As part of my role as a Virtual CFO at The Shared Finance Center, I work with business owners to plan for their real estate needs. Commercial real estate is a complicated business it should not be entered into casually. So when we have these conversations, we try to determine with the owner what role the real estate is going to serve as part of deciding if the real estate should be bought or rented. Commercial real estate has three distinct roles in a business.
Tool – Most often the real estate is needed but has no business critical components. It can be office space, a retail location, a warehouse or such. While it should be chosen selectively for its features, none of the features are so critical and unique that without them the business would suffer a large setback. As a matter of fact owning the real estate could be a liability if you were to sell the business.
Asset – There are times when the real estate is a critical part of business plan and should be purchased. In such cases if there was a disruption the business would suffer tremendously. For example if a business’s strategic advantage was having easy access to a highway exit or airport, or if major and business specific improvements had to be made to the real estate to make it suitable for the business’s use. One way to look at it is if not owning the real estate would be a major obstacle to selling the business then it is an asset.
Investment – Sometimes a piece of real estate is attractively priced and while it is not critical to your business, it could be a good alternative investment. It should have a favorable discounted net present value when all things are taken into consideration. Also, it would not be a critical part of the business. Acquiring this real estate would more than likely not make sense as a business purchase but would be bought outside of the business and could be rented to the business or another business.
What role does real estate play in your business plan and are you handling it the right way. If it doesn’t match well with what I’ve outlined above, it might be a good time to sit with your financial leadership or advisor and put a plan together to fix the situation.
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