Part 5. Planning for Real Estate
In this series we have addressed the merits of effective communications, the need for structure and process, implications of the status quo and the benefits of proactive planning. In this installment we look at how real estate can be a significant component of a succession plan. The example is intended as an illustration and should not be considered advice or relied on by the reader to make decisions. Consult with your professional advisors on structuring options based your specific circumstances.
Dealerships typically occupy prime real estate locations that can have a significant value. Visibility, accessibility and a significant footprint in key commercial areas mean that real estate can be a key asset for a dealer group. In some cases the real estate may be more valuable than the business. A key planning approach is to own the real estate in a separate entity from the business. This can provide an effective element of creditor protection with respect to the real estate. For tax purposes rental income received by a company that owns real estate will be active income if it is received from an associated corporation that carries on an active business. In the context of succession planning, the real estate could be a source of long term income for retirement.
The real estate value and income could also be part of the asset base that that is shared with family members that are not active in the business. For example, family members that are active in business may own equity in the business, whereas family members that are not active in the business may own part of the real estate. The key is that by having the real estate in a separate entity we have more tax and financial planning options. As we have highlighted in our prior modules the key is to contemplate options and plan proactively. A structure whereby real estate is held in the operating company can be problematic because it leads to less options. Further, it may be a complicated and expensive exercise to transfer real estate out of an operating business if it is determined that this is optimal for planning purposes.
In this series we have addressed the level of effort and initiative that is required to properly prepare for succession as a dealer. You should use this insight to foster discussions internally with key stakeholders and externally with key advisors such as professional accountants and lawyers. The key is to develop a complete and proactive plan that works best for a particular business and its stakeholders. This discussion is based on the Welch LLP webinar “Succession Planning for Automotive Dealers” with Welch LLP Partner Jim McConnery CPA, CA, TEP and Sirius Financial Founder and President Susan St-Amand.