For those selling a business, and where they lease the property the business occupies, the long-term effects of the lease on the landlord are of little concern to you since you will no longer be involved. But for those selling a business they occupy in a property they also own, even if separate entities exist, the structure of the lease is of far more importance. In this scenario, the owner is selling the business but not the real estate.
The three areas we will introduce here are valuation, refinance and cash flow. The value of the property is directly related to the income that property can generate, independent of any other income the owner receives as a result of the business sale. Therefore it is important that the lease ‘coupon’ rate, and additional expenses are both accounted for and at market levels. This is important because when you go to sell or refinance your property, the achievable valuation, or appraisal value, will be determined based on the contracted rental income. In a refinance scenario, a higher rental income will produce a higher valuation which will allow you access to more cash on a percentage basis of total value.
Speaking of cash, cash flow or income generated needs to be considered even if a sale or refinance is not on the table for years. Generally, most leases have built-in annual increases or adjustments to the base rent. If you establish a lower or higher initial base year rent, the future increases will build on that amount. When you factor in the compounding nature of percentage based annual increases, the higher year one amount grows substantially greater over time than the lower amount, especially in the case of longer-term leases.
There are many other factors and deal points that need to be considered in the lease itself. Maintenance, insurance, taxes, and options are other significant factors when evaluating your lease. Every situation has its uniqueness and nuances. We look forward to the opportunity to discuss your situation with you. Over the years we have helped many other companies, families and individuals like you navigate this process; we look forward to helping you, too. Call us today to discuss your situation.
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Christopher J. Destino, SIOR, a Principal at Lee & Associates, is an engaging, responsive professional who enjoys working closely with his clients and helping them succeed.
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