Dealer Insights - Jan/Feb 2014 - Separate Real Estate Entities: Two Can Be Better Than One
There’s usually more than one way to approach a complicated situation. And when it comes to your dealership, separating your business from the real estate on which it operates — if you own both — can be a savvy move. Structuring your holdings this way can benefit you and your heirs.
GETTING THE JOB DONE
Legally, you can separate your dealership business from the building(s) and the land it owns by transferring the title to the real estate into a newly created legal entity such as a corporation, limited liability company (LLC) or trust. After you separate the real estate from the operating business, your dealership would simply rent the space from the new legal entity in a landlord-tenant relationship.
You could, however, incur transfer or capital gains tax when you transfer real estate into the new entity — as if the real estate had been “sold” to that company. Your tax advisor can help you choose an entity type that minimizes transfer costs and ensures you maximize tax saving opportunities generated from the lease.
When you separate real estate from other business assets, those assets are better protected from lawsuits and property claims if, say, a passerby trips on your sidewalk. (Even if you hold title to your business separately from your real estate, you must have adequate liability insurance for both legal entities.)
On the flip side, if your dealership files for bankruptcy and you own real estate separately, creditors generally can’t seize the land and buildings unless you’ve pledged them as collateral. So, you could theoretically liquidate the dealership and then sell the land and buildings at their full market value. The real estate sales proceeds would likely escape the bankruptcy court’s purview.
FACTORING IN YOUR ESTATE
Estate planning is another good reason to consider holding real estate in a separate legal entity. Having the real estate in a separate entity allows you to gift the interest in the dealership without giving up the interest in the real estate. Gifting of the real estate can take place at a later date, or provide retirement income as you transition out of the dealership’s operations.
Or perhaps you want to award stock to a key employee as a way to incentivize performance and gradually transition ownership to him or her. Creating a separate real estate holding entity lets you transfer shares in the dealership to the key employee, again without transferring real estate ownership.
This strategy gives the employee a stake in the increased value of the business but not in real estate appreciation, which is largely unrelated to employee productivity. A caveat: Discuss any employee stock transfers with franchisors — they may need to approve the new owner first.
Yet another benefit: If you sell the dealership but keep the real estate entity, you can continue to collect rent from your dealership’s new owners, thus creating cash flow through rental income.
REACHING DIVERGENT GOALS
When a dealership is owned by more than one person, the owners might disagree about whether to own or lease the facilities. Everyone’s objectives can be met by creating a separate real estate holding company.
Not all the owners need to invest in the real estate entity. One dealer, for instance, wanted to build a new showroom that was more visible from the expressway than the old showroom. His older partner thought this expansion was too risky, especially because he planned to retire soon.
The younger partner had a longer investment horizon and was willing to take the risk, so he funded the expansion plan himself using a real estate LLC. Then he leased the property to the dealership using rental rates based on nearby comparables.
GIVE IT SOME THOUGHT
Creating a separate real estate entity has many advantages. Discuss this option with your tax advisor to see if it’s the right strategy for your dealership.
Dealer Insights - Jan/Feb 2014 Issue