Once the own vs lease decision has been made, what are the questions a partnership would be wise to consider? Each corporate structure can be unique. This article at the very least will help get you started on the journey.
Should we set up a separate holding company?
In most cases this would be recommended. It’s always wise to consult your accountant and lawyer. There are the obvious additional costs of setting up and maintaining a separate corporation. The benefits however can include limiting liability and in turn protecting the asset, provide the option of a different corporate structure as well as the ability to sell your business at some point and keep the office building for long term rental income
Is it advisable for each partner to have equal shares in the holding company?
I don’t subscribe to that theory at all. Each partner is likely to have differing financial goals and cash available to invest. I believe it is probably important to have a required minimum initial investment. We have established unequal percentage of ownership in some of the Saskatchewan commercial real estate investments I am a part of and have not found that to be a problem (ICR non-compete clause). With each party reasonably invested according to his or her desire or ability, my personal experience has been positive.
What happens when partners disagree how much rent should be paid to the holding company?
A remedy needs to be established within the written partnership agreement in the event a disagreement arises. It is possible that a future rental increase could impact one or more of the partners differently. In many cases an arbitration clause is added as part of the dispute mechanism which provides for a separate appraisal(s) by a qualified independent third party.
How much time before our lease expires do we need to start looking?
I recently met with a partner of a financial services company who told me they are likely two to three years away from being in a position to transition from tenant to owner. Although it may be difficult to determine the extent of your space requirement far in advance, taking the time to ask these questions a few years ahead of time can be very wise. Sit down with a commercial real estate broker that you trust and determine the questions that are applicable in your particular case. I believe you’ll find the time invested will pay significant future dividends! What is your overriding thought when you consider this topic?
Posted by Barry Stuart