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