Should You Buy Commercial Real Estate for Your Business?
Posted November 3, 2010, 2:42pm EDT
Source:monstercommercial.com
Maybe some of the reasons cited in part 1 of this 2 part series have piqued your interest in owning your own premises but you are not sure whether owning is right for you. The table below outlines some benefits and challenges to owning or leasing your facility.
| Benefits | Challenges | |
| Leasing | No need to worry about selling if you want/need to move.
Rent is 100 % tax deductible You have flexibility if your business is expanding rapidly Limited liability risk |
Rates rise with or in some cases despite market conditions.
No equity buildup. You may have to move at the end of the lease Landlords can take advantage of captive tenants |
| Buying | Interest on the mortgage loan is tax deductible
Annual depreciation deductions are tax deductible You control rent increases Excess space can be leased out You control maintenance cost You may be able to transfer future capital gains. |
Requires initial equity to secure financing
Legal risks of owning real estate Time spent on non business related concerns (repair/maintenance/ security issues) Building ownership can be costly if operated inefficiently. |
While interviewing our past clients on “Why Own?” we also enquired as to “How?” they determined if the time was right for them to buy their own facility. The following questions are derived from those that other business owners asked themselves before buying. Although not exhaustive the list provides some thought provoking questions that every good business owner should ask themselves. We have categorized them based on the major benefits and challenges of buying as noted in the table above.
Tax & Legal Implications
How important is it for me to defer capital gains?
Is my business making enough to have a “tax problem” that I need to mitigate or defer?
Are there any legal risks of owning real estate that I have not planned for? If so, what are these?
Control
Is it important for me to control my space?
Do I have a business that can easily move to another space?
Do I require special equipment or amenities that are part of the real estate I occupy? Are things like heavy office components, cranes, yard, slab thicknesses and heavy power supplies important to the success of my business?
Is there a chance that my landlord could deem me as a “captive audience” and charge me more than market as it will be difficult to move my business or replace the space that I occupy?
Do I like having a landlord that can raise rent on me when my lease comes up?
Can I do a better job taking care of the real estate that my business occupies versus my landlord?
Building Equity
How much of my landlord’s mortgage have I paid off now that I have been in this building for X number of years? With the average amortization of a commercial mortgage being 20 years, if you have been in the space for 5 years you have paid 20% of the landlords mortgage for your space. Very likely more.
How much stronger will my balance sheet be if I buy real estate versus lease it?
Can I use the equity in my building to recapitalize or expand my business?
Do I have an event like a partner buy out that I need to build equity for?
What is the value of my business if I were to get no good will? Is this enough for my retirement?
Market & Financial Considerations
Is now the right time to buy?
What will I pay in mortgage payments versus lease payments?
Can I get reasonable financing for this purchase based on current financial market conditions?
What will I require for a down payment?
Will coming up with the down payment put undue stress on me or my business?
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