Last week’s column struck some nerves as I discussed the two most common mistakes I’ve seen owner occupants make with their commercial real estate. To refresh, not charging the operating entity a market rent and an absence of agreements between the ownership and occupant were the two mistakes discussed.
Let’s tackle the market rent question first. The key to setting a market rent is to think like an impartial third party. Imagine you don’t own the building, and you’re simply looking at it as an investment. What would you expect to pay if you were leasing the space from someone else? This mental shift can help you approach the task with objectivity.
Now, onto the agreement. This part can seem daunting, but it’s critical for protecting both parties involved—yes, even when both parties are you! The agreement should clearly outline the terms of the lease, including the amount of rent, payment schedule, length of the lease, and any responsibilities each party has regarding maintenance, repairs, and improvements.
Once you’ve established a fair market rent and formalized the lease agreement, you’ll be in a much stronger position. Not only will your financial records reflect a more accurate picture of your business’s performance, but you’ll also have peace of mind knowing that both the ownership and the operating entity are protected by a clear, mutually beneficial agreement.
It might seem like extra work, but these steps are essential to ensuring your commercial real estate works for you, not against you. So, take the time to do it right—your future self will thank you.
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