By Jim Ward and Rusty Kruciak
It will come as no surprise that investors in the real estate market are doing very well right now. With these increased real estate values comes significant opportunity for business owners who own the property on which their business is operating. With so many gains coming from the investment in real estate, business owners need to ask themselves: “Am I in the real estate business?” If not, it might be worth utilizing your real estate holdings to get proceeds to focus on the business that you are in.
Business owners invest in real estate related to their business for a number of reasons, including (among others) diversification, tax reduction, control, operational flexibility and avoiding “flushing money down the toilet” by paying rent. Depending on a company’s or business owner’s individual situation, real estate can play a major role in the decision-making process, particularly at current values. Below are a number of scenarios that might fit your business:
- For companies that need capital for growth, monetizing an existing real estate investment can be an excellent way to “unlock” capital to grow your business. Just because real estate returns over the past few years are higher than your business returns does not mean that trend will continue. Some businesses are well-served with additional capital to launch a new product line, hire additional salespeople, bring on a formal management team, upgrade their facilities, etc. Rather than bring on investors (or additional investors) as a source of this capital, business owners could consider their real estate as a source of capital.
- For companies navigating an operational transition or those with financial difficulties, an assessment of real estate assets can potentially provide a remedy for operational constraints. In other words, an under-utilized real estate asset can serve as a bridge, helping a business owner weather a downturn.
- For companies that are performing well, decisions around the real estate assets may go unnoticed and/or dismissed. A company may be sitting on real estate that is not being utilized for its highest and best use. For example, the real estate currently being utilized by a niche manufacturing operation may be worth more when reallocated and utilized as a multi-family, multi-use development, giving its current occupant options for growth in a different, possibly more efficient, configuration. In another scenario, it might not be detrimental to the business to move to a location or facility that better serves the business, but is less expensive, thus creating a net gain for the business owner.
- For companies that have developed a portfolio of real estate assets over the life of their business, planning for growth or succession can take on a whole new form when the existing value of the real estate is higher than the value of an entire company. Making the decision to include a parallel real estate strategy can mean the added consideration of operational flexibility, the impact of tax matters, expectations of management and investors and in some cases, asset control. Consequently, careful consideration is crucial when deciding on an effective approach to capitalizing on real estate’s true value.
- For business owners who are looking to sell the business, including the real estate as part of the sale could increase the value of the transaction. Real estate, whether held outside the business or within, has a distinct value separate from the value of the business. The decision to keep or sell the real estate can have a large impact on the net consideration to the business owner.
Remember: In any scenario, the value of the same piece of real estate can vary significantly depending on whether it is vacant or occupied by a long-term tenant. Those otherwise underutilized assets leased on a long-term basis reduce risk for potential investors while the income produced by tenants provides cash flows, often leading to significantly higher property values when owners act on a succession plan. This effect on business value is one of the many considerations business owners need to understand when considering their real estate assets.
With real estate values soaring, business owners should ask themselves:
“Am I in the real estate business?”
In our role as advisor, intermediary and investor, we help many clients evaluate the best strategic direction of their business. With the current real estate market, there have been some extraordinary (and often unintentional) gains on paper. If the situation is right for a particular business, taking advantage of these gains and monetizing this real estate can be another tool to increase profitability, to lead to business prosperity and to promote long-term business value.