Buying commercial property
At some stage in their business, many owners reach a point where they consider the benefits of purchasing commercial space. For large corporations the decision to buy may be an easy one; for small to mid-size firms it can be much more complex.
Investing in commercial property is an involved process. There are many things to consider, including development plans, zoning and allowable use, environmental issues, a company's financial position, owner equity and market conditions.
If you are in a position to buy, it certainly gives you better control of your overhead. It can also add to your company's equity position in the long term.
Location, zoning and allowable use
Location may seem like an obvious consideration. However, location can affect everything from customer experience and revenue base, to production costs and ease of access for suppliers.
A good location today does not necessarily make for a good location down the road. City planning, zoning changes and future development can affect an area drastically. Increased density and changes to infrastructure can impact access and parking.
Zoning changes may even increase your tax costs. For example, transportation corridors such as the Lougheed Highway in Burnaby have been rezoned to allow higher density. While this had a potential positive impact on equity for existing property owners, it substantially increased annual commercial property taxes.
Allowable use is another consideration. As your business grows its operations may need to change. You should consider whether a property's allowable use will meet both your current and future needs.
If you are looking to purchase warehouse space, consider past use as some commercial properties sit on previously polluted land.
Environmental regulations were not always as stringent as they are today and clean-up costs can be staggering. Older industrial areas and properties can be especially affected.
As a buyer it is crucial to review the reports because clean-up costs may have to be negotiated into the purchase price.
Your financial position
If your company is new, leasing space may be the right decision. For an existing firm, financial position must be considered when deciding to buy.
Is your company profitable and are revenues strong enough to support both mortgage and property tax payments? Profits can be offset by claiming building and equipment depreciation which may make purchasing more attractive.
The down payment on a commercial mortgage is often 25-35%. Can your business afford to tie-up a large amount of capital in commercial property? Or would it be better kept for operations?
A company facing an unexpected drop in business may need capital to carry it through more difficult times. If funds are tied-up in commercial property they are not easily accessible. If forced to sell, it may take time or market conditions may not be favourable which can impact your return on investment.
Unexpected costs can also impact your business operations. As the property owner you are responsible for all repairs – even simple plumbing problems can cost tens of thousands of dollars.
Owner equity and retirement planning
Purchasing property builds equity, and for a business owner it can become an integral part of retirement planning. Selling the business and the property can create a lump sum available for retirement.
If a building is owned outright, leasing space can create a revenue stream for an indefinite period of time. You can lease unused space while you are in business or the entire space when you retire. Both will help you achieve your retirement goals.
After weighing all these issues, you may decide that purchasing makes sense for your business. Be sure that you have the right experts on side to assist you.
Your business advisor can help validate the pros and cons of purchasing. Your accountant and lawyer will structure the purchase from a tax and legal perspective. And a commercial real estate agent will know the area and many of the suitable properties.
A business advisor from BlueShore Financial will work to structure the purchase in a manner that is best for you. They can also recommend appraisers and engineers to confirm the viability of the property you are looking to purchase.