At one time or another,
most commercial business owners will consider purchasing the real estate
in which his or her business operates. Such a major financial
commitment requires careful consideration of the economic advantages and
disadvantages of owning commercial property, both short-term and
long-term.
We
advise our business clients to approach the real estate acquisition as a
separate venture from operating the existing business. While it is
true that purchasing one’s place of business can provide stability to
the business and directly benefit the bottom line of the business in
many ways, it is also a long-term investment with a unique set of
liabilities, benefits and risks. Accordingly, we generally advise that
the business owner establish a new legal entity to acquire the real
estate and lease it to the business under commercially reasonable terms.
On
the most basic level, separating the business from the real estate
entity minimizes the risk that losses incurred by one entity will
negatively impact the other entity. If the business begins to operate
at a loss, the owner can scale back or close the business and lease the
property to another company (hopefully, at a profit). In most cases,
creditors of the business will not be able to seize the owner’s interest
in the real estate entity. Similarly, if the real estate declines in
value or an accident occurs on the property resulting in significant
liability to the owner, the business will not suffer as a direct
result.
There
can also be tax advantages to separating the business entity from the
real estate entity, most notably that the business can deduct its rental
payments to the real estate entity as a business expense. We always
advise our clients to consult their CPAs before establishing the real
estate entity to determine the best way to experience tax savings.
If
you are considering purchasing your place of business, it is important
that you consult an experienced attorney to discuss how to protect your
business from your new investment, and vice versa. The attorneys at
Gross & Romanick, P.C. have many years of experience advising
business clients on real estate matters and can assist you throughout
the process.
