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Tuesday, 06 April 2021 21:52

Deciding Between Leasing and Purchasing When Adding Shop Locations

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John Walcher, top left, of Veritas Advisors moderated a panel discussion on real estate issues related to growing collision repair businesses. John Walcher, top left, of Veritas Advisors moderated a panel discussion on real estate issues related to growing collision repair businesses.

Index

...fewer than 10 locations and tend to buy the real estate at most or all of their shops.

 

“Most of them look at real estate as a form of the asset base that they’re building, utilizing the business to pay for the asset base,” he said. “So they’ll typically try to purchase the real estate as part of their retirement or sale model.”

 

He said real estate in this industry is unique, often requiring many modifications to a property, lease-holder improvements that may make leasing less advantageous.

 

“When you purchase a piece of property, often that mortgage is less than you would be leasing it for on a triple net lease,” he said. “There can be some profitability that you can specifically take out of that payment to yourself that creates some favorable tax opportunities for you.”

 

All that said, there are some risks involved in purchasing the real estate, Fisher noted: EPA risks if it is a brownfield, zoning issues, easements, tying up too much wealth in the industry even if it’s in two different asset classes.

 

“Too many don’t weigh the potential cost of all that,” he said.

 

He also cautioned anything driving up real estate values does not automatically increase the lease payment a shop owner who sells the business but retains the real estate can expect from the new shop operators. That remains “contingent big-time” on the cash flow of the business, so a period of business retraction “devalues the lease value” as well, Fisher said. 

 

Johnston said there is one set of circumstances when it is often in your best interest to purchase shop real estate: when your landlord on a property is considering selling to someone else.

 

“You might have had a cozy relationship with that landlord. It might even be someone who sold you the business,” Johnston said. “But if they’re now flipping that real estate, you have to consider whether the person buying that real estate is buying it because they want you there as a long-term tenant, or if they are buying it because they want to redevelop that property.

 

"It may be advantageous to you to consider buying it if you think there’s a risk of losing what is otherwise a very valuable operational asset. No one wants to have to go find another body shop and relocate a successful operation.”

 

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