Commercial real estate for business owner
Abington, PA · Member since 2013 · 6 posts · 0 votes
I am planning to purchase a small business in Texas. The current owner holds the real estate in an LLC, separate from the operating company.
I would like to make parallel calculations regarding P&L and cash flow for:
(a) purchase of the real estate and have it in a separate LLC. The operating company would pay rent to this ... generating passive income as I understand.
(b) "lease to own" ... offer the owner to buy the operating company, and lease the real estate for ~2 years with an option to purchase.
I would like to compare the relative returns, but I need some guidance how to start and if there are templates that can be used.
I have fairly good business acumen, but this is my first time getting into this type of question, so I appreciate any advice!
(originally posted in the ite Q&A by mistake!)
Regards,
Matt
Matthew Stewart Welcome aboard! There's a fellow BP member, that has software, Real Data, for analyzing property. I've never used it, but you might want to check it out. Here's a link to him. https://www.biggerpockets.com/users/gallinelli You can get to his website from there.
100% of your lease payments will be an expense under the operating company, only the interest expense if you buy, but you'll have the asset value. You're moving money from one pocket to the other with closely held entities, there is no benefit talking in income, expensing the rent, taking in all of the rent as income, then paying the PITI, expensing the interest, taxes and insurance, and the remainder to principal will be an asset paid with after tax dollars. It's not passive income if you own the RE LLC and run it.
Feeding one company you own with funds from another company you own in an audit may be considered a sham transaction by the IRS and cause more problems than you think especially loading more expenses from the RE LLC.
Any option payment is an expense until the option is taken and then recaptured at the purchase, you are deferring a tax liability to pay when you take the option, not really a benefit.
The expense in the operating company will limit your ability to borrow, your income from the RE LLC will be discounted and they will add back depreciation, it will have little if any borrowing power with funds being made by you. They will look at your income on a consolidated basis, no advatage.
Now, what you have is a rent-buy decission, nothing more. Is it better for the operating company to rent the place or to buy it.
You need to know what the rent would be and the sale price, amount down required, costs to acquire the property, payment amounts and taxes, interest and insurance. From that you can see what the depreciation would be and your after tax cost to buy vs renting. Don't forget maintenance issues, you may have that to some extent in a commercial lease, more so if you buy usually.
Look at it as a consolidated statement, both companies going to you, cash flow is the same, the P&L is the same.
As one entity, cash flow will be less paying rent to the seller, as well as the P&L. Your cash flow is not effected by depreciation if you buy, it's the tax beast eating at a non-cash expense. Buying, your cash flow will probably be more than if leasing and you will have equity as an asset that increases the net worth.
I suggest, since you're making an offer to buy the operating company that you simply include the RE and have the seller finance the RE as part of the offer. If the seller refuses or you can't buy the property conventionally, then you'll need to lease.
I have no idea what the operating company is, if you had to move how would that impact the business value? I know it would be less unless the location is irrelevant like internet sales.
Buying a company and then leasing the place of business should be done with alot of due diligence, you are at a disadvantage as you are estimating income under a pro-forma and the seller knows what the income is likely to be and he is setting the rents, just saying, I suggest, even with your business experience, that you see a good accountant and attorney. Good luck. :)