Real estate included? Featured

8:00pm EDT August 26, 2007

When planning an exit strategy, business owners that own their buildings might find it advantageous to sell their real estate holdings separately from the business itself. By implementing such a strategy, additional real estate proceeds can be procured while the company’s financial statements are fortified.

The current environment is favorable for those looking to sell commercial real estate holdings. A number of factors, including the potential for above-average returns, attract investors to corporately-owned real estate.

“The market for investment real estate is experiencing a level of liquidity that we’ve not seen before,” says Jim Vondran, an investment properties specialist with CB Richard Ellis.

Smart Business spoke with Vondran about the benefits of selling a company’s real estate holdings separately from the business itself, why the market for corporately-owned properties is so robust and who should be consulted prior to a sale.

Why should a business owner consider selling the company’s real estate holdings separately from the business itself?

Typically when a business is being sold, the real estate assets are included as a part of the sale. Unfortunately, when corporate real estate is included as part of the business sale, the party selling the business may have left a considerable amount of money on the table. This is because when the buyer is placing a value on the real estate, they generally are looking at the book value of the real estate, which may be very different from what the potential market value of the real estate could be. In most cases, the value of real estate with a long-term lease in place is considerably higher than the value the business is carrying the building on its books for. Selling the building in a separate transaction can help the business owner to unleash that higher value.

In addition to higher real estate proceeds, what other benefits can be achieved?

There are multiple benefits above and beyond just the increased proceeds via the separate sale. The biggest one in a situation involving a business being sold is how the sale improves the company’s financial health. The sale provides the company with an infusion of cash without additional debt being incurred. Also, the negative impact of depreciation and interest on the income statement is eliminated when the building is sold. In addition to the benefits on the company’s financial statements, prospective buyers for the company may prefer the flexibility afforded by being in a leased facility when compared to being in an owned facility.

What is the current environment for the sale of corporately-owned real estate?

We’ve overseen the sale of a number of corporately-owned properties in the first half of 2007 and investors’ appetite for these types of properties remains healthy. Investors are attracted to corporate real estate in particular because it tends to provide a better return when compared with other income-oriented investments like treasury bills, municipal bonds and corporate bonds. As of today, the 10-Year Treasury Bill rate is at less than 5 percent. By contrast the cap rate for corporate real estate with a ten year lease can range from 6 percent to 9 percent. In general, single-tenant, net leased assets tend to attract a larger pool of investors, as they tend to be more “hands-off” in nature when compared to a multi-tenant asset.

If a business owner is considering the sale of their business, what steps should they take in order to determine whether it makes sense to sell their building separately?

If a business owner is contemplating the sale of their business, they should consult a commercial real estate professional that specializes in the sale of income producing properties and request that they provide a disposition proposal that includes an opinion of value. This will help the company to at least begin the discussion of whether or not it makes sense to sell the building separately or include it as part of the sale of the business.

In addition to contacting a qualified commercial real estate professional, the company or business owner should consult their tax advisor to make sure that any potential tax liabilities are fully considered.

JIM VONDRAN is an investment properties specialist with CB Richard Ellis. Reach him at (513) 369-1325 or