Follow this guide when you’re selling land along with your company

For most companies, the decision of how to handle ownership of their real estate took place long ago. However, if a company’s goal is to structure the best possible sale of both a store and the land it sits upon, it is relatively easy to change the ownership structure to enhance a potential sale.

There are extenuating circumstances that should be verified with each company’s tax and legal counsel. That being said, we believe the ideal real estate structure in the face of a pending sale is to have the real estate owned by a separate entity under the control of the same individuals who own the company. This way, the selling owners avoid the delays of getting third-party approval to transfer existing leases.

If you must lease real estate from a third party, try to whittle down the landlord’s right of approval of lease transfer. One compromise is a notice period that requires the landlord to object based on the financial soundness of the buyer; otherwise, approval is automatic. If a lease says consent “cannot unreasonably be withheld,” you don’t want to learn your landlord’s definition of reasonable as a result of his delaying a sale.

The next question is how much rent should be paid. If the real estate ownership is different in any way from the owners of the company, market rate typically prevails. However, we recommend pegging the lease rate to the current market regardless of real estate ownership. This way, financial results always reflect the company’s performance under a scenario of market-based third-party land ownership.

With market rate rent baked into the numbers, a buyer can assess whether he or she wants to step into the leases or buy the real estate. It goes without saying that a phase 1 environmental assessment should be completed on all properties (leased or owned), and buildings should be maintained in top condition.

The final key decision point regarding real estate concerns if and how the land should be offered as part of the sale. When presenting a company to buyers, a seller is seeking the highest debt-free, cash-free enterprise valuation; to accomplish this, it must be made clear that the company is being sold separately.

The seller should then state his or her preference for the resulting ownership of the land. Some business owners enjoy owning real estate for the stream of retirement income that can be provided. Some like maintaining a connection with the company they built. Others view landlord status as a source of leverage if there are any contingent payments due from the buyer.

Other sellers remember cases when a buyer has fallen on hard times and used bankruptcy laws to break all of their leases. Real estate ownership quickly loses its appeal when that means presiding over a possibly far flung portfolio of property. Sellers that fall into this category will prefer to sell the real estate to the buyer or to a third-party institutional investor.