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By Nathan Peck | MiBiz
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WEST MICHIGAN — Underneath the feet of many business owners might lay a potential morass as they look toward succession planning or the sale of their business.

Despite the slowed real estate market of late, tax professionals say now is the time business owners should start looking at the structure of their business and whether their real estate holdings are tied in with their business assets. While uncertainty reigns in capital and investment markets, it may be an opportune time to separate real estate from other business assets.

Companies considering a sale or transfer of ownership in the next five years would do well to evaluate the impact of their real estate holdings on their attractiveness to buyers, said Patrick Lennon, partner in Honigman Miller Schwartz and Cohn LLP’s real estate department in Kalamazoo.

“The buyer is primarily looking at the product, product lines and logistics, and the other elements involved in that type of transaction,” Lennon said. “The real estate becomes a secondary consideration.”

For sellers, having separated out real estate from other business assets may create a win-win situation for buyer and seller alike. Many buyers do not want to take on the added cost of the real estate, and it can provide an income opportunity for the seller into retirement. There is an inherent risk to the seller, should the company outgrow the facility, explained Daniel Lynn, partner at Beene Garter.

“In the current environment with interest rates so low, it may not be attractive to a seller taking his proceeds and taking 1 percent interest on it. If a seller can maintain some of their consideration in a real estate lease, they may realize a higher return on their investment,” Lynn said. “The current environment makes it very conducive to posture a business for possible sale by separating the real estate from the corporate assets.”

If a corporation has goodwill in it, acquirers may prefer to buy the assets rather than a stock sale, as it allows them to amortize goodwill for the assets of the business and avoid a double tax, both at the corporate level then on the distribution.

For owners who may want to lease the facility to the buyers of the business, separating the real estate may sweeten the pot. For leases of less than 35 years, the seller can keep paying at the current property tax rate and it does not “uncap” the property to the facility’s current assessed value. Factors that are conducive to this posturing, he said, are that capital gains are low, capped at 15 percent through the end of 2012, and real estate markets are depressed. A company can distribute a piece of property and at a lower price and pay the gains tax at the lower rate, minimizing its tax burden.

“This economy provides opportunities from a planning perspective. With real estate prices being depressed and tax rates where they are, now is a great time to do that planning,” Lynn said. “If you have gains, distributing property now when evaluations are low (will) minimize the amount of corporate tax you have to pay. Or, in an S Corp, the capital gains are passed through to the shareholder at a minimal rate. The cost is as low now as it is ever going to go.”

The uncapping of property taxes can sink deals as banks have been requiring buyers to put a lot of money down, which impacts cash flow and the business plan’s feasibility, said Jim Manning, partner at Plante Moran.

“The uncapping issue is definitely one to consider when deciding to lease a property or thinking of buying. You might not be thinking that the taxes could jump up considerably,” Manning said. “You need to stand back and ask if you’re in the business of owning real estate. If the business had been around for some time, the tax implications of this uncapping could be significant.”

For business owners looking to sell their business to family members, Lennon recommends considering combining a sale with a gifting strategy to transfer ownership and minimize the tax implications.

“If you are looking to sell to family or employees, the considerations are very different,” Lennon said. “The gifting strategy can be a great way to move forward with a sale to family. Accountants and lawyers are familiar with this situation and are able to provide guidance on a case-by-case basis.”

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• daniel lynn
• honigman miller schwartz and cohn
• jim manning
• miller schwartz
• patrick lennon
• west michigan