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If it’s Real Estate – It Must be Real!

It it's real estate - it must be real

What is the Real value of your Real Estate

Lost in the noise of the real estate bubble bursting and the seemingly endless waves of the tsunami of residential foreclosures and short sales is the fact that so much commercial real estate is owned by private closely-held businesses. This represents a significant amount of business assets and wealth that is being carried on the balance sheets of these closely-held businesses.

How ‘Real’ is that value now compared to a decade ago? These and other issues were recently addressed in a podcast episode of Don’t Get Stuck in Your Business with Joel Goobich.

One of the overused clichés about real estate is “They aren’t making any more of it”.  The underlying premise of this statement 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).  Is that a real statement anymore?

Without debating the validity of this statement, it points to a commonly held belief that real estate is always 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 want it you’ve got to figure it’s real. Wonder how many banks would like to rethink that approach from 5 – 6 years ago?

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? For most small businesses this is probably not the case. They are holding inflated valuations that skew the balance sheet toward an incorrect reality.

According to Richard Arzaga of Cornerstone Wealth Management 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. Real estate holdings in a private business can also be an anchor, a way of getting stuck in your 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 for any business owner contemplating purchasing versus leasing real estate. Don’t get stuck in your business with real estate that is not working for you properly.


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About the Host

Joel Goobich is a big-picture guy with sharp insight into how individual parts make a strong whole. He has 30+ years of entrepreneurial endeavors; starting, building and exiting businesses. He is tireless in the pursuit of solutions to boost your business and put you on a track to a profitable transition and exit to your next act.