Real estate ownership and closely-held firm value

DOIhttps://doi.org/10.1108/JPIF-07-2013-0045
Publication Date01 Apr 2014
Pages229-243
AuthorJohn Edward Graham,Craig Galbraith,Curt Stiles
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Real estate ownership and
closely-held firm value
John Edward Graham
Department of Economics and Finance,
University of North Carolina Wilmington, Wilmington,
North Carolina, USA, and
Craig Galbraith and Curt Stiles
Department of Management, University of North Carolina Wilmington,
Wilmington, North Carolina, USA
Abstract
Purpose – The authors aim to measure the value of leasing, versus owning, business locations for the
closely-held firm.
Design/methodology/approach – The authors examine the sales transactions of small businesses
in the USA – those with revenues of less than $20 million per year – between 1995 and 2010.
The authors contrast the values of firms that own, and do not own, their real estate.
Findings – In general, the authors find negative relationships between closely-held firm values and
real estate ownership. Nowhere did the authors observe firm value being enhanced by property
ownership.
Research limitations/implications – The data set may be limited by the accuracy of the data
provided by business brokers. Compared to the capital markets, the small business “exchange” is less
efficient, but it is the only source of unlisted business sales data.
Practical implications The findings are important to the small-business broker and the investor.
The broker might better advise the buyer and seller with the findings. Business owners, private equity
investors, and their advisors, are all reminded to focus on the core business strategy and avoid getting
“locked into” real estate ownership in a business investment.
Originality/value – The impact of real estate on the valuations of closely-held firms is a largely
unexamined area. And there is a lack of consistency on publicly-held company valuations as a function
of real estate ownership; these public company findings and the dearth of work on the privately-held
company’s real estate attract the attention in this study.
Keywords Closely-heldbusiness, Real estate ownership, Real estatevalue, Small firm value
Paper type Research paper
I. Introduction
Ownership of commercial real estate (CRE) by businesses has been an area of interest
in the finance and real estate literatures for some time. Prior work focuses upon
publicly-traded firms. Those studies, examining the impact of real estate on the value
of publicly-traded companies, are inconclusive. The impact of real estate on the
valuations of closely-held firms is a far less examined area.
Within the USA, the strategic ar guments for a non-real estate fir m to own real
estate tend to focus on risk reduction and fin ancial diversification issues. The re al
estate may be “coincidental” sinc e many small-business owners ma y have inherited
or started a business located on land purch ased long ago. However, where the
ownership is “intentional,” the m ost common justification is to hedg e against various
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Received July 2013
Accepted February 2014
Journal of Property Investment &
Finance
Vol. 32 No. 3, 2014
pp. 229-243
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-07-2013-0045
Real estate
ownership
229

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