Business Owners "rent-hacking" commercial property?

Question

Are there any business owners who own their commercial space and "rent hack" the additional space in the building. My lease for my commercial kitchen is up in 4 years and I would like to learn more about this strategy. I am in the Northern Virginia market. I would love to hear any stories or any pointers to begin learning more about this option. Thank you!

Phil Christian · Answer

Couple things to consider...

As a business owner you are in the business of a business.... whether it's selling, manufacturing, producing, servicing, non-profiting, analysising... whatever sector you are in you are probably not in the business of owning real estate.

First: So consider your internal hurdle rate. If you have 20% profit margins on every dollar you invest into your business is that $1 going to a better use investing in your business or receiving a smaller return in real estate. For simplicity sake, use the down payment required to buy a building as your initial investment which assumes you are paying rent to a landlord elsewhere.

Second: Which follows after the first... are you using company money or personal money.... meaning are you buying personally (perhaps with a single purpose LLC) in your name and your business is renting back space? This assumes that you are not dipping into company money because your company is healthy and your personal balance sheet is healthy and you need a tax shelter or want to diversify your personal assets.

Third: Do you have monuments with your company in your current space that you need to protect against the unknown market conditions? Monuments = heavy machinery that cannot be moved easily. e.g., Raytheons Tomahawk missiles facility or a restaurant in a particular location that fits your needs. In essence, can you replicate your current setup within a years time with tolerable business interruption or setup capital expense.

Obviously, that's not all of it... but If you can answer those questions then you are in a position to make an informed decision.

Bob Langworthy · Answer

@Lou LaMedica, the real estate is in a separate single member LLC. I have a 20 year commercial note on it, with a 7 year balloon at 4.375%. And yes, an SBA loan can be used to purchase owner-occupied commercial real estate.

Hope this helps,

Lou LaMedica · Answer

@Phil Christian Those are great points and something that another professional mentioned to me. In our case, we are a catering company so we are not dependent on walk-in traffic and we are looking at it as a real estate investment for our family trust, so it will be a single purpose LLC with our business renting back the space.

The other big consideration is growth of the business over time - our agent recommended having a 15-year time line. Our commercial market for smaller spaces (<8,000 sq ft.) is fairly tight at the moment so that would be enough time for proper appreciation as well.

Ronald Rohde · Answer

Are you occupying 51% of the space?

Lou LaMedica · Answer

@Andrea O. Yes that seems like a smart strategy. I am not even worried about the positive cash flow as much as just building equity and having an expense on the business side that would be going back either to me or into the business. Seems like a win win!

That's awesome @Bob Langworthy! So did you set up a seperate LLC for your commercial real estate business? How about financing?  I am wondering if the SBA can help with something like this?

Bob Langworthy · Answer

I'm doing this with a four-office building and my accounting practice. The other three tenants and the parking pay all of the bills and what I pay is the positive cash flow. Works beautifully. It has also allowed for some tax planning opportunities. Office hacking is the way to go!

Hope this helps,

Andrea O. · Answer

@Lou LaMedica I'd love to hear more about other's experiences, too.  I bought a property that I'll use as a second office in a new location where I'd like to grow my business in the next several years.  I'll rent to a retail tenant on the first floor and one or two additional tenants on the second level (offices).  In 3-5 years, I'll consider taking more of the space myself.  Cash flow will breakeven with the income from the other tenants, but my business will pay rent to the real estate LLC, so the property will cash flow.  In planning for my next real estate acquisition, I'm considering doing this again in another location.

Business Owners "rent-hacking" commercial property?

Most Popular Reply