Owning commercial property can offer businesses many advantages—staking a claim in a strategic location, hedging against rising rents, or diversifying income and assets. Some leaders also look ahead to post-transition and plan to lease the property to secure an additional income stream.
With any successful business property transaction, however, there are numerous factors to consider. Even the best business real estate strategies can unravel when neighborhoods change, ownership costs (repairs and maintenance) explode, or the real estate market faces turbulence.
Real estate investment property looks different for every business—your reasons for buying may affect your decision. If you do start exploring a business real estate purchase, here are a few fundamentals to keep in mind.
1. Knowing where to start the process
If you’re currently in a lease, making a hasty move may expose you to penalties. It’s important to understand how moving to a new location could affect your revenue stream. Are you in a long-term lease? If so, what are your options for getting out of it?
Instead of breaking your lease agreement, consider subleasing the property to avoid fees for leaving before the rental term is up. Your lease agreement should include a clause stating your right to sublet, but it may require written consent from your landlord or property manager.
Between getting landlord approval, finding and screening prospective tenants, and executing a sublease agreement, this process may take a while. If your lease contains a holdover clause, it might be in your business’s best interest to be in your new office space before your lease ends. A holdover clause allows you to continue occupying the space beyond your lease term at a premium rate, which could negatively impact your operational cash flow or cost structure.
And maybe you don’t have to move at all. Some businesses could have a lease-to-own contract, which gives them the opportunity to purchase the property at the end of the lease. Evaluate your situation carefully to ensure you’re making the best decision for your business.
Tip: Communicating your buying plans to your landlord early may provide more options and help you maintain a positive relationship through the termination of your lease.
2. Evaluating property considerations
While every business has unique needs, common considerations include:
- Does your business rely on high traffic?
- Is your business a destination itself?
- Do customers visit your operating space? Or is most of your business done through e-commerce?
- Do visiting customers typically walk in or schedule appointments?
Tip: Locations with higher traffic tend to have higher prices. If you operate a business that doesn’t rely on traffic, paying a premium for location may be a waste of money.
3. Looking for specific qualities in a space
Here are basic traits that business owners look for in a property:
- Industrial property or warehouse – Ceiling heights, truck or tractor-trailer access, number of bays, floor bearing capacity, proximity to major transportation
- Retail property – Visibility, signage, ease of access, higher foot traffic, complementary and stable local businesses, adequate parking
- Office property – Similar considerations as retail, but with less emphasis on high-traffic location
Tip: A thorough analysis of your business processes and day-to-day needs will help you prioritize the qualities that will help you get the most from your new space.
4. Assembling your team
Navigating the world of commercial real estate and finding the right property can get complicated. As you continue your search, the guidance of knowledgeable advisors can be helpful.
Take real estate attorneys, for example. Retaining real estate counsel early in the process—and well before you execute a purchase contract—puts an expert in your corner who can advise on everything from how the property should be held to how to limit liability exposure. Real estate attorneys can write title insurance policies that protect your investment property, as well as handle funds transfers at the time of purchase.
You’ll need a skilled professional accountant to manage the tax implications of your commercial property investing strategy to make sure you’re maximizing your income stream.
Additionally, you’ll want someone to represent you in the transaction. The commercial real estate agent holding the property listing has a fiduciary responsibility to the seller, not you. They’re not looking out for your best interests, so you’ll want a buyer’s representative who can help broker the best deal for your business. A buyer’s representative can help you find properties that match your criteria, guide you on the merits of each property, and communicate with the seller and their agents on your behalf. They do a lot of the leg work in the transaction, so you have time to focus on your business.
The tax aspect of purchasing commercial property is complex—and tax software or books on tax planning aren’t enough to turn business owners into tax experts. You’ll need a skilled professional accountant to manage the tax implications of your commercial property investing strategy to make sure you’re maximizing your income stream. They can evaluate the financial benefits—and risks—of owning an investment property versus simply leasing office space. Plus, they can also help you understand the financial feasibility of making a purchase.
Lastly, a financial advisor who’s knowledgeable of your business—and the elements of a commercial property purchase—has the resources to assess your capacity for debt to finance the transaction.
Tip: Before starting your journey, find the right team of experts. These advisors can provide valuable guidance and help protect your business throughout this process.
5. Conducting due diligence
If you’ve purchased residential property, your commercial real estate purchase has many similarities. For instance, your contract should have a due diligence period for performing property inspections and examinations. The appraisal report will help determine whether the purchase price is fair, and an environmental report will assess the likelihood that the property has or will have environmental issues. Potential problems uncovered in advance can be considered in your purchase price and negotiation over responsibility for remediation or cleanup.
A property condition report can identify any deferred maintenance or systems deficiencies that need repair. Well-prepared business owners can factor those items into the property price, deduct repair costs from the sales price, or have the seller fix them before the sale is completed.
Tip: Don’t skip due diligence—lenders will require it to secure financing. Even if you’re not financing the transaction, you’ll still want to protect your hard-earned cash and equity from problems down the line.
6. Meeting financing standards
Financing guidelines vary by type of real estate purchased but generally require:
- A loan-to-cost ratio often up to 80%
- A debt-service coverage ratio often of at least 1.25
- A history of successful business operations
Personal loan guarantees supported by good personal credit for the owner
Tip: As you prepare to secure financing, verify that your business credit scores and reports are accurate and dispute any errors.
The decision to own or lease property depends on your business situation. By considering certain factors and working with a team of experts, you can make the right choice for your business.
Are you ready to buy?
Talk with your Truist relationship manager about how we can help finance your real estate purchase.
