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If you own commercial real estate you either occupy the buildings with your company – owner occupant – or you rely upon the rent paid by a tenant – investor. I have clients that are both owner occupants and investors – they own the building from which their company operates AND they own additional commercial real estate which is leased and provides a nice income to supplement their day job.
With that differentiation as a benchmark, I want to describe the biggest mistakes I’ve seen owner occupants make.
Not having a current lease agreement. Generally, an entity owns the building and a related entity occupies the space. In the case of an owner occupant, the two entities may be tied by a common individual – Allen C. Buchanan, LLC owns the building and Allen C. Buchanan Company is the resident. Cool. Many times – because Allen, LLC is collecting rent from Allen Company – no official lease exists. After all, money is going from the left pocket to the right – no need to have that in writing. The fun begins when something happens to the individual and now his heirs must piece together the understanding. I actually witnessed a manufacturing company be forced to move when the heirs smelled dollars and no lease had been executed.
Over improving. You know that house down the street from you that is larger than the lot will allow? Yeah. We have the same with industrial real estate. When the physical space will no longer allow for growth – adding employees or machinery – many owner occupants add square footage to their building through second stories or production mezzanines. If a building was not designed to have an upstairs and one was added anyway – the resulting product becomes difficult to sell.
Not fully utilizing. The opposite of over improving is not fully utilizing the space that exists. Frequently, a re-work of the manufacturing flow or warehouse racking will find much needed and under-utilized space.
Keeping the building when the operating company is sold. I wrote about this in a recent column entitled “Be Careful If You Sell Your Business and Wind up the Landlord of a Vacant Building”. Inherent in this issue is the belief that if you sell the business and the business buyer is prepared to continue leasing the building – you are golden. Weighing your options – sell the building or keep the building – revolves around this question – would I want to own the building if it was vacant?
Using the real estate as an ATM. Frequently, banks view real estate as better collateral than other business assets – goodwill, account receivables, inventory, equipment. Observed are cases where the amount of money owned against a location are far in excess of the sale value. Maybe not an issue unless you are forced to sell the building.