I’d like to share with your a strategy we use in my brokerage. It’s called CARTs, an acronym that stands for challenge, action, result and testimonial.
We use these “case studies” to tell a transaction story through the lens of these four filters. The cool thing about CARTs is they have no shelf life and can be used many times as the situation dictates.
One thing my 38-year career in the commercial real estate business has taught me is that every deal is unique but many have similarities. However, we use CARTs to look through the rearview mirror after a transaction closes. As I pondered the information conveyed in them, I wondered why we don’t use them before a transaction occurs.
After all, the information contained in each CART can be helpful to anyone with a desire to sell or lease, regardless of which side they occupy. Allow me to demonstrate how this might work.
Let’s say you’d like to sell a building you occupy but stay put after the sale. We refer to this as a sale-leaseback. Easy enough, right? But now, let’s dig into the four CART areas to engineer the kind of result you’re seeking.
Challenge
Think about issues such as your ownership structure. Is the real estate owned solely by you or are other stakeholders or shareholders involved that may have a different view of the world?
Many times parties may be juxtaposed depending on their station in life and the direction they’d like to head in the future.
How much, if any, money is owed against the property? How does the physical plant of the building compare to others in your size range in the marketplace? How about things such as percentage of office, truck loading doors, warehouse clear height, fenced yard or staging area, and available parking spaces? All of these physical aspects will affect the value of your real estate.
If you own the building as a limited liability company and lease the building to an operating corporation, you may be paying yourself rent that is not commensurate with market rates. As we’ve seen many times recently, this amount might be dramatically less than what the market rent would generate. Consequently, any investor willing to buy the building would base his price on the rent he will receive.
Finally, be really candid with yourself as to what you will do with the proceeds. As we’ve discussed in this space numerous times, if you are not planning to defer the taxes via a 1031 tax-deferred exchange, there will be a significant tax bill to pay. The list goes like this: approximately 20% for long-term capital gains, 25% for depreciation recapture, 13.2% for the state of California and 3.8% goes to the Affordable Care Act.
As you can see, almost half of your gain would be wiped out by taxes if you don’t defer the gain. In situations where you have multiple shareholders, this can get a bit cumbersome, especially if there is a disagreement.
Action
In the action phase, we consider exactly what steps are necessary to achieve the results you seek.
As an example, let’s say your plan is to defer any gain received from the sale yet you have shareholders with differing opinions. It might be wise to break up the limited liability company into a tenants in a common structure. This way, in the event of a sale, the individual tenants go their separate ways.
Your property may contain some deferred maintenance that needs to be addressed before marketing the building for sale. Finally, you may need to examine the lease under which you will operate once the transaction closes. We assume here that you’ll engage a commercial real estate professional to assist you in marketing the building.
Don’t get too tangled up with exactly how your action will be accomplished as a part of this will be handled by a brokerage. However, having an idea of how you’d like the action to unfold is critically important.
Result
Here, you get to close your eyes and imagine the perfect result. You sell your building for top dollar to a qualified purchaser, in the least amount of time possible, with very favorable lease back terms and conditions and with very little oversight on your part.
Testimonial
Certainly, after the task is accomplished, you’ll have some things to say about how the plan unfolded, the challenges overcome, the results that were maximized and the positive actions taken by yourself and your professionals.
Allen Buchanan is a principal and commercial real estate broker at Lee & Associates, Orange. He can be reached at 714.564.7104 or abuchanan@lee-associates.com.
Source: Orange County Register
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