Many business owners aren’t sure what options are available to handle their business real estate when they sell their company. It is important to understand the value of the real estate and the tax liabilities associated and it’s important to consider your goals as the owner of the property – immediate liquidity or retaining the rental income for some period of time going forward.
If you own the real estate in a separate entity you have a clearer path to valuation. Any revenues or costs associates with the real estate are recorded on a separate income statement, thus making it easier to value the building/land separately from the business.
On the other hand, if your company owns the real estate, additional diligence is required to delineate which expenses and/or revenues should be considered separately from the business. Prior to a business sale it is important to get a third-party appraisal of the real estate so all parties have an understanding of value. Also, if you are a C Corp and your company owns the real estate then your real estate will be taxed differently. You should consult with your tax advisor to understand these implications.
A general proxy when valuing real estate is to apply a capitalization rate to market rent. For example, if you pay $200K/year in rent and you apply a 10% cap rate, then you’re pegging your real estate value at $2MM ($200,000/10%). Know that cap rates vary based on location, building type and condition.
Like all real estate transactions you have the option to sell or lease the building. Selling provides immediate liquidity while leasing your facility provides a longer stream of income, plus all the upside of selling the real estate down the road. Some buyers prefer to purchase the real estate with the business and others elect to enter into a long-term lease. If you want to sell the real estate and the buyer prefers a lease (many buyers do not want the hassle of real estate assets), another option is to sell the real estate to a third-party who will hold the lease with the business. You get liquidity and the buyer doesn’t have to worry about a real estate investment – win-win.
Recognize that you have a number of options from selling or leasing to the buyer of your business, selling or leasing to a third party or holding on to the real estate and selling down the road.