Buying a Commercial Real Estate Building for Your Business

Before we get too far into this topic, let’s be clear:

Buying a property isn’t the right solution for everyone.

Buying your building certainly brings benefits, such as greater control over your space to make improvements, an opportunity to control your growth into the space and potential rental income from other tenants. However, it also ties up a significant amount of equity and usually requires substantial capital investment as well as some amount of ongoing management responsibilities. These are big risks, and jumping into the decision without proper consideration is a recipe for failure.

In this article, we’ll cover how to assess if purchasing a building is right for your business, and what to look for in the right building.

When Should You Consider Buying Commercial Real Estate for Your Business?

When assessing whether to buy, step back and take an objective look at your business’s current and future needs and the motives for buying. General arguments for buying include:

• Your monthly payments will be less with ownership vs. with leasing, and more predictable.

• The opportunity cost of tying up equity in your building is minimal.

• Your forecasted growth will require additional space or a high degree of control over your space.

Of course, there’s no single argument that determines if buying is right for you or not. Instead, you need to look at the whole picture using strategic tools and expert analysis.

Lease vs. Buy Analysis

A lease vs. buy analysis looks at many different factors that go into the decision to buy, including:

• Opportunity costs

• Capital requirements

• Lease rates

• Rental increases

• Future growth prospects

• Real estate value

• Tax liability

• Interest rates

By balancing so many factors against one another, you can get a clearer answer about which option will minimize your costs while optimizing along business goals both present and future. An experienced commercial real estate broker can help you get the most out of this type of analysis.

Growth Analysis

Unlike a lease vs. buy analysis, a growth analysis can usually be conducted internally. To do so, you need to examine key performance indicators (KPIs) over time, identify existing trends, and project future growth in your business or future business lines. Layered on to that internal growth projection, your commercial real estate broker can also help facilitate a workplace program outlining future needs. They will help you understand the requisite space needed in different areas to meet your projections over various intervals (3 years, 5 years, etc.).

How to Buy the Right Building

If your research reveals that buying a building for your business is the right move, the next step is finding the right building. This process can involve a traditional needs assessment and property search, or a more in-depth process called site selection. You can check out our previous blog on commercial real estate site selection, or our blog on leasing commercial space for a more in-depth description, but in summary, the site selection process is led by your commercial real estate broker. They will:

• Identify your business needs and location preferences.

• Analyze potential real estate markets

• Evaluate potential sites within target markets

• Negotiate purchase price, terms, and contingencies as well as look at incentives and tax credits

Regardless of how your search proceeds, finding the right building will always require a clear understanding of your needs, wants, and financial capabilities. So let’s finish by looking at how you can refine that understanding.

Determining your Building Needs and Preferences

Some of your needs for your building will be obvious to you, while others may not come to mind without prompting. To ensure no important details are missed, you need to have an in-depth strategy meeting with your broker to discuss your requirements and preferences.

When your broker is meeting with you to determine your goals for your property, they’ll ask questions like:

• Will the property serve your long-term needs (i.e. is there growth possibility within the facility?)

• Do you want your property to be multi-tenant and produce additional income through renting?

• What are your physical characteristic needs? i.e.:

  • Clear height

  • Power

  • Loading capacity

  • Layout

  • Office/warehouse build-out needs

  • Access

Financing your Commercial Real Estate Purchase

Most commercial real estate transactions require one or more loans, but as every business owner is aware, not all loans are made equal. Securing the right financial backing can make a huge difference in your long-term success as a building owner.

Look for an experienced lender that’s interested in working with your business and finding you the most beneficial financing options. Depending on the size and structure of your business, you may qualify for federal loan programs like SBA 7(a) and SBA 504. These can be particularly attractive options due to their flexibility and lower down payment requirements, but be mindful that they also tend to take longer to secure.

Finally, in addition to having cash for a down payment, you may also want to consider budgeting some cash for renovations or new construction. Otherwise, any planned office or warehouse build-out will require an additional loan.

Modern CRE Can Help You Find the Ideal Commercial Property for your Business

At Modern CRE, we’ve helped countless clients lease and buy optimal properties for their businesses over the years. Our seasoned experts can help you with every aspect of commercial real estate, including lease vs. buy analysis and other critical steps for buying your own commercial property. We’re ready to help you assess your options and select the perfect site for your business today, all you need to do is reach out to us to get started.