with each of the buyers, one was selected.
Fred and the Seller selected a buyer they felt would have the best ability to close on the sale by year end. Both parties signed the purchase agreement on December 8, 2020 with a short due diligence period. All parties worked together to get an appraisal and environmental study completed in less than three weeks. Christmas even fell within that three weeks. The sale closed on December 30, 2020 and the property sold for $500,000 over asking price.
With a time from listing to close of less than seven weeks including holidays, this was an extremely fast transaction. As the real estate world gets more complex, most transactions are taking longer. This sale is an example of how complex real estate transactions can still be completed in a short time frame if all parties work together towards a common goal. It also demonstrates the strength of the Twin Cities investment sales market and investors’ appetite for good real estate with strong credit tenants and long-term net leases.
Written by: Fred Hedberg, Principal | Paramount Real Estate Corp | TCN Worldwide
IOT? WHAT IS IT???
The Internet of Things, or IoT, is a little-known concept becoming increasingly more important in everyone’s daily lives. A technical definition is: cyber-physical systems incorporating internet connectivity with the ability to sense and react to the world in innovative and highly useful ways. In practical terms, you can think of IoT as the fine tuning of efficiency in the supply chain using technology. For example, IoT is the Amazon Echo you use to control the temperature in your home. It’s the smart glasses your warehouse workers wear to guide them in filling customer orders. That’s right. There are glasses worn by humans, that have visual and verbal cues provided by a connected inventory and sales system overlaid on real world pick locations. Think virtual reality glasses, with the actual warehouse racking in full view. Glasses that guide them around the warehouse to pick and fill orders.
Businesses have been searching for ways to acquire more data and use it effectively to reduce costs and increase efficiency. Until recently, the processors needs were too large, costly, and inefficient to scale up. Three new developments changed this:
First, RFID tags – Radio Frequency Identification tags, which are low-power, inexpensive chips that can communicate wirelessly. These allow manufacturers to track inventory location. As well as monitor information such as manufacturing date, expiration date, and warranty periods.
Second, the increasing availability of broadband internet and cellular and wireless networking. These systems provide digital infrastructure for IoT to be more broadly used in manufacturing.
Third, the adoption of IPv6, (internet protocol version 6), which, should provide enough IP addresses for every device the world is ever likely to need.
Now the stage is set to dramatically increase the effectiveness of IoT in at least three distinct areas:
(1) PRODUCTION AND FIELD OPERATIONS
IoT solutions can be used to monitor machine utilization such as run time, operating speed, product output, repair needs, and quality control. The data is gathered in real time then aggregated in the cloud. It is transmitted to shop floor workers’ user interface apps making immediate adjustments. These systems can monitor inventory of raw material on the shop floor and automatically order parts to keep production running.
(2) SUPPLY CHAIN MANAGEMENT
IoT supply chain management solutions monitor the location, status, and condition of every object at any segment of the supply chain (be it an individual inventory item on a warehouse shelf or a truck delivering supplies). For instance, with the traditional supply chain management methods, manufacturers could only retrieve general data such as availability of a part. With IoT in the manufacturing and distribution supply chain it changes everything. Businesses can get information such as the location, condition, shelf life, quality, AND availability of each item.
(3) CONTROL OF OUTSOURCED OPERATIONS
When a business builds or buys a facility in a different city, state, or country, it still needs to maintain quality and production standards. IoT-driven utilization monitoring solutions help industrial companies keep production and distribution on track. They do so by monitoring real-time equipment efficiency metrics without direct access. Smart products located in one city can access and assess real time data in another city. This allows companies to make changes to and keep the distribution process moving effectively and efficiently.
IoT may be the new hot technology buzzword, but there are challenges. Lack of qualified employees who can use it, cost implications, and data privacy concerns are causing businesses to carefully measure the costs and benefits of IoT adoption. In most cases, businesses are taking a step-by-step approach. This ensures they are implementing processes that match company culture and create efficiencies. So, IoT is not yet self-aware, but beware, you will be hearing a lot more about it in the years to come.
Written By: John Young, CCIM