At some point, it makes sense to consider purchasing the real estate your company occupies. “It can be a strategic play,” states Jeremy Blanche, vice president of commercial banking at Salem Five. “It can be a great way to diversify, grow ownership’s personal investment portfolio, and act as an asset that can be integral to the purpose of the operating company.”
To the latter point, he says, it’s not just an investment in your land and/or building(s). “In its simplest form, a business owner should look at this investment much differently than a real estate investor would,” Blanche explains. “The business owner must look at the rent and occupancy expenses on the business’s P&L, and come to terms with the ability to repay the mortgage without causing undue burden on the company’s operating health. It should wash or alleviate cash flow, while creating the ability for ownership to build equity over time. Appreciation may or may not occur, depending on how long the asset is held and the timing of the sale. In some cases, particularly in a forced sale—if the business is moving or has incurred financial difficulty—the building could lose value.”
In addition to those considerations, potential owners need to look at other issues associated with acquisition, including the macroeconomic factors related to the timing of an investment. For instance, it is important to buy at best value possible, but the business owner must also consider financing factors like the interest rate environment, ability to obtain financing based on the current capital markets, and the outlook of the industry the business is in. While the building may have the ability to be leased, a savvy investor should heavily weigh the ability for the business to repay the debt independently over the life of the mortgage.
A bevy of potential benefits
In some cases, the operational benefits are simply too great to ignore. For example, Resin Designs, a custom adhesive manufacturer in Woburn, worked with Salem Five to acquire its building in 2013. “We’re in a building that fits our operational model perfectly, so buying it made sense,” says managing partner Tim Desmond. “Having our lab, warehouse, office, and order fulfillment in one location at the ultra-convenient node of I-93 and I-95 is strategic and enhances our competitive advantage. We were also able to bring R&D, manufacturing, packaging, and shipping together.”
Beyond general considerations around buying are the tax and other financial benefits. Mark Henry, CPA, tax manager at Kirkland Albrecht & Fredrickson, points out the following:
- Section 179 and Bonus Depreciation. During 2013, tax provisions allowed accelerated deductions for equipment and furnishings purchases that are put into service the same year that they're purchased. Under Section179D, immediate deductions are allowed for cost of qualified energy saving improvements to commercial buildings at a maximum of $1.80 per square foot.
- Cost segregation. This study, performed by engineers, can determine the value of components of a building that can be depreciated over shorter lives. For example, electrical work for operating specific equipment would be assigned a five- to seven-year depreciable life, rather than 39 years. This allows for quicker tax write-offs.
- 1031 exchange. Investment property used in a trade or business sold at a gain would normally result in taxable income. A 1031 exchange allows the sale funds to be applied toward the purchase of a similar property within 180 days of sale, in order to defer the gain until the replacement property is sold. The purchased property must be of equal or higher value to result in no current-year tax. This provides leverage for a property owner to move to a larger property as their business grows, while deferring taxes.
- Energy credits. Tax credits of up to 30 percent of the cost of qualified energy property are available through tax year 2016.
If you do decide to buy, says Blanche, it’s important to be comfortable with the process. “Work with trusted advisors, including attorneys, your CPA, banker, and other professionals that have experience in these types of transactions. Business owners who have a firm understanding of the process of both acquiring a building and obtaining financing have an advantage over the novice. The entire process is a negotiation with multiple parties, including the current owner, existing tenants, banks, and vendors who provide service to the building. Preparation and experience are great allies.”
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