by Aaron T. Domoto
Business owners choosing to buy real estate should do so through an entity separate from their business. Pass through entities allow the individual investors to include depreciation and interest deductions on their personal tax returns. There are several forms of pass through entities, including limited partnerships, limited liability companies, S corporations and individual ownership. Another advantage of owning the real estate on which your business operates is that you can establish the rent amount to provide your business more or less operating revenue and allows income to pass through the real estate entity and avoid Social Security, unemployment, income, and other taxes that would have to be paid by the business to you as an owner/employee of the business.
Leasing real estate for your business can be attractive because it allows you to concentrate exclusively on running the business without the distraction of maintaining the facility. However, you should approach a lease the same way you would a purchase. Commercial leases are typically much longer than residential leases, and you want to ensure that the property will be a good fit for your business. It can be extremely helpful to hire an architect or engineer to help determine whether the property will be suitable for your current and future needs.
No matter how much a landlord may insist, there is no such thing as a standard lease. All terms of a lease can be modified by agreement of the parties. However, if you are unsure whether to agree to a term in a lease it is better to address your concerns and questions early on in the negotiation. Starting with a letter of intent or term sheet is a highly recommended way to quickly come to an agreement on key terms of the lease.
Whether you decide to buy or lease, always make sure that you have reviewed the zoning ordinances that apply to the property. Zoning ordinances outline detailed rights and restrictions on lighting, parking, signs and even use of property. This may not pose an initial problem, but may become a significant roadblock if expansion or changes to your business require renovations that are not allowed by the zoning ordinance.
The attorneys at Mette, Evans & Woodside have assisted countless business owners in purchasing commercial real estate and negotiating commercial leases. We also have experienced land use attorneys who can analyze and interpret local zoning ordinances to ensure the property you choose is appropriate for your business.