Current market conditions, including lower interest rates, have created an attractive environment for small business owners to shift from leasing to buying their workspace. Business owners opt for owning instead of renting for a variety of reasons, including tax benefits, increased control and security over the location of the business enterprise, expense management, building credit and asset value, and pride of ownership.
If you are a business owner interested in purchasing real estate for your operations, consider these solid suggestions.
Pros and Cons
Create a list of benefits and downsides of buying commercial real estate. Owning will bring benefits such as tax deductions for certain expenses. On the other hand, as an owner you will be responsible for all maintenance and repairs, which can bring on unexpected financial burdens and require additional planning. You’ll want to consider all the pros and cons, determine if there are ways to reduce your risks, and then decide if ownership is the right decision for your company.
Think Long Term
Forecast the long-term costs of both leasing and owning. Also, consider the risks and rewards of long-term commercial real estate ownership vs leasing. Work with an accountant to review the cost benefits for each scenario, and engage your finance department in forecasting revenue and expenses. Keep in mind that expenses like rent, taxes, utilities association dues, and insurance will likely increase over time, so build that into your forecast model.
Building your team of experts
Before you buy commercial real estate, select a lawyer, a certified public accountant, and a broker to help guide you through the purchase process. These experts will listen to your needs, evaluate potential property, navigate the negotiations of the purchase, and make sure all documents are properly prepared before you sign them. You'll also need a trusted lender who has a strong background in commercial real estate, as well as a construction expert. Even if you plan to purchase a property “as is”, you will want to ensure that the property is thoroughly inspected from a structural, mechanical, electrical, and plumbing standpoint.
Buying the right property
The property you purchase should fit the needs of your business. Important items to consider before purchasing commercial real estate include:
- The location of the property
- Development plans for the surrounding area
- Condition of the property
- Freestanding building vs. commercial condominium
- Potential immediate or future capital needs
- Future space needs for your business
- Zoning and other municipal factors that may affect the property’s use
- Multitenant vs. single tenant – perhaps you may want to consider purchasing a multitenant property to generate revenue in order to cover the monthly debt service, while securing a space for your business with room to expand in the future.
Determining a budget and financing options
Prior to even looking for the perfect property for your business, establish a budget range for both the purchase price and the monthly costs associated with property ownership. Your team of professionals can be a great resource to you in this process, as well as the finance department in your company. Your business may decide that paying cash for a property is the right course of action, in which case you’ll need to be very certain that acquisition costs, closing costs and other expenses have been properly projected in order to avoid surprises. If financing is the right decision, establish a relationship with a reliable banker who can help you obtain a commercial loan. You'll need a great deal of paperwork, too, including tax returns, cash-flow statements and future income estimates, audited financial statements, etc. To save time, pull together that information before you start the budgeting and forecasting process. Not only will it be of great resource, you’ll have the information on hand when it comes time to seek financing.
Contact the professionals at DRK to assist you – our clients’ needs are our priority.