Welcome to Part 2 in our blog series on managing occupancy costs. In Part 1 we covered due diligence and the hidden costs of corporate occupancy.
Now, here are three additional commercial property tax elements to consider. Keep these in mind as occupancy cost management opportunities when you’re expanding your CRE portfolio.
- Proper Purchase Price Allocation: Getting a purchase price allocation (PPA) done by a professional during the due diligence process is necessary for a variety of reasons.
The PPA sets the opening balances for your accounting and is the basis for a beginning balance sheet. This is imperative, as your assets depreciate during your holding period from these starting balances.
A PPA will also determine an allocated value for all of the components of the acquired asset(s) — including the value of the real estate, the land, site improvements and personal property, as well as the value of the acquired inventory, the (non-taxable) intangible assets and more. You can use these allocations for a variety of reasons, including property taxes.
- Proper Transaction Reporting: Far too often a corporate attorney or someone else not intimately familiar with jurisdictional requirements to document a sale for property tax purposes will improperly document and over value taxable components. Let’s say you pay $5 million for a hotel – as part of the PPA it’s determined that $3 million should be allocated toward real estate, $1 million for personal property (furnishings and appliances that are part of the sale) and $1 million toward intangibles. If your state doesn’t tax personal property and intangibles are non-taxable, and your commercial property tax value is recorded as $5 million instead of $3 million, you’ll overpay your taxes and/or encounter major obstacles to get the problem rectified.
Ensure your PPA and all associated documentation is correct so that occupancy costs, such as real estate taxes, are based on accurate information from the beginning. If your property tax assessment is based on incorrect numbers, it creates a domino effect that costs you more and is harder to fix in the long run.
- Exit Strategies: In addition to a company’s corporate expansion to accommodate its own growth, many businesses expand as part of the strategic process of gaining market share by acquiring competing businesses, consolidating operations and then selling the surplus real estate and personal property. This occurs across the marketplace, especially in the manufacturing, retail and healthcare industries.
But if you don’t consider your exit strategy, you could inadvertently impact your occupancy costs.
Whether you’re buying commercial property in a growth period of the business or acquiring your competition with the intent to eventually sell, it’s important to understand what you will have to sell. For example, one firm in Texas built an office building to meet its unique needs. When the firm decided to sell the building years later, it struggled because the building’s parking lot was too small for the office space available. While a small parking lot wasn’t an issue for the original owner, it posed a significant roadblock for potential new buyers as there were limited options available to solve the problem, resulting in lowball or no offers at all.
Another, now-defunct firm built its corporate headquarters to resemble an airplane because the CEO was an aviation enthusiast. Never considering its exit strategy when developing the plane-shaped property, the firm ended up selling the building for much less than it anticipated as the market did not value the unique shape of the building.
If you’re going to expand, have an exit strategy in mind. Determine if anything could hinder the sale of your new building at fair market value in the future and put a strategy in place ahead of time.