If you operate a business that owns and occupies its real estate, then you may know how difficult it can be to find space that meets your needs.
Finding the perfect space is not always easy, especially now with historically low vacancies, rising rental rates, and the time and financial investment required to design-build or develop land.
“Whether to own or to lease” is a common decision owners are faced with. Both have their pros and cons that must be factored into their business and financial models. Most businesses start out leasing until they can afford (or get the opportunity) to purchase their own space when they can begin laying roots and planning for the longer term.
Later on in a business’ maturity, however, it becomes possible to do a sale-leaseback, where an owner-occupier leases their space to themselves (to ensure continuation), before selling the property. This can be both effective and attractive to a buyer or investor, as there is a tenant to produce cashflow, while the business receives a lump sum payment.
They have become popular for a number of reasons, especially with owners looking to retire or businesses seeking a capital injection. However, some people face consequences they don’t expect when first diving in; mistakes that can not only expose them and their business to additional and unnecessary risk but also negate any of the desired benefits.
And so, sale-leasebacks may not always be the right move.
At the end of the day, a sale-leaseback is simply a tool in every owner-occupier’s arsenal, and it may or may not be applicable (or desirable) for your given situation. To that end, we would say speak to a legal, tax, or real estate professional who can properly diagnose and prescribe a custom solution.
Now, of the mistakes that may arise, we’ve identified Four Common Objections to doing a sale-leaseback. These are the very same things that we may bring up to a prospective client when assessing their needs and desires (something we would be happy to offer you if you require guidance), and while you may be set on taking a specific course of action, it is important to understand what may happen.
Taken individually, these Objections may only have minor impacts on the future health of the business. However, a combination of many (or all) of them may put you in a dangerous position.
Today, we are in the third issue of our series on “Where A Sale-Leaseback Can Go Wrong,” so let’s dive right in…
Costly Objection #3: You May Become Exposed to Capital Gains
Do additional taxes still make this a desirable move?
I would like to be upfront and say that you should not take this as legal, tax, or investment advice, and use the following for educational or informational purposes only. Please contact your accountant, lawyer, or reach out to our team to help you get guidance for your specific situation.
With that being said, as a rule, selling your property (or asset of any kind) will expose you to capital gains tax, meaning if you’re looking to do a straight sale, there is a price to pay.
Investing in commercial real estate is a long-term and potentially risky play; including long periods of holding, considerable expenditures, and other associated risks and potholes you may need to maneuver around and avoid.
Therefore, it is understandable that, to many owners and landlords, handing over a nice portion of those successful earnings afterward can sting, even if it is what is required by law.
That’s why there exist creative (and legal) strategies to:
- Defer payment,
- Claim a loss or reserve,
- Reinvest into your business, or
- Claim exemption…
Along with a myriad of other options (which I won’t go into the weeds in here) that you can ask a tax or accounting professional about; someone we would happily connect you with if interested.
In order to maximize the amount you can walk away with – if that is your objective in completing a sale-leaseback – you’ll need to leverage a strategy or be comfortable with covering the capital gains (which in Canada at the moment, entails a 50% income inclusion taxed at the appropriate marginal tax rate).
But what your focus really should be here is…
What is your overall objective, and what needs to happen in order to best get there?
Once you are clear on the desired outcome, then the appropriate steps can be reverse engineered to ensure you achieve your goals. Just remember; what works well for one business or investor, might be out of the question for another. It is natural for people to leverage strategies they have seen others use successfully, however, given the differences in circumstance as well as the changing market landscape, you may have to employ more creative solutions.
As a result of our constant contact with users, landlords, and investors, we have access to the latest information from the street level. We see what other property owners are doing to get the most out of their portfolios and investments, and can advise our clients to do the same once we get a complete understanding of their objectives. Whatever you choose to do, having a strategy in place and an expert to help you navigate can make all the difference.
Contact us today if you are thinking of doing a sale-leaseback, would like help in valuing or selling your property, or if you would like a professional opinion on your current situation.
Luis Almeida is the Senior Vice President and Partner of Lee & Associates Toronto, specializing in the acquisition, disposition, and leasing of industrial properties, as well as providing clients such as local and national corporations, landlords, and developers with a full range of real estate services across verticals and industries.
ABOUT LEE & ASSOCIATES
Lee & Associates is a commercial real estate brokerage, management and appraisal services firm. Established in 1979, Lee & Associates has grown its service platform to include offices in the United States and Canada. Lee & Associates provides superior market intelligence in office, industrial, retail, investment, and appraisal to meet the specialized needs of our clients. For the latest news from Lee & Associates, visit leetoronto.com.
To get clarity and direction when looking to sell your building, or to discuss any other real estate needs, please contact Luis at 416.628.8151, email at email@example.com, or visit www.leetoronto.com.