Are you looking into a new commercial property, but you can’t quite make a decision about whether the purchase is viable? It’s one thing to dream about a successful business venture, and it’s another thing entirely to make it happen. It’s wise to ask yourself a few key financial, logistical, and legal questions before you make your move. When you plan your purchase carefully, you’ll be in a much better position to start operating from your new location.
- Owning vs Leasing?
Before taking the plunge to purchase a commercial property, think through the long-term costs of owning versus renting. Evaluate the market to get an idea of how much you might spend. Work with your accountant to review the potential income of your business and/or the property and the associated operating expenses. This will determine how much you can afford. Remember to factor in all costs associated with owning—such as taxes and debt service—and the savings, such as tax deductions. On the other side of the column, also evaluate rising rents and expenses. In many cases, ownership is financially more attractive than leasing.
- Is the property right for your business?
Any given location could be perfect for one business and disastrous for another. Make sure there is a strong demand for your business in the target location, and consider whether that demand will stand the test of time. A new cafe may not thrive in a neighborhood already saturated with coffee shops, but student rental properties located near a college will always be in demand.
You should inspect the floor plan of your property and make sure it can accommodate the needs of your business. If you are opening a restaurant, will the space allow for both an efficient kitchen and an appealing layout in the dining area? Will your retail store have enough space to display your inventory while allowing customers to walk around comfortably? You might also plan ahead and consider whether your space can be expanded as your business grows.
- Do your due diligence!
Does the existing land use and zoning designation of the property permit the kind of business you want to operate? Or will you need special approval from the County or Municipality? Is the property saddled by code violations, insurance claims or litigation? Is there sufficient water and sewer capacity for your proposed use or will you be hit by large impact fees? Also, as with residential real estate, you should make sure there are no technical or environmental issues affecting your commercial property. Get an inspector to look for contamination, infestations, structural issues, shoddy plumbing or electrical work, and other potential problems. You may even need a Phase I and or II environmental survey to meet lender requirements.
- Will you be financing?
Most commercial property buyers will obtain financing. Check in with your banker early on and identify the best financing option for your business. Will you apply for a traditional commercial loan? Or, perhaps you can qualify for an SBA Loan with favorable financing terms? Either way, securing a loan requires time and a significant amount of paperwork. You will need to submit tax returns for the last two to three years, current profit and loss statements, projects, etc. These days this is the most cumbersome of all of the processes when purchasing real property. Start early and be responsive to your banker’s requests.
- Assemble the right team.
Besides your banker, you should involve your CPA in your decision to purchase commercial property to understand the tax benefits or consequences. An attorney can assist you in preparing and/or negotiating the purchase contract and can also walk you through the due diligence process, financing and closing. If you’re developing the land or renovating an existing building, take care to hire experienced and reliable contractors. Some may even have experience in your particular industry, making it easier for them to meet your needs. In all aspects of your purchase, professional guidance will allow you to move forward with confidence.
Once you’ve evaluated all of the risks, sorted out your financing, and completed all the necessary homework, you’ll be well-equipped to make a decision about your commercial property.
Call Ser & Associates if we can assist you with the purchase of a commercial property. We will work alongside you while making sure that your interests are protected and that your business will always have room to grow.
