In the printing industry, I’ve seen several examples of prudent owners sharing my view and not only with real estate but also with internal financing. Quite often these two forces together are strong indication of a healthy company, regardless of size. Businesses closely held, generally family owned, have opted to self-finance themselves.

What does that mean? Simply put if a piece of equipment is being purchased or perhaps a building is being bought, these businesses set up a new corporation, purchase the asset, and then lease it back to themselves. I have scene this scenario countless time when moving around capital equipment. It may not be a possible for everyone to employ this strategy, but it is one being utilized by savvy business owners around the world.

Loblaw could easily do the same but has instead chosen to spin off its real estate into a REIT that will continue to rent space to itself. The Canadian tax laws allowing for transference into these so-called trusts perhaps provide a vehicle to shelter gains (like crystallizing shares) and this could be the argument against simply holding assets in a new company. Trusts usually will not pay taxes as all profits are paid out to shareholders. Additionally, there may be some substantial tax advantages in a REIT as opposed to creating a new holding company.

Smaller businesses should reconsider how they might want to take advantage of current low mortgage rates in order to capitalize on a strong tenant (themselves), all the while continually writing down the property year after year. Purchasing a building should not be confused with speculating on condominiums of other types of housing that can go into the tank by speculators. You are your own tenant – that is the key difference.





It is also possible to take this approach with printing machinery, but the difference is the asset generally does not increase in value. Even so, depending on what rates you are offered, self financing still can be a way of keeping more of what you make. The risks are much higher because your cost of funds is a lot more than the banks. In this business, larger funders make profits on volume.

Banks and other financial institutions understand real estate. They know profit on a mortgage can sometimes take decades but they also appreciate real estate’s security against inflation. Supplying a mortgage is not mission impossible for these lenders, because they know how to measure probability.

Of course, ownership is not without risk: A new roof can cost hundreds of thousands of dollars, or perhaps there maybe environmental issues such as contamination of soil that can cost millions. General up-keep cannot be amortized to a tenant but must be funded out of cash flow. Just like a lease on a vehicle, however, whether a tenant or owner, the user eventually pays. These are the obvious major downsides of real ownership.

Uncovering The Hidden Value
Machinery depreciation varies dependant on country, application and governmental incentives. Accountants use this, of course, but they will not know if there is hidden value. A zero-value piece of production equipment can be assessed differently through an appraisal, which solidifies the value, or by a willing buyer. Goodwill is much harder to value, because, unless your business has long-term contracts, most assessors and even buyers will look at the book of business as a moving target of sorts. The same can be applied to Intellectual Property. For the vast majority of printers, their process is one of manufacturing and may not have any unique or legally protected technologies.

There can be pleasant surprises for a printer, however, when their plant floor is valued. For example, the piece of equipment purchased for a special job, for that customer now long gone, may have sat idle for years, but, if it can be determined as unique or rare in the market, it might be worth a lot more than imagined. Strange as it may seem, equipment you would not take a second look at for running a job today may hold values you never thought possible. In my appraisal assignments I’ve frequently uncovered dollars to the surprise of clients.