Purchasing Commercial Real Estate
When deciding whether to buy commercial real estate, it’s important to understand the potential risks. The last thing you want is to buy property and realize a year or two later that you would have been better off renting. Here are some of the potential risks a business faces when buying:
- Location may backfire. Today’s “hot” neighborhood can become tomorrow’s “not” neighborhood. Locations are trendy. Gentrification may stall. The market may go bust. The area you choose one day may become undesirable the next. Of course, the reverse can be true, as well.
- Loss of liquidity. Businesses may tie up much of their liquidity buying real estate. It’s not always easy to sell real estate, particularly in a slump. At the same time, businesses that own real estate at least have something to sell if they need a cash influx to revive a lagging business.
- Tenuous cash flow. Tenants sometimes stop paying their rent. Other times, buildings are in need of unexpected — and expensive — repairs. Your cash flow can become compromised, especially if you are forced to simultaneously pay repairs and attorney fees to handle a tenant situation.
In order to be aware of risks, do your homework. Undertake extensive due diligence before signing any contract. You also need to be hands-on with your commercial property by overseeing every level of operation and making frequent on-site visits — otherwise, you may learn about problems after it’s too late to do anything to fix them.
The decision ultimately comes down to the economics. You may want to have a real estate expert help you undertake a rent versus own analysis, taking into account growth forecasts for your business and real estate market trends.
There are a number of factors to consider when looking for suitable commercial real estate to purchase. The old adage “location, location, location” is true for commercial properties just as much as it is for residential. But there are other issues at play, as well. Here are some things to consider:
- Location. This is still the No. 1 issue. You want to be close to your customers, your workers, and your vendors or suppliers. “You want to be convenient to customers to the extent that you have a business where the customer comes to you. After identifying the general location, consider how the property was used, the wear-and-tear, whether there are any environmental issues or potential liability issues, such as asbestos or lead paint.
- Allowable uses. If your business is an accounting firm, you likely need commercial office space. If you are a manufacturer, you need an industrial space. Either way, you need to make sure the zoning allows you to do what you need to do on the property.
- Limitations on exterior and interior. Whether due to zoning laws or building codes or covenants, there may be limits to changes or alterations you can make to the property. A good example is a building that is in an historic area and subject to restrictions on changes that can be made.
- Adequacy of access and parking. You need to make sure your customers can park and take into consideration whether access is compliant with laws such as the Americans With Disabilities Act.
- Opportunity for expansion or leasing. Entrepreneurs often have a rosy outlook about growth and so the potential to expand is a consideration as is the flipside – if you don’t grow as much as planned, can you lease out extra space?
Before buying commercial real estate, it’s important to make sure that buying is right for your business for the long-term.
