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With
this as a backdrop - in what circumstances would price not matter?
Utility
trumps.
Currently, I’ve a client who leases a good sized space for his distribution
business. His lease expires in a year and he wants to buy a building from which
to operate. While understanding his motivation - he explained - the new
footprint will allow him to triple his revenue. Sure. Owning a facility twice
the size of his leased premises will cost him more - but not as much as the
inability to expand his revenue. Plus, these are young businessmen. They see
the bigger building accommodating their growth for many years. Does price
matter? Not in the face of the alternative - stymying the sales pop!
Tax
impact. Many
times an investor will find himself in a pickle. You see, he sold a piece of
commercial real estate and must now purchase another lest he pay a significant
chunk of his equity to the government. I’ve seen extreme examples where the
potential tax exceeds the sale proceeds. Does price matter? No! Just help me
defer my tax obligation.
The
hold horizon is longer. When
I started my commercial real estate career - Wham! was together - the price of
a 50,000 square foot industrial building was around $2,500,000. The same 50,000
square foot building today weighs in closer to $11,500,000. Wham is right! So
that buyer in 1984 who had heartburn over a few thousand dollars is now kicking
himself. Does price matter? No. Just don’t ever sell.
Financing
is attractive. We
have benefited from Eisenhower era interest rates for several years. The days
of double digit borrowing costs we saw in the early 1980s have been usurped by
rates in the low 4% range. If you can buy today - lock in financing at record
low rates for 25 years - why not? Does price matter? Not when the payment is
close to what you would pay in rent.
After-tax
benefits. Owners
of commercial real estate are afforded many ways to reduce their taxable
income. Depreciation. Each year - as a property owner - you’re able to deduct a
percentage of the structure’s value. Certain expenses related to the operation
of the real estate are also deductible. The costs associated with re-tenanting
should be considered. Mortgage interest? Yep. Does price matter? Not when you
analyze the after-tax reality.
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.com.