Selling my commercial business property!

How do I sell my commercial business property?

When selling your business, your operations and HQ are essential strategic assets. If you own your commercial property, you may also need to put this into the exit mix.

Most businesses operate from premises of some sort, so when it comes to exit planning, your decisions about what to do with your business premises are equally important. It requires serious discussion and planning.

When it comes to planning, the first thing to do is to review how and what you use your office, factory shop, etc., as part of the business on a day-to-day basis. For that reason, the location may be the reason for the business’s success. Coupled with the possibility that the business building and its surroundings, such as a hotel, fun park or caravan park, may be the selling point. The business HQ property may also have been purpose-built, and the value of your business sale may be exploited if the business and property are sold as one package.

Further, your business may have multiple premises to consider, which factor into the strategy along with what can be sold, what can be consolidated, and what is required to move forward.

Strategic Review of the Business, how it operates and where

As part of the exit strategy, pause and take a hard look at where the business operates. Will the business stay put, or will it need to relocate when the owner exits or sells? If the business is sold separately from the property, consider the impact on continuity, customer access, staff, suppliers and overall business disruption. Also factor in any CGT consequences early, as the structure of the sale and the property’s ownership can materially affect the final outcome.

The property itself may be just as important as the business. Does the owner want to sell it, retain it, lease it, develop it, use it for retirement, or pass it to the next generation? If the business operates from home, consider whether that location helps or hurts the saleability of the business. Most importantly, clarify the owner’s wishes for the family, including how the property should be dealt with, protected and transferred as part of the broader succession plan.

• The business.
• What are your wishes for the family and for passing the property on to the next generation?
• Does an SMSF assist in this decision?

Is your property ready for Sale?

You’re about to sell your business – do you sell the property with it?

As the owner, you will need to review the property to ensure it is in a sellable state. Take a moment and look at:

• Access and potential change of Council Zoning. What points of access are there to and from the property?
• Fire safety:  Does the property comply with fire safety and other emergency safety factors?
• Security:  Is the property safe and secure?
• Surfaces: Are the floors slippery, OHS?
• Hazardous materials and toxins:  Does the building present any dangers associated with asbestos used in its construction?
• Old fuel tanks and other old substances – Banks hate these when it comes to financing
• Installed plant and equipment:  Is the equipment, such as air conditioning systems, in good working order and maintained?
• Lighting: Is the property well-lit for the purpose you intend to use it?
• Air quality: Is the building adequately ventilated?
• Does your property have sentimental memories? Will this influence you, and should it be considered as being held for the next generation?

Consider all options!

Let’s first look at why you may choose not to sell the freehold property and instead sell only the business.

For many owners, the property is the strongest long-term asset in the deal. It may provide reliable rental income, future capital growth, and control over the site. It is also a valuable fallback position if the sale of the business does not go exactly to plan. Selling the business while retaining the property can turn the owner from operator to landlord. This can create a cleaner exit from day-to-day trading while preserving an income stream and a stake in the location’s future value.

Keeping the freehold may also be driven by family, tax and legacy considerations. Your business commercial property might be intended for the next generation. Or you may be looking at a future redevelopment, retirement income, or broader estate planning. In some cases, separating the business from the property can make the business more affordable. This may be a strategic approach as it may make it more attractive to buyers. It also allows the owner to retain a strategic asset. The key is to understand whether the property is simply where the business operates or a core part of the owner’s wealth, succession, and long-term family plan.

There are some options to consider when it comes to your business real estate that you own. These can be classified as follows:

• Keep the property and treat it as a long-term investment
• Transfer to SMSF
• Sell with business
• Sell the property separately from the business
• Relocate the business and develop the property before selling the business
• Leave to the next generation – family farm
• Sale-leaseback arrangement

Each option has pros and cons. They should be evaluated. Geoff Gartly can offer you an independent assessment and help you evaluate each pathway so you can make the decision that is right for you.

We may also need to conduct a CGT analysis to see how that may impact any sale.

Sell or keep your freehold property

Let’s first look at why you may not sell the freehold property and choose to keep it and sell only the business:

• It might be too hard to consider – too much work
• The passing of the land onto family – save for subsequent generations, so it needs to be kept
• The property value may exclude or reduce the number of  potential interested  buyers if the property is sold with the business
• You may start another business on the property
• It is better sold as a development opportunity
• Maybe a good long-term investment
• Strategy – especially for hotels, etc., where you may wish to sell the business but take back long-term for a family
• Your real property may have been used to secure a business loan. Selling the property may affect the security for another loan used in another part of the business that is not being sold.
• A business may have multiple uses, or several businesses may operate on the same premises.

Why you may consider selling the best option!

Opposite to the above, here are some valid reasons why you would sell the property at the time of selling the business:

• Some businesses need specialised buildings and assets from which to conduct their operations. Therefore, you may have the opportunity to sell the property to a buyer who appreciates the attributes of the building.
• When deciding to sell the business,  will the purchaser of your business wish to relocate it to another location and may leave you with an unwanted property in the future
•  Investors avoid investing in highly specialised assets like laboratories or dedicated production facilities. The primary risk for investors is the use of the building should the tenant company, the buyer of the business, default or not renew at the end of the lease period.
• If your business is specific, it would most likely be best sold as a going concern to give the buyer business certainty.
• Time to reassess the financial plan for retirement
• Issues of maintenance that will require significant capital moving forward.

Whatever you intend to do, take time to make sure the structure you have chosen to hold the business vs the property works for you from a tax and estate planning perspective.

Reduce the CGT pain – use the tax concessions available for small businesses and the sale of your business commercial property:

• General 50% discount but not for companies, and reduced for SMSF
• 15-year exemption: If your business has owned the premises for 15 years and you are 55 or over, retiring, or permanently incapacitated, you will not have an assessable capital gain when you sell.
• If you have held the property for less than 15 years, it must be held for 7.5 years
• 50% active asset reduction:  You can reduce the capital gain on your premises by 50%.
• Retirement exemption:  Capital gains from the sale of your premises are exempt up to a lifetime limit of $500,000. If you are under 55, the exempt amount must be paid into a complying superannuation fund or retirement savings account.
• Rollover: You can defer your capital gain from the sale of the business until another event happens that crystallises the gain. For example, suppose you sell your existing business premises and buy different premises for your business within a specified period. In that case, you can defer your capital gain until the new premises is sold down the track.

Traps when utilising the CGT concessions.

It is crucial to verify that assets, such as the taxpayer’s business real property, have been held by a ‘connected entity’ for at least half of the period of business ownership (or 7.5 years).

Where the necessary level of ‘connection’ does not exist, it may be possible to implement a restructuring without material cost to ensure that the entities are ‘connected ‘. ‘ 

Where there is a question of whether the amount paid constitutes “rent”, a pivotal factor to consider is whether the occupier has a right to “exclusive possession” of the property. The payments will likely be classified as rent if such a right exists.  – means no active asset!

If the arrangement allows the occupier to enter and use the premises only for specific purposes and does not amount to a lease granting exclusive possession, the payments are unlikely to constitute rent.

What should you do now?

Time is of the essence. You have opportunities to capitalise on what you do! Exit planning requires the business owner to review all aspects of the business operations,

This includes the business location and premises, which affect the pathway chosen to achieve the best results for you and your wealth generation.

Don’t leave the planning too late

• Don’t ignore the legal implications of the property regarding lease and ownership.
• Think of generational ownership issues and how they may impact
• Look at specific property types and intrinsic matters
• If you ask a purchaser to relocate the business from its current location, consider how that would affect the sale and the business’s ongoing stability. Also, the cost of relocation
• Plan the Tax, GST and stamp duty implications of the decision

Of course, planning for any business should be part of every person’s business exit plan.

Please note this is general advice. We welcome you to book a time to discuss your affairs and help you plan for a wealthy retirement.