As I’ve mentioned here before, our commercial real estate practice is focused on family-owned manufacturing and logistics businesses.
These companies may lease or own the buildings from which they operate. The most common among them is usually a transition that leads to a change such as a lease, sale or purchase.
Today I would like to discuss the five Ds of transition and how locations are affected.
Death
Recently, we found ourselves committed to selling a building where the director of the company had died. It’s hard. Taken too early from his family and business and with limited planning, quick decisions had to be made to keep the business viable.
After long discussions and numerous meetings with their accountant, banker, wealth advisor and lawyer, the decision is made to sell the business and the real estate that houses it. A silver lining when a property owner dies is that the tax base is strengthened – meaning the gain on sale is based on a value at the time of death. Therefore, taxes on gains are not as severe.
Arrangement
It’s amazing how many manufacturing companies are bankrupt these days. I spoke with 10 in the past week.
Two had been sold in 2022 and the other eight are either in serious negotiations, recently acquired a competitor or were considering selling the business this year.
Why you might wonder? Money has been cheap and the same dynamic that governs real estate investing has played out in the world of mergers and acquisitions. Private equity sees great returns in small, well-positioned and profitable companies. Each – merger, acquisition or sale – requires making a real estate decision.
Let’s say a competitor is acquired. Chances are they have a facility they operate from, and now that space is redundant. I have witnessed this excess capacity being given up through a sale or sublease. What if the business is sold and the commercial real estate is retained? A lease must be negotiated between the new owner (tenant) and the former owner of the business.
Debt
As interest rates have skyrocketed in recent months, companies that hold revolving lines of credit or term loans that are coming due are facing a different rate environment than at the time of the origin of the debt.
Sometimes the answer to loan repayment is the sale of the property and possibly the rental of the premises.
Dissolution
Dave Ramsey once said, “The only ship that won’t sail is a partnership.” I don’t necessarily agree as I’ve seen many limited partnerships succeed, but I’ve also come across two or more people in partnerships that have fallen out, leading to a partnership buyout or outright sale and simple buildings.
Divorce
When a marriage ends, the spouses must divide the property and separate. Add a family business and a few addresses and the split becomes quite complex. When a party requests that the settlement proceeds be paid in cash and there is a lack of cash, only a disposition of the real estate remains.
Much of the drama surrounding a “D” can be eliminated with careful planning and a game of “what ifs.” You would do well to consult with your trusted advisors and plan for any eventuality.
Allen Buchanan is a Principal and Commercial Realtor at Lee & Associates, Orange. He can be reached at 714.564.7104 or [email protected].