Using Commercial Real Estate as a Supplemental Retirement Plan

Friends, Redskins, countrymen, lend me your ear.  I come to praise Rex Grossman, not bury him.  Which is odd, since I have blamed him for everything from the increase in DC suicides to congressional gridlock.  The NSA has a secret surveillance program to figure out where he's throwing half the time.  Rex is the best third string quarterback in the NFL.  He is Bret Favre, without the talent, Peyton Manning, without the brains, Tom Brady, without the smokin' hot supermodel wife.   But, he is better than Pat White.

Pat White is the rule to which RGIII is the exception.  White is the rule that running quarterbacks can't throw.  Have you seen him throw to the right side of the field?  Not and complete a pass to someone wearing burgundy and gold.  So, I raise my glass in a toast to Rex Grossman.  May he forever stay on the Redskins sideline holding a clipboard.

Here's what I'm not talking about when I advise using commercial real estate as a supplemental retirement plan.  I am not talking about Rich Dad, Poor Dad nonsense.  I am not talking about buying real estate for no money down and flipping it in six months, thus becoming fabulously wealthy.  That won't happen.  You'll just go broke.  You're not that smart.  I'm not either.

I am also not talking about buying commercial real estate with your IRA money.  You have to be pretty stupid to do that.  It gives up the main tax advantage in owning real estate, the lower capital gains rate when you sell it.  If you put property into a qualified retirement plan, you don't pay taxes when you sell the property, but you pay ordinary income taxes when you take the money out of the plan.  Stupid - really stupid.

I am talking about buying space from which you will operate your business.  If your business doesn't require office or warehouse space, please go back to your porn site.  This post isn't for you.  There are three great reasons to buy commercial real estate for your business operations.

First, you are paying rent already to somebody.  You might as well pay it to yourself. This is the primary reason we bought our office space.  At the end of a five year lease, our monthly rent doubled, just because we needed to lease office space in a tight market.  When we bought our office space, we forever ended rent increases.  For the first few years, making the mortgage payment was difficult.  However, the payment was never going to increase again.  Our rent, in the form of the mortgage payment, was never going to increase, let alone double, again.

Second,  over a period of ten or twenty years, your commercial real estate investment will increase in value, and you get capital gains treatment when you sell it.  If you intend to be in business for less than ten years, again go back to your porn site.  Commercial real estate, in the short term, is a wild ride best avoided.  Prices can move down or up twenty percent in a year.  However, if time allows you to sit out the price swings, commercial real estate is a great investment.  The eventual appreciation is a great tax advantaged supplement to other pension plans.

The third reason to own commercial real estate for your business is that the rent is an excellent way to get money out of your S or C corporation without suffering the tax disadvantages of dividends or salaries.  You also have wide latitude in determining a fair rent to pay yourself.

How can you afford to buy office or warehouse space?  The SBA loves making real estate loans.  They love hard assets.  You'll have to operate your business there, though.  The SBA doesn't loan for investment properties.  Pretty much nobody does anymore unless you have forty percent down.  For your purchase, you'll likely need ten percent down.  The place to look for an SBA loan is a local bank specializing in small business lending.  Look for a bank that makes a lot of these loans.  You don't need an amateur banker, who is more comfortable with home mortgages.  Commercial real estate loans are a whole different animal.

Here's a hint on owning the real estate.  Create a limited liability company (LLC) to own the office or warehouse space.  Then make the LLC the landlord for your business.  This separates the building from your business for liability purposes.  If your main business goes bankrupt, you may get to keep the building since it is in a separate entity.  No guarantees there.  Check with your lawyer.  You can also easily sell the business, or real estate, separately from the other.

Commercial real estate can be a valuable part of a comprehensive retirement plan.  I drank the Kool Aid myself.  But have realistic expectations.  It is a part of the plan, not the whole plan.

Thanks for reading.  For real tax and accounting advice, please visit the main S&K web site at www.skcpas.com.  Also, please like the "How to Screw Up Your Small Business" Facebook page.  I post snarky tips there three or four times daily.

Until next time, let's do it to them before they do it to us.