• Thu, Mar 19, 2020
  • Retirement Strategy For Entrepreneurs: Own Your Building (Forbes)
  • Author:  Christopher Hurn is CEO of Fountainhead Commercial Capital, offering SBA 504 loans, SBA 7(a) loans, and low loan-to-value conventional loans.
    In my experience, many entrepreneurs haven’t put much thought into retirement. Some might say, “I’ll work until I die,” while others might just resign themselves to simply shutting down their business, paying any outstanding debts and walking away.

    A survey by small-business website Manta found that a third of small-business owners do not have a plan for their retirement savings. Reasons for that lack of planning included not having enough profit to save for retirement and having invested in their business using their previous retirement savings. Of course, this is understandable: You want to invest any additional revenues into the business.

    However, business owners often overlook a strategy that can both fund a retirement portfolio and deliver an additional income stream to the business. That strategy is to purchase the commercial real estate where their business operates.

    Who Can Own?

    “That’s only for really successful business owners or big companies like Apple or Google.”

    When I speak at conferences and suggest this strategy, I usually hear this response, which is partially true. Previously, large companies used to lease their facilities, because Wall Street analysts would demand a return on assets, and real estate generally was not considered an asset that could deliver a decent enough return.

    However, in recent years, companies have begun to design, plan, build and own their own new headquarters. For example, Apple opened its $5 billion “Apple Park” headquarters building in April 2017.

    A gym, catering company or auto body shop may not be the size of Apple. However, with historically low interest rates and effective loan programs offered by the U.S. Small Business Administration (SBA) for owner-occupied, owner-operated commercial real estate, it can make sense to buy now rather than rent.

    Occupancy And Becoming A Landlord

    One popular SBA loan program for owner-used commercial real estate requires that the owner occupy at least 51% of a building. As such, it’s entirely possible to buy a building and have your business occupy enough of the building to satisfy that criteria, and then rent out the rest. The additional rental income generated can then be used to offset part of the loan cost. And if your business expands, you’ll have the option of occupying that “extra” space.

    There are other considerations. Your current landlord may not be willing to sell you the building. As such, you may need to move to another property in the area, which could be a good thing. You can move into a larger space and sublease the extra to another business. (Of course, if your business is location-dependent, this could be an obstacle.)

    Further, you may need to retrofit the new space for your business, as it might be larger, and you might want to rent it out to other businesses. A small renovation loan might be needed to do this.

    But the good news is you can become a landlord. According to the survey referenced above, 18% of entrepreneurs plan to sell their business to fund their retirement. If there were an additional stream of income from tenants occupying part of the space, you might not need to sell your business for the sake of funding a retirement portfolio. You might be able to still retain the business but hire managers to run it for you.

    Commercial Real Estate Options Vary Widely

    Again, many business owners are surprised that commercial real estate is even within reach. They may see large office buildings, shopping centers or industrial parks and, apart from financing, think: “It’s probably owned by some big real estate conglomerate,” or “I don’t need all of that space.”

    These are valid concerns. However, what surprises many is that large commercial properties are often broken down into smaller owner-occupied units. This is known as the property becoming “condominiumized” or “condo’d,” with several people owning smaller parcels within a larger commercial or industrial real estate complex.

    This is usually welcome news to professional services businesses, such as law firms, marketing agencies or financial planners, that never think they could actually own the offices in which they conduct business. Rather than continuing to pay an office lease, such businesses can buy an office space, even a larger one than they are in currently and sublease the extra space to other professional services firms.

    More Options At Retirement

    If you own the property where your business operates and it comes time to retire, you’ll have three options, each of which generates a degree of wealth:

    1. Sell the business but not the building. In this scenario, you can cash out, retire from the day-to-day business and simply be a landlord. This would create a steady stream of income.

    2. Sell the building, but shut down the business. Perhaps you cannot find a buyer for the business, or you cannot transfer it to family. You might have to take a loss, but you would still profit from the proceeds from selling the property.

    3. Sell both the business and the building. This would be the best of both worlds: You would receive the proceeds from the sale of the real estate in addition to a buyout of the business.

    Of course, at any time before retirement, if you need to cash out, you can always sell the building, but keep the business. It’s good to know that additional options exist.

    And I’m all about business owners having options. They’ve worked so hard for so long that they should be rewarded for their efforts. And owning commercial real estate can help them reap those rewards — for retirement or sooner.

    The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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    Eric J. Gall
    [email protected]