Posted 09-01-2008 5:01 pm by
If you own the building your business is located in, you may receive a large chunk of cash needed for your business operations by selling your building on the condition that you can rent it back from the buyer.
As a small business owner, your resources are limited and you need to decide what business you should be in. Suppose you own an industrial company and you also own the building your business is located in. This means in addition to being in the industrial business, you are also in the real estate business.
There is nothing wrong with being in the real estate business, but you need to understand that the real estate business and your industrial business are two completely different businesses that generate very different rates of return. Suppose the money you have in the real estate is generating you 10% a year considering the mortgage is being paid down, the tax benefits you receive, and the appreciation hopefully happens as you expect it to be. Is 10% a year a good return on your money?
Well, what if your money can generate a better return by putting it into your industrial company? Suppose your industrial company needs $200,000 for expansion, and if you had the $200,000, it would generate a 30% per year return on the money. Wouldn’t it make sense to sell your building, receive (let’s say) $200,000 from the sale, and use the money for your industrial operations so you can make 30% rather than just 10% on your money?
The scenario I have just described is called the sale leaseback, where you sell your building subject to being able to lease it back long-term from the buyer. It’s a win-win situation because you get to utilize your money at a higher rate of return, and the buyer gets a steady cash flow by having you as the tenant long-term. It is one of the most overlooked source of business operating capital.
Is the sale leaseback right for you? Well, it depends. Do you want to be in the real estate business in addition to operating your main line of business? Is being in real estate taking your energy and capital away from your main line of business – the place that can generate you higher returns? Being in real estate is considered a slow and steady approach to wealth in the long run. Even though it may generate lower returns in the short run compared to your business, properties tend to increase in value in the long run and you can sell the property for a handsome profit in the future. Your business, on the other hand, may give excellent cash flow in the short run, but does not necessarily increa se in value just by having owned it for a long time. If your business is not profitable in the future, it may not be worth very much at all. Being in the real estate business in addition to your main line of business can be a hedge against your business not doing well in the future. What’s more, you may not need to sell your building to get the money for your business expansion. All you may need to do is to refinance the property.
The sale leaseback technique may or may not be right for you. You may want to consult a good advisor to determine whether it’s a good move for you.
---Written by Oliver Wu
Oliver Wu | Advantage Commercial Brokers
The Commercial Broker for
Small Business Owners in Puget Sound
Direct: (425) 785-6608
Office: (425) 651-4242 ext. 103
Fax: (425) 882-2547
E-mail: oliver@acbrokersinc.com
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