Business organisations and property investment edge

BY OLUFEMI ADEDAMOLA OYEDELE

Olufemi Adedamola Oyedele, MPhil. Construction Management, managing director/CEO, Fame Oyster & Co. Nigeria, is an expert in real estate investment, a registered estate surveyor and valuer, and an experienced construction project manager. He can be reached on +2348137564200 (text only) or femoyede@gmail.com.

Business organisations are corporate bodies set up to generate profit. They are entities created to carry on the business of commercial enterprise. These organisations depend on commercial transactions – manufacturing, sales of goods and products or rendering of services – to survive. Business organisations are hubs of risks since business is a pool of risks. They are predicated on laws of the land in which they operate, laws of contract, incorporation and property rights. There are four types of these organisations; sole proprietorship, partnership, limited liability company (LLC) or public limited company (PLC) and corporation. They operate on locations known as business- premises or addresses or plants.

While some business structures can be operated from the bedroom of their owners, most businesses cannot be operated in a residence. For example, for hygiene reasons, a food manufacturing establishment must not operate in a living area. Noise pollution and customers’ traffic flow must also be considered before locating a business. Most manufacturing activities also require spaces that a residence cannot provide. Service-providers like online marketing, legal, real estate and secretarial organisations, which hardly require visitation by customers, may find it convenient to operate from home, especially as a result of COVID-19 protocols. Most big organisations cannot afford not to have business premises (properties), either rented or owned, for their operation and expansion. It is strategic to do so.

Properties or real properties or real estate are defined as landed properties, land, buildings, air rights above the land, except those properties near airports or security zones in which governments have laws restricting the height of the buildings, and underground rights below the land, except exploration of mineral resources underneath a property. The term real estate means real or physical property. According to urban and regional planning rules, it is expedient, economical and safer to have the various land uses in either concentric zones model or Burgess model developed by sociologist Ernest Burgess in 1925 or sector model or Hoyt model, developed by economist Homer Hoyt in 1939, than to have them unorganised.

Industrial and commercial properties are usually more expensive per unit area than residential and agricultural areas, especially in communities where there are restrictions on the usage of properties guided by law, because of their scarcity and infrastructure provision. Commercial and industrial hubs receive, comparatively, more attention from governments because they generate corporate and personal income taxes more than residential areas. Since commercial and industrial properties are required to do business and generate profit, the buyers of these properties are prepared to pay higher prices than for residential and agricultural land. Researchers have shown that business organisations which have their own properties have business advantages over business-premises renters, except temporary businesses.

Business entities which operate in their own properties are perceived by customers as having a more solid structure and financial base than those organisations in rented premises. Owning properties brings consistency. Landlord-business organisations do not have to fear an increase in rent and can plan their expenses over a long period. Organisations in rented apartments are under the mercy of the owners of properties in which they operate in that the landlord may use their annual turnover (business performance) for annual rent increment. The worst calamity is when the property owners decide to sell their premises and the new owners decide to occupy them. There is nothing as stressful as moving out of business premises!

Ownership of business premises allows businesses to grow roots in the community, and prevents unnecessary needs for expensive moves and change of address on letterheads, files and business cards when the lease on a rented property expires or the business has outgrown the leased space. A business owner who is in owned property has the liberty to design the building and the property to his taste and to meet business needs. There are occasions when part of the car park may require to be converted to a stacking arena and the side of the factory may require roof extension to accommodate business expansion. Most landlords will not want renters altering the usage or using the premises for unpredicted and uncovenanted uses.

Consider the amount a business will save annually by not paying rent. At times, it is better to get loans to buy your own business property than to be at the mercy of shylock landlords. Owning of properties by businesses can also save them from long gestation litigation. See Eloichin and others versus Victor Ngozi Mbadiwe, Supreme Court of Nigeria (SC 54/1 of 1981), Inder Mohan Kahhanna and others versus Jai Parkash and another (17 May, 1978) and Christopher Amah versus Fidelis Ozoli (E 298 of 2006). Though purchase of factory premises or business offices may be initially expensive, it is cheaper and wise to do so where there is means. Astute business organisations are now speculating by strategically buying real estate for future expansion.

Businesses do not require only premises or plants to succeed. They require equipment, furniture and fittings and operation cost. It is prudent for any business owner to reach a compromise between having its own premises, that is, having a property investment edge and having liquidity. After all, life itself is about compromise and there is nothing as hard as a business with a cash strap. Balance sheets do not have fixed assets again after current assets. What we have now in a balance sheet are current assets and noncurrent assets. Land and buildings are classified as non-current assets because businesses now see them as assets that can be used as collateral for business loans and not fixed. Organisations also engage in “sale-and-lease-back” of their land and landed properties to generate funds.

Properties in good business locations give advantages to business organisations that own them. Manufacturing organisations which have residential estate close to their plant will see improvement in performance as workers will get to office timely, work optimally due to the fact that they are not stressed up inside traffic hold up while going and coming back from office; and work till late. Organisations are also able to provide a befitting living environment as staff quarters and will not be sceptical to refurbish the houses and improve the value. Though, as tenants, instead of property owners, companies will have more capital to reinvest in their core businesses, but having a property portfolio has a lot more advantages.

Organisations like Macy’s, a mall-oriented departmental store, seem more like a real estate mogul than a retailer. The company owns most of its locations, including its flagship Herald Square store in Manhattan, New York. The value of the company’s real estate empire was fixed at around $28 billion in 2021. MacDonald’s, a fast food restaurant, is another company with a property investment edge. In 2020, MacDonald’s hauled over $9.0 billion as rent from its properties. This was more than a third of its corporate revenue in the same year. MacDonald’s owns about 90 percent of the physical buildings where its restaurants are located (valued at $29.6 billion). Walmart is another giant retailer with a property investment edge.

As at December 2021, Walmart owns over 4,700 of its 5,542 locations in the U.S. These included Walmart and Sam’s Club stores as well as warehouses for distribution. It owns 6,688 of its 11,909 international retail and distribution facilities. Many of these properties are so large that they are rented out to other corporate tenants. Banks are also comfortable granting operation loans to organisations with huge property portfolios because part or all of the properties can serve as collateral.

The only demerits of businesses owning their own properties and more is that it ties down capital and may slow down a company’s ability to grow; but the benefits are many and include having property investment edge: supplemental income, status-boost, flexibility and rest of mind.