The Impact of Real Property Leases on a Business’ Value
Property leases raising concern
Business arrangements concerning leases for real property will generally have a major impact on the risk profile of a business. Key items that should be reviewed as part of a valuation are discussed below.
Length of Lease
The timeframe remaining on a lease can have a major impact on the value of a business. If the remaining term on a real property lease is quite short (that is, under 3 years), a risk may exist to the future operation of the business beyond the remaining term of the lease. Further, the business may encounter costs should there be a requirement for the business to be relocated. Risks such as these often discount business values.
Restrictive Covenant Clauses
Consideration should be given to any restrictive covenant clauses contained within real property leases. One of the most common such clauses is a demolition clause, which generally allows the landlord to demand that the tenant vacates the property under certain terms.
Clauses such as these should be assessed on a case-by-case basis, however they can present a major risk to businesses where they exist and accordingly, can mean that business values will be discounted.
Oftentimes, businesses will lease real property from a related party. An assessment should be made as to the commerciality of rent being paid from the business to the related party – If the rent is not in line with market norms, an adjustment will be required.
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