Smart Business Magazine, June 2013

16 Smart Business Philadelphia June 2013 Purchase or lease How to decide whether or not to own your factory or warehouse Youve been in business for several years and it is profitable You have a decision to make Do you want to invest in the business and buy a facility or will you continue to lease With the help of your accountant you should carefully examine the anticipated capital requirements of your business Evaluate your ability to obtain capital or loans Dont box yourself into being cash poor and unable to meet business obligations or take advantage of opportunities The prevailing reason that businesses fail is insufficient capital Draining capital to pay for a real estate project could be a cause says Howard N Greenberg managing member at Semanoff Ormsby Greenberg Torchia LLC My colleague Jeffrey Rosenfarb a principal in Hart Corporation a national industrial real estate firm advises that small manufacturing firms overwhelmingly desire to own versus rent whereas larger corporations generally prefer leasing Smart Business spoke with Greenberg about some pros and cons of leasing or purchasing industrial real estate What issues should be examined when considering purchasing a facility First whats the nature of your business Manufacturing that utilizes heavy difficult to move equipment is where purchasing may be desirable to avoid being at a landlords mercy when your lease expires Or is it light manufacturing or distribution that moves easily Second can you obtain a facility that will remain adequate for your needs Plan for potential future expansion Have your counsel review the local zoning code to determine what can be built either now or in the future Do you contemplate children in the business Real estate can provide a source of income and inheritance Counsel will need to prepare an agreement that deals with numerous issues including governance death disability termination of employment and sale of the business Where do you want to invest your limited capital Be sure that you will not need capital to expand your business versus acquiring a building Lending rates are at historic lows encouraging acquisition Consult counsel concerning special types of financing such as tax free industrial development or state provided financing as well as tax abatements What issues should you consider if you determine to lease Check locally to ensure there are adequate reserves of industrial rentals available With any lease secure options to extend the term terminate early purchase the building for a right of first refusal and for the ability to assign the lease or sublet in connection with your business sale If I decide to purchase what entity should purchase the property and how should the lease be structured Keep the building owner entity distinct from the entity that occupies it The building owner entity should be a limited partnership limited liability company or S corporation to enable you to utilize tax advantages like depreciation and amortization and to permit gifting Also you may want to divvy up interests differently in the operating company versus ownership in the real estate company You could decide to bring a partner into your business but not into the building ownership You will need a lease between the two entities especially if youre going to sell the business and not the real estate As a landlord limit the tenants options and set a reasonable term Does new construction make sense versus purchasing and rehabbing an existing building With new construction or significant rehab you must have a reliable contractor and architect Assume that its going to cost at least 15 percent more and take 15 or 20 percent longer than initially estimated Weigh the aggravation of new construction versus having your building the way you want However over the past 15 to 20 years sale or leasing of existing facilities has far exceeded new construction per Rosenfarb Buying and holding an industrial property usually works out well for the owner For heavy manufacturing building ownership or a long term lease with renewal options is the way to go HOWARD N GREENBERG Managing member Semanoff Ormsby Greenberg Torchia LLC 215 887 0200 hgreenberg@ sogtlaw com Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg Torchia LLC WEBSITE Visit www sogtlaw com for more information about legal issues INTERVIEWED BY JAYNE GEST INSIGHTS LEGAL AFFAIRS