Transitions

As I’ve mentioned here before, our commercial real estate practice is centered upon family owned and operated manufacturing and logistics businesses. These companies may lease, or they may own the buildings from which they operate. Common among them, however, is generally a transition is experienced which causes a commercial real estate requirement – the need to sell, lease or buy. Today, I’d like to discuss the five D’s of transition and how locations are impacted.

Death. Recently, we found ourselves engaged to sell a building where the principal of the company had died. This is tough. Taken too soon from his family and business and with a limited amount of planning – after all he died suddenly – some quick decisions had to be made to keep the business viable. After long discussions and many meetings with their CPA, banker, wealth advisor, and attorney – both the business and real estate that housed it were sold. One silver lining when a real estate owner dies is the tax basis is stepped up – meaning the gain when sold is based upon a value at time of death. Therefore, the gains taxes are not quite as severe.

Disposition. Its uncanny how many manufacturing businesses are on the blocks these days. I spoke with ten last week. Two had been sold in 2022 and the other eight are either in serious negotiations, have recently purchased a competitor, or were considering a sale of the enterprise this year. Why you may wonder? Money has been cheap and the same dynamics that govern real estate investing have been felt in the merger and acquisition world. Private equity sees great returns in solidly positioned and profitable small businesses. Each – merger, acquisition, or sale requires real estate decision to be made. Say a competitor is acquired. Chances are they have a facility from which they operate that is redundant. I’ve witnessed this excess capacity jettisoned via a sale or sublease. What if the business is sold and the commercial real estate retained? A lease needs to be negotiated between the new owner (tenant) and the previous business owner.

Debt. As interest rates have spiked over the past few months, companies carrying  revolving lines of credit or term loans that come due are faced with a different rate environment than when the debt was originated. Sometimes the answer to paying off the loan is a sale of the real estate and possibly leasing back the premises.

Dissolution. Dave Ramsey once opined “the only ship that won’t sale is a partnership.” I don’t necessarily agree as I’ve seen many limited partnerships thrive – but I’ve also experienced two or more folks joined through agreements and there is a squabble which leads to a partnership buyout or in the alternative – an outright sale of the buildings.

Divorce. When a marriage ends, husband and wife must divide the assets and go their separate directions. Throw in a family business and a couple of addresses and the split becomes quite complex. When one party demands the settlement proceeds be paid in cash and there is a lack of liquidity – what’s left is a disposition of commercial real estate.
Much of the drama surrounding a “D” can be eliminated with some careful planning and a game of “what if”. You’d be well serve to consult your trusted advisors and plan for any eventuality.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.