Tag Archive for 'commercial lease'

Small business ownership has stealth benefits

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by
Jim Blasingame
on 6:00 am
in Legal and Real Estate
. 0 Comments

The classic financial benefits derived from business ownership typically fall under two categories:

  1. Earned income – salary and bonuses as reported on your W2 form each year.
  2. Unearned (investment) income – distribution of profits from the operation and/or sale of the business.

But there are other ownership advantages that I call “stealth benefits,” because they’re not as evident as operating opportunities. The stealth benefit that is not only the most generally accepted, but which has the most wealth creation potential is to personally own the real estate in which you operate your business.

Here’s an invariable: Every business is a tenant of a landlord under a commercial lease. There are many financial and strategic reasons to lease property from someone else. But this arrangement offers only tax advantages – deducting expenses associated with the lease – no direct investment benefits.

Now let’s consider a lease relationship that includes stealth benefits. As long as your business is legally structured as a tax reporting entity, like an S Corp or LLC, you can accrue those stealth benefits by personally owning the real estate your business operates in, and becoming the landlord of that legal entity. For example: Smith Enterprises, Inc., tenant of Tom Smith, property owner and sole shareholder of tenant.

The first stealth benefits are your business doesn’t have to worry about prohibitive rent increases, or getting kicked out because the landlord won’t renew the lease. Other stealth benefits are tax and investment related:

  • As with any lease, the business deducts lease expenses before net profit passes through as income to shareholders.
  • As owner and landlord, you personally deduct expenses necessary to deliver on the lease agreement, including mortgage interest and depreciation.
  • Profits arising from this venture are taxed as unearned (investment) income, subject to income tax, but not payroll tax. And unlike your business sometimes, most profits – and even some losses – usually come with distributable cash.
  • Upon the ultimate sale of the property, basis-adjusted profit is taxed at the current capital gains rate, typically lower than income tax.
  • Over time, as rents rise against constant mortgage payments, monthly cash distribution is possible.
  • When the mortgage is paid off, you property becomes a cash-producing annuity.

Take advantage of the business owner’s stealth benefit of owning the real estate your business operates in.

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Last week on The Small Business Advocate Show I talked more about the benefits of owning your business’ real estate with Chris Hurn, CEO and co-founder of Mercantile Capital Corp. based in Orlando, FL and author of The Entrepreneur’s Secret to Creating Wealth: How the Smartest Business Owners Build Their Fortunes. Click on one of the links below to hear what he had to say.

Real estate as part of a small business retirement strategy

Get financing for your commercial real estate acquisition

Check out more great SBA content HERE!

Commercial real estate leasing: Part II

Published
by
Jim Blasingame
on 1:32 pm
in Business planning and Real Estate
. 2 Comments

This is the second of a two-part series on leasing commercial real estate for your small business. Last time we talked about how to start the due diligence process of narrowing your search down to two or three options. Let’s wrap this up by focusing on the final steps.

In the first stage, you built a comparables spreadsheet and started populating it with basic information for each property, like square footage, base rent, notes, etc. Now we’re going to finalize the expense picture by identifying who pays for what.

There are three classic lease structures: net, net-net and triple net. But the leases you’ve been reading won’t actually say “net lease.” The type is determined primarily by how expenses are allocated.

  • A net lease means the tenant pays the base rent and possibly some or all of the utilities. This is the simplest and most common lease, and the easiest to evaluate. Be sure to ask how much to expect incremental expenses to be, so you can build that into your comparison.
  • A net-net lease has the same elements as the net lease, plus the tenant will typically have some maintenance and replacement expenses, as when an air conditioning compressor goes out. Like the net lease, estimate what these extra expenses will be for comparison and budget purposes.
  • A triple net lease means the landlord is merely making the building available, and all expenses associated with that availability are obligations of the tenant. This includes insurance and property taxes, plus all maintenance and replacement. These are long-term leases, such as 20 years.

Of the different properties you find that work for you, it’s likely that one will be offered as a net lease and another as a net-net. The net lease base rent will be higher, because maintenance, etc., is not included in the net-net lease base rate. This is where your spreadsheet pays off, because it reveals the total annual lease expenses for each property, regardless of the lease structure.

Every property has maintenance, grounds keeping, utilities, insurance and taxes that someone has to pay for. So don’t sign a lease until what you’re responsible for is spelled out, in plain English, in the lease. Also spell out who is responsible for getting the work done.

Just like in the 1st grade, when negotiating a commercial lease, there are no dumb questions. And let your attorney look at the lease before you sign.

Don’t sign a commercial lease until you know the total annual expense. Good luck.

Commercial real estate leasing: Part I

Published
by
Jim Blasingame
on 8:00 am
in Legal and Real Estate
. 0 Comments

This is the first of a two-part series on leasing commercial real estate for your small business.

In most markets, one of the sectors that a small business can get a good deal on these days is commercial office and retail space. Whether you need more room or a better location, now is probably a good time to think about finding and negotiating for those new business digs.

But just in case you’re a little rusty on where to start the process, let’s focus on the initial steps of commercial real estate leasing fundamentals that will help you find and compare leased space that works for you.

1.  Don’t stop looking until you find at least two or three places that work. The extra shoe leather will pay negotiating dividends later.

2.  Don’t sign any lease until you know the entire expense picture, including maintenance, which we’ll cover next time

3.  Avoid emotional attachment until after you’ve negotiated lease terms you can live with. At this point, the only emotion that should enter into your decision is whether customers will get excited about the location. Love is for lovers - this is business.

4.  Ask for a pro forma copy of the lease as soon as possible and read it. Commercial leases are like belly buttons - each one is different.

5.  Create a comparables analysis in an electronic spreadsheet that allows you to compare the details of prospective properties. The basics include: leased square footage, unit lease price, incremental expenses (including maintenance), lease term required (how many years), plus pros-and-cons notes about each property.  The notes will come in handy later if you need a tie-breaker when you’re making the final decision.

Since every leased space is different in size and price, here is a handy rule of thumb to help you start the elimination process. Ask the agent or landlord for the unit lease price - $8, $14, etc. - which is the price per square foot of the space per year. Multiply those two numbers and then divide the product by 12 to get the monthly base rent. Use this only as a quick tool to compare properties of different size and unit price.

Taking these numbers and your preferences into account, by now you should be able to get your list of prospective properties down to a manageable list.

Now is a good time to look for a good deal on commercial space, if you know how.

In the next column we’ll wrap-up this project with the rest of the financial analysis and lease details, including types of commercial leases.


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