Should You Sell Your Building Before or After You Sell Your Business?

Many companies own their real estate to maximize their revenue in the long run. When it comes time for a company to sell both their real estate and the company as a whole there is not necessarily one best strategy. The order in which you sell your real estate and company depends on the type of space, type of lease, and various other factors that are unique to your company.

By Colliers International

Many businesses choose to own the real estate from which they operate for a wide variety of reasons. The most common reason is to ensure the continued availability of the facility and to cap the associated costs. A particular type of business that employs this practice is a car dealership wanting to ensure the high visibility of its location, while avoiding the market fluctuations associated with retail rents.

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Other businesses have facilities with characteristics unique to their industry, such as high ceilings, heavy duty floors, crane systems and storage yards. In this instance, it is more practical to build to their specifications than to modify existing properties in the rental pool.

Professional firms often throw off large cash flows and choose to invest in their real estate. Many long-term business operators have come across golden opportunities to buy their building from a distressed or retiring landlord. Several entrepreneurs have shared that they have earned as much money from their real estate investments as from running the business.

Today, a large number of successful baby boom entrepreneurs are planning to retire or pull back from their businesses. In fact, statistics indicate that many postponed their exit because of the Great Recession. The North American economy is back on much more stable footing, and Canadian entrepreneurs are facing the happy problem of planning the sale of successful businesses, as well as commercial real estate at record values across the country.

Some important questions are: Do they want to sell the business and the property together? And if the answer is no: Which one should be sold first? There is no generic answer to this question. Each situation is different. Failing to understand how the sale of the business will affect the value of the building is often an expensive mistake.

Another frequent mistake is to sell the business with a long-term lease for the property to the new operator. The purchaser understands he is negotiating with the building owner, and the vendor may make lease concessions that reduce the value of the building. Many new landlords come to appreciate the impact only after they are unable to sell the building for market value.

It is also important to understand how vacancy will impact the value of the property. Large, modern office buildings and distribution centres are only moderately affected by the owner operator leaving – it is relatively easy to replace them. Medium-sized facilities are often heavily discounted by the market without a strong, long-term tenant. Smaller buildings, on the other hand, typically achieve the highest prices when sold vacant to another entrepreneur. Remarkably, there is no obvious relationship between the sale price of a building and the cost of renting a similar property.

In my experience, it is crucial for the prospective entrepreneur vendor to establish a strong team in advance of any sale. This team should include a tax professional, a business broker and a real estate advisor experienced in selling and leasing commercial real estate.

Will Canadian commercial property values continue to climb? Should you sell your building before selling your business? Making such a decision is based on your individual circumstances. I can quantify the trade-offs you will be facing. Believe me: Your lawyer and the person who sold your house cannot.

 

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Nick Banks

Nick created Front Street Commercial Real Estate Group in 2002 and spent the first eight years developing and acquiring office and retail projects in South Florida as well as North Central Florida. In 2010 the focus of the firm was shifted to primarily serve third party clients and perform brokerage, property management and mortgage banking functions. Nick has personally developed and acquired nearly 200,000 square feet of office and retail properties in markets throughout Florida. Prior to founding Front Street, Nick was the Director of Finance and Dispositions for Stiles Corporation in Fort Lauderdale where he financed and sold over $500 million in commercial real estate. Before joining Stiles, Nick was an Associate Director at GE Capital Real Estate where he sourced over $200 million in financing throughout Florida. Nick is a graduate of the University of Florida with a degree in Finance and a concentration in Real Estate. He serves as a board member and current vice-chair for the United Way of North Central Florida where he also chairs the Development Committee. Nick is actively involved with the Gainesville Area Chamber of Commerce where he serves as a board member and committee member for the Council for Economic Outreach. He is also a recent graduate of Leadership Gainesville which is a year long leadership program hosted by the Chamber. He is a member of Grace United Methodist Church where he has served as finance chair and as a member of the leadership council. Nick serves as an advisory board member of the University of Florida Bergstrom Center for Real Estate Studies. Nick was recently named chair of the Gainesville committee for the North Florida chapter of Urban Land Institute (ULI). He is a licensed real estate broker in the State of Florida and is a long time member of the International Council of Shopping Centers.

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