When businesses purchase their own real estate to occupy instead of just renting a property owned by someone else, they not only save on rental costs but have the option of using their real estate as they see fit. Owner occupied commercial real estate affords several options to create and capture value. If you’re considering investing in commercial real estate, you should consider some financial benefits such a property can generate.
First, your business can do a sale-leaseback transition that will sell their property to a finance company with an accompanying leasing agreement for a period of time, typically at least five to ten years. This arrangement can provide your business with a substantial infusion of cash while allowing the business to keep using the building, with the likelihood of a repurchase clause. At the end of the lease agreement, a repurchase clause allows you to buy back the building. Also, if you wish, you can lease parts of your building yourself. For example, you can lease spaces inside the building for office space or storage uses. You can even lease the roof to cell phone companies to put up antennas.
Another financial benefit is a cash-out refinance. This would entail re-leveraging your owner occupied commercial real estate to optimal debt-to-equity and debt-service-coverage ratios that would generate cash from your property that is not subject to taxation. This also means you can receive cash from your property without selling it. Be aware that how you use this loan may generate interest that is not tax deductible.
In the event that your business expands to the point that you need more space than the building provides, you can engage in a tax-free exchange of your property for a like-kind property. Since the definition of “like-kind” is loose in tax law, you could take a commercial building and exchange it for a different kind of real estate, like an apartment building. A tax-free exchange can even be arranged for land that is not built on.
Finally, if you’re looking to offload your property without incurring tax costs, you could donate the building to a charity. If the charity qualifies under the tax code, you don’t have to pay large taxes if your property is highly appreciated. You could also get an annuity of payments from the charity that will supply you income for a time. With any of these options, your business has ways to make your investment in owner occupied commercial real estate a success.