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To buy or not to buy?

Consider location and funding strategies before you purchase a commercial space

By Dawn Josephson    

For many business owners, owning their own commercial space is one of their primary goals—and it comes with manycommercial benefits: control of the commercial space, the ability to build equity and the owner’s net worth, and a tax write-off on the loan interest. Even with those benefits, though, the fact is that in some instances, leasing is still the better option.

“We’re in a unique environment where there is a lot of vacancy now,” says Colin , CCIM, with Coldwell Banker Commercial Benchmark. “So you have to determine whether the cost of owning is more or less than the current lease rates for similar space.”

Colin Nicholson

Colin Nicholson

Nicholson

Nicholson explains that he’s seen some deals in which leasing was the better option because of how low the current rents are. “If you can get a low enough lease rate, you might be better keeping the cash in your pocket and investing in your business instead,” he says. “The key question to ask yourself is: ‘Is my business growing faster than the real estate appreciation?’”

Sid Jones

Sid Jones

To find out whether you should make the plunge into buying, having a lease versus buy analysis is crucial. Sidney O. Jones, CCIM, with Killashee Investments, LLC, frequently performs such analyses for clients. “In putting one together, we look at the needs or requirements of the tenant/buyer,” he says. “What is in their best interest? What is the liquidity and reserves of the principal(s)? There comes a point in the lease/buy analysis where you see the breaking point and it becomes clear whether the owner’s equity is better served in buying or leasing.”

Start with the end in mind

If you determine that buying is the best option for you, choosing the best location is the next step. And while we all know the old adage that the three most important things in real estate are location, location, location, today’s commercial real estate agents suggest business owners think in terms of resale, resale, resale. 

Jeff Evans

Jeff Evans

According to Jeff Evans, broker/associate with Colliers International, “The most important decision in terms of location is not whether the business can use the property for 20 years; the most important decision is determining who is going to buy this property when you sell it.” Few business owners keep their commercial space forever, he reveals, and eventually everyone does sell their property. So while the space you choose does have to work for you now and have some room for growth, the most important thing is to be looking at your exit strategy. 

Jones agrees. He suggests business owners look at the underlying real estate first rather than get emotionally attached to a property. Some questions he advises business owners ask are: What is the viability of this real estate should my business go down or move? What else can I use it for? How easily can I sell it? Is it something other business owners would want to rent? “You always have to look at the resale or leasing potential of that commercial space,” says Jones.

Borrow smart

Fortunately, if you do decide to buy, getting the funds you need to make the commercial real estate purchase are available. “The market is turning around; credit is unfreezing; and banks are more willing to lend on commercial real estate transactions,” says Evans. Additionally, local funding sources and assistance are available.

Joe Whitaker1.small

Joe Whitaker

Joe Whitaker, business development and recruitment coordinator with the Jacksonville Economic Development Commission (JEDC) says his role is to help connect business owners with the right financing resources and programs. The JEDC is the authorized agent for issuing industrial revenue bonds, recovery zone bonds, and empowerment zone bonds, all of which are used for the purchase of real property, machinery, and equipment used in manufacturing or developments within particular zones. 

“We also work with the private sector financial entities, particularly with the Small Business Administration (SBA) programs,” says Whitaker. “The SBA programs that are effective for small businesses are either the 7(a) program, which is their standard loan guarantee program, or the SBA 504 program, which is a hybrid program that allows businesses to borrow up to 90% of the cost of fixed assets, whether it’s land, building, machinery, or equipment.”

With the 504 program, the business owner gets 50% financing from the bank. Then, the SBA, through a certified development company such as Florida First Capital or Essential Capital, provides the bond financing for the remaining 40%. All SBA programs are nationwide.

When it comes to financing your purchase, Whitaker offers some sound advice. “Make sure you borrow enough money to accomplish your objective,” he says. “Often, people underestimate their costs. They arrange for the financing and the down payment, but they don’t set aside enough for renovations.” As a result, the business owner ends up pulling money from their working capital to invest it in fixed assets. They then don’t have enough money to operate their business.

“I always tell people to borrow what they need to make the deal work, but don’t under-borrow,” he says. “At the same time, people shouldn’t take on more than they need unless they foresee growth within five years. The SBA has a rule of thumb: They require you to occupy at least 51% of a space. If you’re building a new structure, they require that you occupy 75% of the space. They’re leaving you some growth room, but they don’t want to over-finance you.”

Ultimately, when you know your business’s needs, have smart financing in order, and buy with an exit strategy in mind, you can make a sound commercial space purchase that serves your business well today and creates equity for your future success. 

Dawn Josephson is a contributing editor to Advantage: The Resource for Small Business. She can be reached at dawn@masterwritingcoach.com.

SIDEBAR

Selecting a location

Only you can decide the best location for your needs. An experienced commercial real estate agent can help you navigate the choices. But if you’re a DIY kind of person, go to www.expandinjax.com, click on the “real estate” option, and then click on “industrial & commercial.” This site, which is maintained by the Cornerstone Division of the Jacksonville Regional Chamber of Commerce, lists a seven-county database of commercial real estate properties available for purchase. Although it is not all-inclusive, it enables you to see what’s out there so you have an idea of costs and locations.

 


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