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If it's Real Estate it must be Real - A new business podcast episode from Big Picture Advisors
Listen to the most recent business podcast episode on Don't Get Stuck in Your Business where we delve into the issues of how to hold real estate in your business with Richard Arzaga of Cornerstone Wealth Management
The host of the program, Joel Goobich, President of Big Picture Advisors http://www.bigpictureadvisors.com pointed out that the underlying premise of this expression “Buy land! They aren’t making any more of it” is that there is a finite amount of space on planet Earth and by staking your claim to some of it you stand a good chance of getting higher returns in the future (as scarcity drives up the price).
Without debating the validity of this statement, it points to a commonly held belief that real estate is Real. Unlike other business assets, such as intellectual property, brand image, and goodwill – it represents something tangible. You can see it, feel it, and touch it. It must be real. Right?
Isn’t this one of the first things that commercial bankers wanted as collateral for working capital and other business loans? If the banks wanted it you’ve got to figure it’s real.
If real estate is real in a tangible sense, is it real in a valuation sense? The past four years have certainly put this into question.
Do the values of real estate on the balance sheets of most privately held business accurately reflect the ‘real’ value of the property today? Are periodic or annual appraisal conducted and adjustments made to the financial books to reflect the changes in value? Probably not for most small businesses. They are holding inflated valuations that skew the balance sheet toward an incorrect reality.
According to Richard Arzaga of Cornerstone Wealth Management http://www.cornerstonewmi.com many privately held businesses that own real estate don’t know what is the optimum method to hold it. Often the Real Estate holdings of a business have significantly more value than the business/operations themselves. This was certainly the case four to five years ago before the bubble burst. Most likely not the case anymore.
Real Estate holdings in a private business can also be an anchor, a way of getting stuck in the business. This situation can occur when the carrying cost of the real estate gets larger in proportion to the companies net operating capital.
Recognizing that the reality of real estate is not an absolute is one of the important lessons to learn. Don’t get stuck in your business with real estate that is not working for you properly.