Collins The Trend Tracker
by Mike Collins
April 6th, 2009

The Impact Real Estate Has on a Company (and Vice Versa)

In my last blog, I discussed the ways in which troubled companies are valued by the market. Now I’d like to explore the ways in which the value of a company and the value of its underlying real estate affect each other.One of the most obvious ways in which real estate can impact the value of a business is when there are environmental problems. Environmental regulations get tougher every year, so many companies choose to outsource environmentally challenging processes like anodizing, powder coating and even staining and varnishing. Because of potential environmental impacts, it is critical to have a Phase 1 environmental analysis completed whenever purchasing real estate. When you’re reading the Phase 1 report, ask yourself whether you’d be willing to fast forward to the future and hand it to a potential buyer for your company. If that causes any hesitation, you should undertake a Phase 2 analysis, which is more likely to uncover any existing environmental issues.

It is less well-known that the status of a company can have a significant impact on the valuation of the underlying real estate. For instance, if a company is in danger of being shut down, the path that its owners pursue will have a significant impact on the value of the underlying real estate. For smaller companies in this position, the value of the real estate may actually exceed the value of the company itself. At the least, the bank that has provided financing to the company will likely have loaned more money against the real estate than against the business. Real estate, after all, is an extremely safe asset (he said with a wink).

The ideal outcome for the lenders to a troubled company will likely be the successful sale of that company as an ongoing business. If the company is shut down, the lenders will seize all of its assets. In that scenario, the value of all of the assets inside the company will drop sharply (inventory, accounts receivable, plant equipment) because the market will know a fire sale is taking place.

What is less understood is that, in the current market, the lack of a tenant will also have a significant impact on the valuation of the real estate. In a recent transaction, several real estate investors indicated to us that their valuation could drop by 50 percent or more when there is not an ongoing tenant located in a facility. Other investors told us that they would not even submit a bid on such real estate. Thus, the optimal path for the lenders to a troubled company is to have the company purchased as a whole by a group that is interested in remaining in the facility, whether they purchase it themselves or lease it from a real estate investment group. Failing to take into account the effect a business has on the value of its real estate could lead to large losses.

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