It is common for businesses to lease the real estate upon which the business is operated. However, it sometimes makes sense to own the real estate upon which you run your business. What factors do you need to consider before purchasing real estate to use in your business?
Who should Own the Property?
In many cases, it is preferable to form a new entity (such as a limited liability company) to acquire real estate. The new entity can then lease the property to your business – allowing for a separation between the ownership of the property and the operation of the business. Typically the owners of the entity which owns the real estate are the same owners as the operating business. Family-owned businesses often own the real estate upon which the business is operated through a separate entity owned by family members. This type of structure can provide tax benefits and can also compartmentalize liability risks. Consult with your attorney and accounting professional about the possible tax and business advantages of this type of structure.
Pre-Purchase Investigation
Before agreeing to purchase business real estate, make certain that the zoning of the property allows your business use. Depending upon the type of use, you may be required to get a special exception or variance in order to conduct your business on the property. You should not sign an agreement of sale until you have confirmed that your business is a permitted use. You must also make sure that your agreement of sale contains an inspection contingency to allow for a full inspection of the property, including the roof, structure, mechanical systems, plumbing and electrical systems and the environmental condition of the property. Any major defects which the seller does not agree to correct should allow you to terminate the agreement of sale and recover your deposit. Make sure your agreement of sale provides for this.
Financing Contingency.
If you plan to obtain bank financing for the purchase, make certain that the agreement of sale contains an appropriate financing contingency, allowing you to terminate the agreement in the event you cannot obtain financing on reasonable terms. Typical financing contingencies contain protections on the type of loan, maximum interest rate and term of the loan you are willing to accept.
Title Insurance
Once you sign an agreement of sale to purchase a property, you will apply for title insurance. This will be required by your lender and protects you and your lender from any undisclosed title defects, such as unpaid tax liens, judgments, mortgages and other encumbrances. Prior to closing, your title agent will issue a preliminary report of title, showing any liens or restrictions affecting the property. These must be reviewed carefully to ensure that they do not adversely impact the operation of your business or the use of the property. Sometimes there can be private restrictions on a property which prohibit certain types of uses. Your agreement of sale should include appropriate language to protect you in the event a title restriction interferes with your intended use of the property, allowing you to terminate the agreement and recover your down money.
In summary, owning your business property can provide valuable business and tax benefits. However, great care is required in order to ensure that your real estate purchase allows you to operate your business without restriction and in full compliance with existing law, rules and regulations.
– Kevin Palmer