Real estate transactions are often complicated. There’s a lot to consider when you’re buying, selling, or even leasing a property — and that can be true whether the property in question is residential or commercial. Financing is just one aspect. Should you lock in a fixed rate, or take a chance on a short-term variable loan to save money?
With commercial property there are “hidden expenses” to be wary of as a tenant, if you want your business to be profitable. A lease can also be used as part of a commercial sale-leaseback. Is that an arrangement that would benefit your company?
How can you make sure you’re getting the best buy, sell, or lease deal? The answer is simple: By consulting with a trusted expert who can guide you regarding the details of your real estate transaction. Plan ahead and get the qualified input you need now, before you make any decisions you may regret.
Q: If I own a business that includes a building and/or real estate, would a sale-leaseback make sense for me?
A: Most business owners are focused on operating their business, because that’s what they do best. As a private equity investor, we at Huron Capital are focused on working with our management team partners to grow companies. We aren’t experts in real estate, and have no desire to be real estate investors.
A sale-leaseback often makes sense for us because it effectively transfers the value of the building into cash that we can use to invest in growing the business. Because we’re the sellers, we can typically negotiate favorable lease terms that won’t hinder growth. Plus, 100 percent of lease payments are a tax-deductible expense, whereas only the interest portion of a mortgage payment would be.
Sale-leasebacks aren’t perfect for everyone, but they should always be explored when there are sizeable fixed assets on a company’s balance sheet.
Christopher Sheeren, Partner
500 Griswold St., Suite 2700
Detroit, MI 48226
Q: As a commercial tenant, what should I watch out for in my lease to increase my chances of business success?
A: Many tenants pay attention to the rent, lease length, and the space. However, many items can impact your expenses. A retailer in most industries shouldn’t spend more than 10 to 12 percent of their gross revenue on occupancy charges. If you don’t understand your expenses, you could find yourself in a situation where your gross revenues never really increase, while your occupancy charges do.
It may be fair to pay a portion of occasional parking lot restriping in a shopping center, but if the definition of “acceptable expenses” isn’t examined closely, you could pay for expensive parking lot resurfacing. Hidden fees in an office context may be a landlord who requires you to buy light bulbs from him, and then use his people to install them! Getting the landlord to control expenses and cap them at, say, 5 percent is a great help.
Another area to watch for is lease options. Do you need exclusivity (i.e., the only Greek restaurant in the shopping center)? If so, you need to negotiate.
It’s important to examine where expenses can be negotiated or controlled when you’re signing a lease. That way, you can have some certainty regarding planning — and even selling your business in the future.
Clark Hill PLC
500 Woodward Ave., Suite 3500
Detroit, MI 48226
Q: I’m thinking of purchasing real estate in the near future. Should I use fixed or variable rate financing?
A: Like many financial answers, it depends. First of all, I always recommend that my clients be comfortable with whichever option they select. If a variable rate is going to keep you up at night, then it’s not worth the additional anxiety. How long you intend to hold the property will also be critical, because some fixed-rate loans will have prepayment penalties that could nullify the benefit of locking into longer-term rates.
While nobody has a crystal ball to know what rates will do in the future, it’s anticipated that short-term rates will likely increase anywhere from 0.25 percent to 0.75 percent within the year (based on the prime rate). The 10-year treasury rate (an index for longer-term rates) is currently at 2.16 percent — a level it’s been at or below only 5.9 percent of the time since January 1962 (and not until December 2008). These are historically low rates, so locking into long-term fixed rate financing is what I’d recommend. But beware of prepayment penalties or additional fees, should you want to utilize the equity in the property.
Brian A. Rang, MBA
Assistant Professor of Finance
4000 Whiting Drive
Midland, MI 48640