December 17, 2020

Retiring with Commercial Real Estate: What to do with your asset

Are you nearing retirement and wondering what to do with your commercial space?

Last week we went to closing with a client that had retired several years ago, sold his business and rented his commercial property.  But after years of tenants coming and going he decided being a landlord no longer suited him and he wanted to sell the property.  As we talked in the parking lot after closing, I was reminded that there are many reasons that lead people to sell their businesses and retire.  It can be age, a desire to travel, health, divorce, or it can be motivated by the lure of a profitable sale.   This conversation made me think I should update an article I wrote a few years ago on this topic and share again some new thoughts on what to do with your commercial real estate when you are ready to be “gone fishing!”

Are you are nearing retirement or beginning to make a succession plan for your company? Possibly you are one of the Baby Boomers making their way into retirement. If you are, you are not alone. The Bureau of Labor and Statistics estimates that roughly 100,000 people retire each month and the number of retires is expected to continue to grow and peak in 2023.  Over the past several years a growing segment of our practice has become assisting business owners in making decisions around their commercial real estate, as they plan for the next chapter of life.

As business owners begin mapping this process, they will have several options to consider; selling the company separate from the real estate, selling the business and leasing the real estate to the new owner or selling the business and disposing of the asset to real estate investor.  The decisions will be driven by financial goals, current financial needs, and the current market conditions.

As we tell our clients, “You only have one shot at selling your commercial asset”. Unfortunately, sometimes market conditions or the property type might not be as in demand at the time they are retiring.  Just think of people like my father-in-law, who made the decision to retire and move out of state in the summer of 2019.  He promptly sold his dental practice by Thanksgiving of that year and his house in January of 2020.  Imagine what a delay in his plans by just a month or two would have been impacted by the pandemic and the quarantine would have had on the value of his exit from the business and the northern Virginia residential real estate market.  You only have one shot to cash in.  Timing is everything!  Here are a few things to consider if you are at this crossroads in your work life.

Has your property appreciated significantly in value since you purchased it and now you have a large capital gains tax bill if you sell?

If so, you should consider doing a 1031 tax-differed exchange. This allows you to sell your current asset and shift the equity into a new, income-producing property.  You should also consider triple-net leased properties. You could buy a leased-up property anywhere in the country and all you have to do is cash rent checks. The tenant is solely responsible for the property and its upkeep.  (Each triple net investment is a little different so it does require due diligence before jumping in.)  Since we first published this article, a new section in the tax code was created called Opportunity Zones.  This was done to incentivize investment in traditionally neglected neighborhoods that would spur development.  Now there are Opportunity Zone funds where you can invest your 1031 exchange money so you don’t have to deal with the complications of purchasing the property yourself.  Something new to consider!

Do you enjoy owning the property and think it will appreciate further over time?

Consider leasing the property to the new owners of your business and become their landlord or structure a lease with the option to purchase with installment payments.  This way you continue to receive payments over time, and without the large one-time capital gains tax consequence, you can pay it over time.  

Are you tired of owning the commercial property but don’t want to pay the large capital gains tax on your appreciated value?

Look for a buyer of the property that you can do owner financing for. When you do owner financing, you pay the capital gains tax in smaller installments as you receive the monthly mortgage payments from the buyer.  You will still owe the same amount but it’s more palatable.  The great thing about owner financing is that you can give up the hassles and liability of owning the property as a landlord. All you have to do is collect the monthly payments.

Where does the value of the commercial property fit into your total personal wealth?  If you have debt on the property and its value is greater than fifty percent you should strongly consider disposing of the asset to rebalance your portfolio. We frequently work with business owners nearing retirement. We help them make sound financial decisions with their commercial real estate.  From architects and government contractors to cab companies we can help you make sense of the best “next step” for your commercial real estate to maximize the return on your investment.

Tartan Properties Commercial is a leader in Northern Virginia commercial real estate sales and leasing since 1973. Call our office today for more information on the 1031 Exchange process and opportunities to acquire triple net investments that pay you rent every month.

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