To buy. Or not to buy
As the economy ebbs and flows between bullish times and bearish times, small and mid-sized businesses are constantly beset by the decision whether to rent or to buy commercial real estate.
Purchasing commercial property is a thorny process to venture into and it presents challenges for even the most experienced and knowledgeable real estate professionals. It is difficult to determine the optimum moment to act in order to reap the most value from an investment. Fickle markets and unforeseen factors can put any transaction in jeopardy. On the other hand, when a business seizes the moment at an opportune time, commercial real estate can prove to be a prized investment.
With so much in the balance, why buy commercial property? Building ownership can be source of financial stability for your business. Unlike a lease which will inevitably expire, purchasing avoids the chance of having to renegotiate during a tight market when rent prices could spike unexpectedly, drastically increasing your company’s overhead. Ownership also provides tax benefits and asset appreciation.
“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.”
No two commercial sales transactions are alike and every business will have to assess what will best service its interests. Here are some factors to take into consideration as you gather a group of experts, research available properties, and if all goes well, transition from tenant to owner.
Acquiring Commercial Property: Are you ready?
Before committing to commercial property ownership, you’ll want to do your homework and know exactly what you are getting into. No business wants to take on the responsibility and liability of owning property only figure out a short time later that a lease would have made more sense.
Below are three possible perils you could encounter upon purchasing property:
• Hot Spot to “Not” Spot. Manhattan real estate is an ever-changing ecology. A neighborhood may be a trend-setting hub one moment only to lose its status 6 months later to the next “it” area. You may move into a booming business district only to have the market plateau or drop off. Then again, you may buy in a locale just ahead of the curve and have your investment payoff big time.
• Stemmed cash flow. Purchasing property will likely mean leveraging your business and foregoing disposable income. If the market slows and property prices fall, it could be hard to dispose of the property in a timely fashion. The benefit of owning commercial property is that the business has a large asset to sell if it needs liquidity to get through sluggish period.
• Unpredictable income and surprise expenses. It’s possible one of your tenants won’t make rent one month. A pipe might bursts or an elevator could go out of service. Or even worse, you could find yourself out rental income the same day you have to pay for major maintenance and repairs.
To best shield yourself from these risks, it’s important to carefully review all the worst case scenarios and fully understand everything you are taking on. Property ownership is an active role even after you sign the contract. Stay abreast of your property’s operations, so you can recognize problems early on and avoid expensive and timely repairs.
It all comes down what make financial sense for your business. It may behoove you to consult an expert in real estate to review your options, analyze the current market and layout the pro’s and con’s of buying versus renting.
“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.