Why should a business buy? "To get a greater control over the cost of
the real estate component of overhead, as opposed to leasing, where you
can be victimized by the market if the lease rolls over when the market
is tight and, as a result, you have higher rental costs," says William
Martin, chair of the real estate group in the Denver office at Kutak Rock LLP,
a law firm with 400 attorneys and offices around the country. "The
other benefit would be investment benefits, including depreciation of
the property for tax purposes and, over the longer term, asset
appreciation."
There is no one-size-fits-all strategy for
purchasing commercial real estate. That decision must be weighed by each
business. The following guide will help a small business assemble a
real estate search team, choose a location, and purchase property.
Purchasing Commercial Real Estate: Deciding to Buy Versus Lease
When
deciding whether to buy commercial real estate, it's important to
understand the potential risks. The last thing you want is to buy
property and realize a year or two later that you would have been better
off renting. Here are some of the potential risks a business faces when
buying:
- Location may backfire. Today's "hot" neighborhood can become
tomorrow's "not" neighborhood. Locations are trendy. Gentrification may
stall. The market may go bust. The area you choose one day may become
undesirable the next. Of course, the reverse can be true, as well.
- Loss of liquidity. Businesses may tie up much of their
liquidity buying real estate. It's not always easy to sell real estate,
particularly in a slump. At the same time, businesses that own real
estate at least have something to sell if they need a cash influx to
revive a lagging business.
- Tenuous cash flow. Tenants sometimes stop paying their rent.
Other times, buildings are in need of unexpected -- and expensive --
repairs. Your cash flow can become compromised, especially if you are
forced to simultaneously pay repairs and attorney fees to handle a
tenant situation.
In order to be aware of risks, do your homework. Undertake extensive
due diligence before signing any contract. You also need to be hands-on
with your commercial property by overseeing every level of operation and
making frequent on-site visits -- otherwise, you may learn about
problems after it's too late to do anything to fix them.
The
decision ultimately comes down to the economics. You may want to have a
real estate expert help you undertake a rent versus own analysis, taking
into account growth forecasts for your business and real estate market
trends. "It's really beneficial to sit down with an expert that can lay
out options for you and discuss scenarios, such as in three years this
is where business will be in terms of revenue, size, or people. This is
how many locations we will have. This is what our space needs will be,"
says Hessam Nadji, managing director of Marcus & Millichap,
a national brokerage focused on real estate investment. A real estate
expert can also help you figure out the costs of renting versus buying,
factoring tax benefits such as depreciation.
Dig Deeper: How to Evaluate Your Office Leasing Strategy
Purchasing Commercial Real Estate: Assembling a Team of Experts
As
a small business owner, you're most likely not a commercial real estate
expert. That's why it's important to surround yourself with the right
team of experts. They can help you determine the right time to buy or
sell, the right locations to consider, and the nuts and bolts of closing
the deal. Here are some of the experts you may consider contacting:
- Accountant. An accountant can help you figure out what your business can afford and analyze the tax and operating budget benefits.
- Lawyer. A lawyer can help you complete the transaction, negotiating with the seller and lender on your behalf.
- Commercial broker. A real estate broker can help you identify potential properties and what you can afford.
- Mortgage broker. A lender or mortgage broker will help you
sort through financing options, from bank loans to those guaranteed by
the U.S. Small Business Administration, such as the Certified
Development Company (CDC) 504 Program, used to finance primarily real
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