Is buying property the next step in your business strategy? Keep these considerations in mind.
Owning business real estate can offer businesses many advantages—staking a claim in a strategic location, hedging against rising rents, or diversifying income and assets, for example. Some leaders also look ahead to post-transition and plan to lease the property to secure an income-generating asset.
Among the successful business property transactions are also numerous factors to consider. Business real estate strategies unravel when neighborhoods change, ownership costs (repairs and maintenance) explode, or the real estate market faces turbulence. Still, 70% of business leaders are confident in setting long-term real estate strategies.1
Real estate investments look 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.
Knowing where to start the process
Before you start, consider the following questions about your current leasing situation:
- Would breaking a long-term lease expose you to penalties?
- Could you sublease your space to avoid fees from breaking your agreement?
- Does your lease include a holdover clause?
- This provision outlines your option to remain in the space, often at a premium rate, if your new property acquisition occurs after your current lease ends.
- Could you purchase the space you are leasing?
- Would moving from your location hurt your revenue stream or cost structure?
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.
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 also 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.
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: Knowing which type of property works best for your business makes it easier to prioritize the qualities you want.
Assembling your team
Navigating the world of commercial real estate and finding the right property can get complicated. As you continue your search, seek the guidance of these knowledgeable advisers:
- Real estate counsel. Connecting with a specialized real estate attorney early in the process—and well before you execute a purchase contract—can put an expert in your corner who will advise you on everything from how the property should be held to how to limit your exposure to various liabilities.
- Buyer’s representative. A commercial real estate agent holding a property listing has a fiduciary responsibility to the seller, not you. Therefore, someone on your team who is knowledgeable about the market can advise you on the merits of a property.
- Accountant. Your accountant can evaluate the financial benefits and risks of owning versus leasing and help you evaluate the financial feasibility of a purchase.
- Banker. A financial advisor should be familiar with all elements of a purchase and have the resources to assess your capacity for debt to finance the transaction.
Tip: Before starting your journey, find the right team of experts. These advisers can provide valuable guidance and help protect your business throughout this process.
Conducting due diligence
Your real estate purchase contract should have a due diligence period for performing property inspections and examinations, which includes:
- An appraisal report to determine whether the purchase price is fair
- An environmental report to assess the likelihood that the property has or will have environmental issues. Issues uncovered in advance can be considered in your purchase price and negotiation over responsibility for remediation or cleanup.
- A property conditions report to find any deferred maintenance or systems deficiencies in need of repair. Factor those items in 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 as part of securing 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.
Meeting financing standards
Financing guidelines vary by type of real estate purchased, but they generally require:
- A loan-to-cost ratio often up to 80%2
- A debt-service coverage ratio often of at least 1.253
- 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.