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The Background: I provide location advice to owners and occupants of industrial real estate in Southern California. Frequently, this advice results in a company buying a building to occupy. With prices notching up but with cheap financing, this in many cases can result in a rental rate cheaper than a market rental rate.
The rental rate I am referencing is the debt service achieved when applying the purchase price financed at today’s low interest rates. When an ownership structure involves the owners of the business that will occupy the real estate – a terrific union is formed. The company pays the rent (debt service), and the owners benefit from the appreciation, depreciation, and stability of facility costs. What happens if the owner decides to sell the company (tenant)? Should the real estate be retained?
- The new tenant will run the business the same as the original owner
- The new tenant will decide to stay in the real estate for many years
- The new tenant will pay rent in a timely manner
- The new tenant will care for the real estate the same way as the original “tenant”