When it comes to valuing your company, you may run into various hiccups and difficulties along the way. One such hiccup occurs if your business is tied heavily to a particular piece — or pieces — of real estate.
This situation is known as special purpose real estate. It exists when the business and a piece of commercial property are dependent on one another. In other words, without the custom-built piece of real estate, the business would cease to exist.
In this article, we’ll take a close look at special purpose real estate and how it affects business owners and the value of a company. We’ll also share a few tips that can help if you rely on special purpose properties for your business operations.
What Is Special Purpose Real Estate?
Special purpose real estate is a type of property that has a specific use. As a business owner, much of the value of your company can be tied up in this piece of real estate. That’s because the piece of real estate is unique, and you need it to conduct your day-to-day business operations. There’s a good chance that the real estate was custom-built with a specific use in mind.
Having said that, your business is just as critical to the property. If your business were to cease operation, it would be difficult to repurpose the real estate for any other use. There may be other companies that express interest in the property, but they would have a very specific niche. These types of buyers don’t grow on trees. The real estate has a single purpose, and much of its property value is based on a business operating in the space.
So how do you know if you have a special use property? One way is to determine whether you could just up and move your business. If you only have office space, you could move any time you wanted. However, you can’t just move the business if you have special purpose real estate. You also can’t easily convert the piece of property into something else if the business shuts down.
Examples of special use property types include:
- Car washes
- Funeral homes
- Gas stations
- Amusement parks
- Self-storage facilities
- Senior living facilities, such as nursing homes or assisted-living facilities
- Bowling alleys
- Movie theaters
- Golf courses
The examples listed above are quite different from what most small business owners are used to. Most small businesses are located in a more commoditized piece of real estate, like retail buildings, industrial buildings, or general office buildings. They could be easily relocated to another similar piece of real estate if necessary. In fact, many businesses do relocate. Perhaps they need more space or would benefit from having a better location (i.e., more drive-by traffic, more foot traffic, closer to a major interstate, closer to a major supplier).
These options don’t exist with special purpose entities. Because the property has limited use, relocation is not as easy as signing a new lease, or selling the existing location and buying another. This, in turn, can impact the business and its value.
How Does Special Purpose Real Estate Impact a Company’s Value?
Businesses that rely on limited-market properties are known as Real Estate Centered Enterprises or RECEs. They may also be referred to as:
- Real Estate Centric Businesses
- Real Property Going Concerns
- Real Estate-Dependent Businesses
- Location-Dependent Businesses
Coming up with a proper market value for these companies can be quite challenging because the businesses are so interdependent on other assets. A traditional real estate appraisal likely won’t value the property correctly, as it won’t consider business earnings and the value that the special-design property offers the business.
On the other hand, a traditional business valuation typically does not account for the value of real estate. Valuation experts may be focused on things like multipliers and other financial metrics without considering the true value of the piece of real estate.
In these cases, business owners may need to have two valuations done by two different specialists. One valuation for the business itself and the other valuation for the real estate. Sometimes, there may be valuation analysts who specialize in a particular industry and can conduct a comprehensive valuation that covers both the business and the special purpose real estate.
What Tips Do You Have for Owners of Special Purpose Real Estate?
If you’re the owner of a business with a piece of special purpose real estate, several things can help you along the way, whether you are looking for an annual valuation or are preparing to sell.
First and foremost, make sure that you don’t let just anyone value the business. Try to find someone who specializes in your type of RECE. Otherwise, you may have to pay for two valuations or receive valuations that don’t accurately represent your market worth (for better or for worse).
Second, when selling, try to find a business broker, M&A advisor, or perhaps even a commercial real estate broker who has experience selling RECEs like yours. This ensures that you receive maximum value for your company and subsequently reduce the possibility of a valuation gap. An experienced broker or advisor can also prepare you for the various scenarios you may encounter during the selling process.
One way an advisor can help is by helping you understand who is likely to buy your business, and how. For instance, when it comes to senior living facilities, the buyers are typically very experienced operators. On the other hand, buyers for a restaurant could run the gamut — from experienced to inexperienced.
There could also be the possibility that you have to find two separate buyers — one for the business and one for the real estate. In going back to the restaurant example, the typical buyer of a restaurant may not be the type of investor who also wants to own a large piece of real estate.
In these scenarios, advisors can get creative with the buyers to find a deal that works for everyone. Perhaps you need to sell the business to the buyer first and then lease them the real estate for some period of time, such as a five-year lease with an option to buy. You’ll want to make sure that the business operations generate enough cash flow to pay an appropriate rent.
In summary, try your best to find and work with brokers and advisors who have experience dealing with RECEs and, specifically, your industry. Doing so increases the likelihood of receiving accurate valuations and a maximum sale price.
Understanding Special Purpose Real Estate Helps Business Owners
If you’re the owner of special purpose real estate, it’s crucial to understand what it is and how it can impact your business. If you have special purpose real estate, your company’s profitability may be much more dependent on the real estate than other small businesses. You can change offices with the help of a few movers, but relocating a golf course is next to impossible.
It’s also important that you understand just how special purpose real estate impacts your business operations and value. Work to find a broker or advisor with experience valuing RECEs.
When looking for an experienced team of advisors to value your business, reach out to Allan Taylor and Company. Our team is here to guide you through the entire selling process, from preparation and planning to finding the right buyer and closing the deal.