Marco purchased his real property in Santa Fe in 1989 and paid cash. From there he operated his cabinet business and survived the various economic ups and downs, paying Marco a nice income for his spectacular work. The business was operated as a sole proprietorship and paid the taxes, insurance and utilities for the property. Now it is 2016 and Marco wants to sell the business, of course charging a new owner proper rent for the property. The broker he has engaged suggests it may be difficult to sell the business with the market rent the property should demand. It is a catch 22 because…..
Particularly in places like Santa Fe, this can be an issue. The value increase in real property has been significant, often rising far higher, faster than the value of businesses.
Broker’s, when valuing businesses adjust cash flow to accommodate a market rate for the real property. If another person owns the real property and is leasing it, more likely the rent is at market or cannot/will not be adjusted when a new owner takes over.
In Marco’s case, it is possible in 1989 the market rate for rent could easily have been accommodated by the business income. As the value of the real property went up (way up), Marco did not or could not adjust the business income accordingly.
Because the value of the real property is part of his retirement plan, he wants income commensurate with the value, yet the burden of the market rent is too much for the business to absorb and be reasonable assured of selling the business.
From a pure real estate perspective, it may be this business is not the highest and best use. In fact, the business and what little or no rent being paid may denigrate the value of the real estate.
What can Marco do?
Here are a few ideas:
- The business may be able to be moved to a new location where rents are less. (There are many cautions to this suggestion – ask)
- The real property may be able to accommodate more than just the one business, making the rent more affordable for this business.
Until something is done Marco may be highly challenged to sell the business or real estate.