Newer agents cut their teeth on small leases or as a ‘caddy” on larger ones, and often gravitate to the sale of small empty buildings, usually to the entity that will occupy the space. This is especially true of office and industrial buildings, maybe not so much for retail.
A lot of new lingo has developed over the years. Now, those who sell and lease buildings are part of a group called “occupier services.” This is intended to distinguish them from those who sell occupied buildings as investments – currently the hottest product class in the U.S. market.
But one thing they have in common: almost everywhere in the U.S. taxing authorities have very little understanding of values in the market for all commercial buildings, especially not industrial, so the tried-and-true method for determining value is to track public records for the amount of a sale – and bingo! That’s the new value. For those who own and occupy buildings for a long time without transferring ownership, the taxing authority – in Ohio, the County – will usually value the property below market, as to consistently do otherwise is to be challenged in court, and owners and their attorneys usually have far more weapons at their disposal to win tax appeals on their merits. So, to keep values below market is self-serving for the taxing authority, but not so much for those who live in the taxed area.
This being said, there’s a dirty little secret in the sale of net leased property. Tenants are obligated by their leases to pay rent to landlords, and as additional rent, the real estate taxes (and other actual owner costs) costs. If the building hasn’t sold in a long time, the taxes can go way up – to the surprise of the tenant – when the taxing authority sees the amount of the sale in the public record.
But what if the building and land is sold as a part of the sale of the enterprise itself? In other words, when investor X decides to by Widget Manufacturer Y, the real estate is only part of the asset sale. Often, the LLC that owns the real estate remains the same – the LLC itself is part of the sale, but there is no ownership change.
What happens then? Almost always, nothing involving the real estate or its value. And this can easily be justified, as it may very well be that the enterprise has elaborate value-add components within the building, and many times with intrinsic value far in excess of the real estate. In other words, the structure that provides the shade and shelter may have a value that is not important, or even meaningless. To the buyer of the enterprise, it is crucial and very valuable. To a buyer of the building and land for a wholly different use – the property could be worth less than zero.
So why not buy the LLC in every case when you want net leased real estate? There’s really no reason not to, and it certainly will curry favor with your tenant, who, of course, is your willing accomplice, as the existing real estate tax is almost certain to stay lower this way, for reasons listed above.