Is Now the Time to Buy Commercial Real Estate?
With property available at bargain prices, the question arises — should you become your own landlord?
Interest rates are low, and bargains abound in commercial property, which can make this a great time for small businesses to shift from renting to owning. There are many advantages to owning your own property. The key to the best payoff is to plan strategically, act at the right time and take a long-term view.
Consider these steps to make the most of today's opportunities in commercial real estate.
Shop strategically
Waiting for real estate prices in your area to decline further is prudent, but waiting for the market to completely bottom out may mean that you lose the property you want to another buyer. Think, too, about advantages you might derive from changing locations sooner rather than later – not only for you but for your employees, customers, and suppliers.
For instance, if you're thinking about accommodating suppliers or making your business more efficient, you might look for more warehouse space or a loading dock with more bays. Similarly, you may want a location with better freeway access. If you're focused on retail customers you may want a location with better parking or a larger stockroom. Check with the municipality you're considering about zoning and other laws, such as those regarding signage and working hours.
Create projections
Create cash flow projections for your company factoring in the likely 40 percent down payment required for a commercial purchase. Ensure that you will have sufficient funds for the down payment, moving costs, renovations and other upfront expenses. Movers, designers and your technology consultant can provide you with estimates to make realistic projections that will help you manage cash flow.
Consult your accountant as well. Real estate ownership brings a variety of tax advantages, notes John Ellis, managing director of Los Angeles-based Integra Realty Resources, a real estate valuation and consulting firm. Deductible expenses include real estate taxes, insurance, utilities (if you're not already responsible for them) and even janitorial expenses.
Consider government programs
The SBA offers a powerful loan program for commercially-owned property financing. One stipulation is that you must occupy at least 51 percent of an existing property; for a newly constructed property, the amount is 60 percent. Other SBA loan requirements are that you have an existing, for-profit business with a net worth of $8.5 million or less, and a net profit after taxes of less than $3 million.
Take a long-term view
Purchasing your office space is a long-term, strategic move, and you must evaluate it as such. For instance, if you invest in renovations, you derive the value of that investment over time. On the other hand, you have to balance the long-term value with your short-term cash flow needs. Make sure you have enough cash to support other parts of your business, advises Adam Weissburg, partner in the Los Angeles office of real estate law firm Cox, Castle & Nicholson. "Don't leave yourself without sufficient reserves to weather the current economic situation," he says.
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