Holding on to a Building or Selling It

Published on Thursday, 17 April 2014 16:19:01    Written by Marc
Any company that has a portfolio of sites that they either lease or own, gets constantly faced with the question of whether or not it should keep a particular site or let it go. If the site is leased, it becomes a matter of either subleasing it (or trying to) until the end of the lease period and then giving back the keys to the landlord. If the site is owned, the choices pretty much boil down to leasing it or selling it. Depending on the nature of the company, the choices should in theory be easy to make: if you are not in the real estate business and own a site, you no longer need, simply sell it.

SellOrLeaseNot Always so Obvious

The simplistic approach to the question of holding on to a building or selling it does not always work, simply because there are a number of situations which would make for a company to want to keep a building, even if their business is not remotely close to the real estate business. Let us look at a few reasons why:

  1. You might need the site in the future. This is probably the number one reason why companies not in the real estate business would want to keep a building even if they no longer have a need for it for their operations. It might be that the building is in good condition and well located and you think that in the future there is a possibility that the building will be needed again. This happens even more when buildings have been customized for specific operations. Whenever companies install their manufacturing operations, there are numerous add-ons to a building, which would probably not be sellable if the building were put to sale, but would cost a significant amount of money if the company had to purchase and install the add-ons in a new building. Sometimes, simply keeping the building for a period of time, and then taking the time to decide if the building will be needed again can make sense. If that period takes more than a few months it may be possible to lease it on a month-to-month basis during the interim.
  2. You need a storage space. Another reason for keeping a building might be that you have a need for storing equipment from all over the company. At times of reorganizations or consolidations, companies often end up with many pieces of equipment, which do not find an immediate home. Keeping a site to store the equipment can be an option. It might also be that the building in question already stores a substantial amount of equipment and parts. In this case, it might make sense to keep the building as a storage and avoid storage costs that would have occurred by leasing a storage space somewhere else. However, unless you have enough equipment in need of storage to fill the entire building, it often makes more sense to sell the building and lease a smaller site to store everything.
  3. You think the market in undervalued. This one is probably the most difficult option to evaluate. In this option, the reasoning to keep the building is that you think that at the current market prices, you would lose too much by selling the building now, so you think it makes more sense to lease it and can always decide to sell it later when the market gets better. This reasoning can be good if the site is clearly undervalued, but playing the market can be tricky if you do not do your homework.

    First, you will need to understand the market for your specific type of building. Some buildings can retain their market value more than others can. For example, standard office buildings in a city are relatively easy to evaluate. If you own an office building for which you no longer need, you can get an evaluation and see how much you could expect to get for the building. However, if you own a manufacturing site things can be a little different. For starters, many building owners make the mistake of considering their cost of the building when trying to come up with an asking price. An example of this is the manufacturer which built his production facility 10 years ago and invested in the installation of numerous add-ons (compressor lines, generator, havoc systems, electrical distribution, other) and looks at the building from a reconstruction cost perspective.

    Obviously, when these building owners get advice from their real estate broker as to how much they think they can sell the building for, they almost have hearth attacks because the broker knows that there is little chance to recuperate any of the add-ons when selling the building; therefore, the suggested sale price might be less than half the construction cost. Before you think that the market is undervalued and you could wait and sell your building in a few years when the market gets better, you need to consider the cost of keeping the building and include the building’s expenses as well as the opportunity cost of keeping it. The expenses are easy to calculate but do not limit yourself to normal maintenance. If you kept your building for a few years, will the roof need to be replaced? How about the heating systems? From an opportunity point of view, you need to consider that if you sold your building today, you could reinvest that money now. Finally, keep the building often means trying to lease it. Depending on the size of the building, can you find a single tenant or will you need to divide it? I wrote a blog on the cost of dividing a site and what to remember a while ago "Blog Name".

Deciding to keep or sell a building is not always clear-cut. There are often a number of elements to consider, and each situation is unique. While the general tendency calls for non-real estate companies to sell an owned building no longer needed, in some cases it can make sense to keep it for a period. Looking at the different options and carefully evaluating them will help make that decision.

A few years ago, I came across the same situation. We had a site, which we owned and no longer needed. I was asked to sell the site so we put it on the market. Since there was little demand for large manufacturing sites at the time, the property ended up being on the market for a number of months. In the meantime, some people of the company started to store equipment there. It was practical since it was large and relatively well located. Within less than a year, people had managed to fill half of it with spare parts and equipment that came from all over the country. People knew they could send just about anything to the site and it would stay there free. Then on the day that we finally managed to get an interesting purchase offer, it was decided that perhaps we should keep the site, so I was asked to try to lease it instead of selling it. Leasing a large manufacturing site, which is practically undividable, does have its challenges but we put the site up for lease.

It took a few years to find actually a tenant that paid some money, but the lease never really covered the cost of the building expense. I still believe that the decision to keep the site was a bad one for this situation. The cost of maintenance, municipal taxes, longer term repairs needed and the loss of opportunity ended up being much more than any money coming in from the lease. It would have made more sense to sell the building when we had the offer in hands and reinvest the money. However, this building had been modified with add-ons and for some people there was the perception that the building was undervalued. Unfortunately, for large manufacturing sites it is not always the case. Often the real value is what people are willing to pay for it, not how much it cost to build or customize it.