Build to Suit
When the time comes to move your business to its own brick and mortar (or any other building material) building, or expand to a bigger building, you have an option to keep your capital in your business rather than spend it on a loan to cover construction costs. This new building can be built to suit your operational needs rather than trying to fit your operation into an existing floor plan, and with limited risk to your business.
Leaseback is a construction delivery method that provides the best of both worlds to qualified business owners and even though it may sound too good to be true, it’s legitimately a great, low risk option for presidents or CEOs to remain focused on their business while a building is created for their use. I’ll explain more about how it works below.
By definition, leaseback is a construction delivery method whereby a developer builds, finances, and leases a facility back to a business owner, allowing him or her to keep capital in the business. This method is perfect for newer, up-and-coming businesses or those that are established and experiencing rapid growth because there is little risk to the business and there is a lot of flexibility in defining the provisions with the developer.
How it Works
The developer reviews the business owner/lessee’s business financials and determines that he or she is a qualified candidate to take on the risk of building a building. The building owner then enters into a contract for the lease, which is flexible in the terms of the duration of the lease, who will handle maintenance, and who will cover taxes and insurance payments among other things. The developer will then work with the business owner to find the most optimal location for the business. Then they both work with the architect to design a building suited to the business’ use (i.e. square footage, floor plan, finishes). Once the floorplan is determined, the developer works with the general contractor to ensure that construction goes as planned, leaving the business owner time to focus on business without the interruption of making decisions because, let's face it, they likely have enough of their own work to do without adding on construction management.
Early in the design process, the developer will be able to determine the lease payment amount, so the business owner will know quickly what the leaseback will cost per month. Also, the terms are negotiated in the contract and the lessee has flexibility to negotiate many of the terms with the developer. Typically, the finishes chosen by the lessee have the most direct effect on the monthly rent of a leaseback. By working with the architect, developer and general contractor, a lessee can choose the interior look and feel that's in their budget.
Key Benefits to Business Owners
You’ll notice that there are numerous benefits and most of them have the underlying theme of risk aversion to business owners. Here are the key benefits:
- Lease payments are fully deductible as a business expense by the lessee
- Terms of the lease can be flexible to allow the lessee the option to renew the lease or purchase the building at any time during the lease
- No large cash investment is necessary, so leaseback saves capital and keeps debt off the balance sheet of the lessee
- The cost of land can be amortized in the lease payment thereby preserving cash by the lessee
- You can choose a prime location that you may otherwise not be able to afford
- There are no financial covenants on a lease, which gives the lessee greater control over its own business and operations
- Owners would be able to keep financing options open for future opportunities
- Rather than worrying about all the moving pieces of construction, you can focus on your business
This is a simplified explanation of the leaseback method. For more detailed information, call Michael Shepard at 800-965-4278 or 989-790-9120. Or click the link below to find if Wolgast's leaseback services are right for you.