Small Business and Real Estate Ownership

by Mark Long

Small business owners have several important decisions to make as they navigate toward the idea of success. As small businesses grow, they begin to look at the real estate that their company occupies as strategic. It becomes apparent that the vehicle of real estate can play a major role in the success of the company and the long-term wealth of the business owner.

Rent expense is typically second only to payroll. Justification for this expense comes in many forms, but nothing affects the morale and culture of a company as much as the space that it occupies.

There are several instances in Kansas City that show how real estate shapes a company. Some examples include Sprint’s campus in Overland Park, Hallmark Cards’ headquarters at Crown Center and Aquila’s headquarters in the historic New York Life building in downtown Kansas City, Mo. These companies have invested millions of dollars into real estate and countless hours of consulting fees and corporate planning to develop the feel and perfect the efficiency for the real estate they occupy.

Another similarity in all these instances is ownership. Each of these companies controls their destiny by being their own landlord. But it’s not limited to the large businesses. Small business owners can benefit from real estate ownership in many ways.

Real estate is a sound investment. Too often, we see business owners invest every dime they make back into the business. Real estate is a nice way to diversify into a historically safe investment. It also can be a key part of a retirement plan. A vision of retirement with a rent check coming in for a building that is paid for is a dream that can come true. Not only do rents increase at rates comparable to inflation, but real estate appreciates as well. This appreciation and equity gain can be a useful source of capital.

Equity in real estate can be used for other parts of the business. As you continue to pay down the debt in your building, it continues to appreciate. The real estate can be used as collateral to borrow money for fixtures, furniture and equipment.

As the landlord for your business, you have better control of your destiny. You don’t have to worry about a landlord viewing you as a captive tenant when it comes time to negotiate a lease extension. The IRS will make sure you charge a market rent to your business. However, it is easier to explain to your landlord that your rent check may be a little late when you own the building.

A small business owner needs to look at the real estate investment as a separate business. This real estate investment also needs a budget and a property manager. Without proper management and annual budgeting for capital expenses and preventive maintenance, this investment will deteriorate.

Small business owners also need to remember that change happens. When investing in real estate for your company or building a new facility, it must be designed for all purpose use, not just the specific use of your business. An exit strategy is important. When change happens, you need to be able to re-let the building or sell it in a timely fashion. Special-use properties take longer to sell and they are harder to lease. Take advantage of a successful, growing business by growing your real estate portfolio.

There are many ways to set up this investment from a tax standpoint. It is most common for business owners to set up a real estate holding company in the form of an LLC and lease the property back to the business. Take advantage of all of the tax benefits of owning real estate by consulting your tax attorney or your CPA. Small business owners can liquidate real estate holdings completely by completing a sale/lease-back transaction. These sale/ lease-back transactions are attractive to real estate investors in this era of the 1031 tax deferred exchange.

Again, the property owner is in control as the building is valued based on the future income stream (rent) and the owner determines the rent rate. The possibilities are endless.

Mark Long, is the Senior VP and Director of Sales and Leasing for Zimmer Real Estate Services, Inc. and an Ingram’s 40 Under Forty 2005 honoree. He can be reached at 816.512.1011 or by email at MLong@Zimmercos.com.