Structuring Your Lease When You Also Own the Property

Working within the industrial property landscape in the Socal commercial real estate world, we find that many of our clients both own the real estate that they presently occupy and run their existing business operations within that property.  Using the operating business to acquire real estate is one of the surest ways we have seem people build wealth, and we have helped many toward that end.  In our time we have found that the structure of the operating lease to the property owner entity has significant impact on the performance, cash flow, and value of both the real estate itself and the operating business.  Furthermore, structuring this lease in an optimal way is critical for positioning your business and/or your real estate in the most attractive way to create maximum value and gains in any potential sale or financing situation. 
 

While we can always discuss this with your Tax or Legal Advisors, here are some items to consider:
Rental Income vs Business Income:  There is a balance between the business income generated and the rental income generated.  Both need to be in line with market standards or inflated numbers will be discounted in any valuation considerations.
Tax Advantages:  Depending on the long term and near-term strategies, different approaches to the  lease may be taken to either increase the value of the business or the real estate within a pending transaction or time period.
Financing Assistance:  A long-term market lease with a creditworthy entity as the guarantying tenant provides lenders stability in considering financing options to borrowers.  A lease that is poorly structured will cause lenders to raise questions and limit what they are able to do with financing.
Negotiating Leverage: A well-structured lease gives you leverage when negotiating with buyers, because they understand the well -structured lease will open more financing sources for them, and the lease provides a clearer path for management of future cash flows. You can use the terms of the lease as a selling point and potentially command a higher sale price and better terms in refinancing.
Cash Flow to Valuation: Owners charging too little to their operating business in rent are leaving potential income on the table, which would negatively impact the valuation of the property based on its income stream.  This also artificially inflates the value of the business because they are not absorbing that delta in below market rents in the operating expenses, thus painting a picture of a higher net income.  
Transition Planning: When you're ready to sell your business or real estate, a well-structured lease can facilitate a smoother transition period, increased valuation, and overall better outcome for the seller and buyer.  This provides opportunity to make lifestyle changes and free more time for personal projects.
Risk Mitigation: A carefully crafted lease can help mitigate potential risks for the buyer, such as unpredictable rent increases or lease termination, providing them with greater confidence in the investment.  This will reduce the seller’s time to market and provide a more transparent investment.
Control Over the Property: The plan of selling the business and keeping the Real Estate. By retaining ownership of the real estate, you maintain control over the property, its use, and future income streams. Selling a business generates immediate wealth that can be used for other investments, while holding on to the real estate at the same time provides long term wealth and income.
To maximize the benefits of structuring your lease properly, it's advisable to consult with real estate, legal, and tax professionals who have experience in commercial real estate transactions. They can help you create a lease agreement that aligns with your goals and enhances the marketability of both your business and the real estate, while also addressing potential legal and financial concerns.  Call us today to begin the discussion on any of these topics.