Q: I own about an acre of land and I built my medical office on half of it.
We are considering building a second office to lease. Is there any benefit in doing a “lease to sell” If there is an economic benefit, how should this deal be structured?
A: Start by asking yourself if you really want to be a landlord, or if you want to build a building and sell it for the immediate profit.
If you want to build a rental building, manage it, obtain the appreciation, get a stream of income, and receive the tax benefits that you would obtain by owning commercial property, then your best bet is to build and hold the building rather than sell it.
On the other hand, if you want to develop the property and want to cash out right away, you can offer it for sale and use the “lease with an option to buy” as an incentive to get additional buyers to consider the purchase.
The only real benefit to a lease with an option to buy or a lease with an obligation to purchase, is that you might broaden the field of interested parties that might want to purchase the building. Keep in mind that the best sale for you is one in which you have a buyer who has a desire to buy the building and sets a firm closing date for the sale.
A lease with an option to purchase may turn up a company that who rents the property for a while and then decides not to proceed with the purchase. A lease with a requirement that the buyer purchase the building gives you a willing buyer, but if the wait is too long, you may find that circumstances have changed and the buyer decides not to proceed with the purchase.
Whether you decide to sell or lease the property, you’ll need a good real estate attorney who can sort through the myriad of issues surrounding the construction of a commercial building.
One advantage to developing the building and leasing it for at least one year is that upon the sale, any profits from the sale should be taxed at your capital gains rate, a maximum of 15 percent. Selling the building within a year means that you’ll pay capital gains tax at your marginal rate, which can float as high as 35 percent.
But you should talk to your accountant or financial advisor more about what the financial consequences would be to you upon the sale of the property. You may find that keeping the property in your portfolio will benefit your long-term investment strategy much more than a quick sale that injects your finances with a jolt of cash all at one time.