Withdrawing your equity…while staying put

For various reasons business owners who own their own building find that it makes sense to pull the equity from their building. Reinvest in the business, estate purposes, family matters, etc. There are two ways to do so; let’s compare them.

Refinance:

You don’t actually get all of your equity; only the difference between what you owe and the loan to value (LTV) ratio the lender is willing to loan. In other words, let’s say your building is worth $100,000, you owe $50,000, and your lender loans 75% LTV. That means you get a $75,000 mortgage, pay off the $50,000 and draw out $25,000, minus the cost of the appraisal, environmental assessment, survey, loan fee and perhaps “points;” which are effectively a buy-down cost for getting a lower loan rate. Let’s say those costs are 5% of the loan amount; that’s $3,750. So you end up with $21,250.

Sale/Leaseback:

Using the same scenario as above you list and sell your building for $100,000. In this case you pay off your mortgage and draw out $50,000 minus your sales costs. Commission, title insurance, transfer tax, and other costs equal about 8% of the sales price; that’s $8,000. So, you pay off the mortgage and deduct your sales costs and end up with $42,000 in your bank account.

The costs above are probably high in today’s market, but I like higher costs better for use in an example – “worst case scenario.” There were times in my career, though, where those costs would have been low.

Of the two options above the best choice for one person may not be the best choice for another, so be certain to get some good accounting and legal advice before making the decision. A good commercial real estate broker should also be consulted.

Now, how might you improve the value of the building, defer capital gains tax, and how much will you pay in a lease? That’s a subject for next week. In the meantime, take a hard look at Washington and what will happen to the Capital Gains Tax. That should weigh heavily into your decision and timing.

To see the commercial and investment land listings that came into my desktop this week, go here:

December 15 2009

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