There comes a point in time where every business owner asks themselves, “Should I buy a building?” The question usually arises after the annual 3% rent increase or your CAM charges go up because the building has a new owner. Buying a building makes sense on many levels. When you own your own building you can typically deduct your mortgage interest, mortgage insurance, property tax, depreciation, amortization, and repairs and maintenance. You are insulated from sudden rent increases and you control your occupancy costs. If all signs point the yes, then buy a “home” for your business.
The process of buying a building can take your focus off the fundamentals of running your business. The last thing you want to do is impact the source of your income. Fortunately, there are a bevy of professionals available to help you. Apply the principal of leverage and use experts, set and communicate your expectations, and then be both patient and flexible.
The first step is to assemble your team. You will need, at minimum, a real estate broker and a lender. A complete team also includes your CPA, a real estate attorney, and an insurance agent. It is imperative your team members understand commercial real estate. It’s even better if they have experience with owner user properties. There are substantial differences between commercial and residential real estate. The risk and potential liability exposure that you face on a commercial real estate deal can be much greater than when you buy a house. These can include multiple liens, title problems, environmental issues, and zoning concerns. In residential real estate matters there are mandatory disclosures that are not required in a commercial transaction. You need to work with experts in commercial real estate in order to limit your liability and protect your assets. Ask your friends and business associates for referrals and then do your homework.
Once you have your team assembled you need to determine how much you can afford. Then you can decide what type and size of building you will need and where you want your company to be located. It does no good to have a broker spend time looking for a property if you can’t afford to buy one. Your commercial mortgage professional will analyze your financial information and let you know if you qualify for a loan and how much you can afford. They should be well versed in all types of commercial loans, including conventional loans, SBA loans, and private money loans. You want to explore all your options and always have a Plan B.
Armed with this information you can sit down with your commercial real estate broker and find a suitable property. The type of business you own will affect the type of building you buy and can affect the location as well. The size of the building will depend on your growth plans. You should consider buying a larger space than you need if growth is in your future plans. It’s much easier to buy something larger than you need and lease a portion (now you’re the one increasing rents) until you grow into it rather than have to sell your building and buy another one. Finding the right location can be a challenging aspect of the process so the sooner you get to this step the better.
You need to be prepared and ready for the due diligence process. Your team will handle most of this process, but you need to be able to respond quickly when asked for additional information, signatures, and the like. The average time to close on a commercial property is 90 days with most of this time tied up in third party reports such as the appraisal and environmental reports. The best thing you can do is be available.
Most business owners go into business for themselves because they want to control their future. One mechanism of control is to own the building from which you operate. Owning your own building allows you to control financial future, receive tax savings, and manage cash flow more effectively. It’s also a long-term wealth building strategy. When it comes to retire real estate can be a generous source of capital. Many times the property can be worth more than the business. For established companies who want address stability and who have the financial resources, buying a building is a no-brainer. For younger and growing companies purchasing a building can be the single most important step towards profitability.
Call me:
Chris Cappeto
(707) 888-4402
eMail me:
chris@baltimore-financial.com
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