Many business 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 – but for small to medium-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, doing so will certainly give you better control of your overhead. It can also add to your company's equity position in the long term.
It may seem like an obvious consideration, but 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 impact an area drastically. Increased density and changes to infrastructure can affect access and parking.
Zoning changes may even increase your tax costs. For example, transportation corridors like the Lougheed Highway in Burnaby have been rezoned to allow higher density. While the impact on equity for existing property owners was, potentially, positive, annual commercial property tax bills in the area increased substantially.
Allowable use is another important consideration. As your business grows its operations may need to change. Always consider whether a property's allowable use will meet both your current and future needs.
Looking to purchase warehouse space? Be sure to consider past use, as some commercial properties – older, industrial areas and properties in particular – sit on previously polluted land. Remember: environmental regulations were not always as stringent as they are today, and cleanup costs can be staggering.
"The current property owner should have environmental reports on hand," said Michael Mullen, a business advisor with BlueShore Financial. "Commercial real estate agents are good at prepping their clients when listing."
As a buyer, it's crucial to review these reports because cleanup costs may need to be negotiated into the purchase price.
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, with revenues strong enough to support 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% to 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. These factors can impact your return on investment.
Unexpected costs can also affect your business operations. As the property owner you are responsible for all repairs – even simple plumbing problems can cost tens of thousands of dollars.
Purchasing property builds equity and, for a business owner, 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're in business or the entire space when you retire. Either – or both – will help you achieve your retirement goals.
If purchasing commercial property makes sense for your business, be sure to 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 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.
