It A Good Time To Buy Real Estate

August 30, 2004
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GRAND RAPIDS — Dan Lynn is a CPA, so he isn't the kind of guy to check tea leaves or read horoscopes before recommending real estate decisions to his clients.

But The Rehmann Group tax principal used an astrology metaphor in telling the Business Journal that buying real estate rather than leasing might make sense for a lot of firms right now.

"All the planets are lined up," he said.

By "planets" he indicated he meant that lending rates are still favorable, construction costs are very competitive, tax incentives are very favorable and — right now — office and industrial property is greatly overbuilt, with vacancy rates high enough to make it a buyer's market.

"The environment is right," he said.

Lynn, who operates out of Rehmann's Grand Rapids office, deals primarily with closely held firms. And he said that he has advised some of his clients to investigate whether they should own property in lieu of entering into long-term leases.

"Every deal is different," he stressed, "but for some people it is possible to get ownership interest for cash flow that's similar to what they would get with a long-term lease."

He cited a recent case in which one of his clients was ready to sign a 10-year-lease.

"I looked at the cash flow associated with the lease and I had a discussion with her about whether it would be worthwhile to purchase the property," he said. "And she found a couple of builders that were both eager to boost some property that they had. They were willing to move the property and give her a good deal."

Lynn said good deals in real estate are available. "But we haven't seen the value of land go down," he added. "People obviously expect values to go up."

The way it worked out for his client, he said, is that she found two options where the cash flow would have been very similar to that 10-year lease. But at the end of 10 years after buying, he said, she will have an equity interest in the property, instead of just leaving the property or facing lease renewal negotiations.

He said the purchase route made even more sense in this client's case because her firm required numerous expensive added investments in the property.

"In her case, she had to have a specialized build-out — a lot of high-dollar things built into her space," Lynn said.

"If she were to enter into a lease," he explained, "in 10 years she would be at the mercy of the landlord and hope that the landlord didn't increase the rates — or risk having to walk away from all those improvements."

As it is, he said, the client now owns a piece of the property. "She's at liberty to do as she pleases in 10 years.

"I was looking at it as a way for her to build personal wealth," Lynn said, "instead of her just making monthly payments that just go away. She's investing in this building and she has something that's increasing in value."

Lynn stresses that making an investment of that sort doesn't necessarily require that one buy an entire building.

"Usually what happens," he said, "is that these commercial buildings are owned by an LLC. And often times, say, what I see is that the general contractor will put their own money into the building or they might have other money backing them.

"So there might be several members of an LLC that own the building, and so what you can do is buy an LLC interest."

He said there's a distinct risk of buying a piece of an LLC.

"It's that if the rest of the building isn't rented out," Lynn said, " you could potentially be stuck with having to cover part of the taxes and interest and payments on the property."

But he said the incentive to sell right now is such that the owners of some vacant properties are providing some kind of guarantee so that the person purchasing the LLC interest doesn't have to kick in for taxes or interest.

In cases where one buys into a building and must make certain improvements, the new tax laws "make it the perfect environment."

He said that in buildings that are three years old or older, the new law enables one to take a 50 percent depreciation bonus up front for certain types of improvements.

"These are components — appliances, countertops, certain types of moveable walls — that appear to be part of the building," Lynn said, "but they actually are personal property. So after the initial 50 percent bonus, you can depreciate the remainder over five, seven or 15 years as opposed to the old 39 years.

"The big thing is that this can be a long-term way of building wealth."

He said owning rather than leasing was a step that made sense for his own firm in acquiring its offices on

East Paris Avenue
near
Sparks Drive
. "From a cash flow perspective it was a little bit more to build the building, but it really made sense."

In some instances, he stressed, leasing makes a great deal of sense.

"You would benefit from leasing," Lynn said, "if you have a company that's quickly expanding and you don't know where you're going to be in five years. Then a lease gives you a lot of flexibility for the future."

The key thing that he typically does, he said, in looking at a proposed deal is to run a present-value analysis. "Then I look at cash flows from leasing and expenditures from purchasing and look at them side-by-side."

Lynn said that the choices facing businesses aren't confined to buying or leasing.

"You can have a hybrid," he said, "a lease with an option to buy."

He said he recalls such a case in which a client wanted to buy a property but was concerned about the creditworthiness of the seller. What finally happened was that the would-by buyer opted for a lease with an option to purchase at such time as the seller's situation was resolved.

"If you can think the deal, you can do it," he said.    

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