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Nikolai Muravyov
Nikolai Muravyov

Buying A Building For A Business

Making the long-term investment in a building for your company is a decision not to be taken lightly. Do a detailed and realistic evaluation of your current cash flow, the company's long-term prospects and the location you are considering. If you have the substantial cash required for a down payment and other upfront costs, you are planning to own and operate your business for 10 or more years into the future, and you can find the right building available at an affordable price, buying a building for your company might be a good choice. The benefits of owning your own building include basically fixed costs, not being subject to ever-increasing rent costs, the potential for extra income from tenants, and ultimately having a paid-off mortgage. And if real estate in your area appreciates over time, you will also have a solid investment.

buying a building for a business

Identify the appropriate building to purchase for your business, based on location, size, building cost and facility needs. Unless you have experience in commercial real estate dealings, it is advisable to work with a professional who can guide you through the process. Choose the location carefully, since you will be tied to it for a long time. Arrange for a professional inspection of the building to ensure it is in good shape and not in need of substantial repairs or upgrades.

Perform a detailed analysis of your financial situation to ensure you have a strong cash flow and available funds for a down payment, which will be 10 to 25 percent of the cost of the building depending on the type of financing you acquire. Compare the costs of the mortgage payment, insurance and other expenses of owning the building against your monthly rental expenses that would be eliminated to determine whether you can manage the monthly cash outlay.

Establish a limited liability company or other similar entity to own the building. Since owning commercial real estate has risks that are different from owning a business, the LLC allows you to keep the two completely separate. The LLC can then lease office space back to your business, as well as to other tenants if space permits.

Work with your real estate agent, attorney and financial professionals to obtain the best possible financing package for your building purchase. The 504 loan offered by the Small Business Administration helps small businesses buy real estate, equipment or machinery at below market rates. If you are eligible, the 504 is an excellent financing option, since it requires only a 10 percent down payment and provides long-term financing at low, fixed rates.

Complete the required facility inspections, obtain business insurance and close the deal. Move your company into the new building. If there is considerable extra office or floor space in the building you don't need, work with your real estate professional to lease out the remaining space. There are additional responsibilities involved in being a landlord, but the added income will help defray your monthly costs.

To qualify for the Green Provision, small business owners need to demonstrate a projected 10 percent reduction in energy costs by implementing one or more energy-saving improvements (e.g. insulation, energy-efficient lighting, more efficient heating/air conditioning, etc.).

This is my second article of a 3-part series primarily intended for small businesses and operating companies. You can find the first article concerned with leasing vs. buying a commercial property here.

1. Conduct a lease vs. buy analysis before making any decisions: The 1st article in my small business series addresses this in detail, so I won't dive into the discussion at great length here. But a lease vs. buy analysis should be the first step any small business takes before buying a building. It should address the following questions:

Sales growth forecasts are a typical metric businesses use to aid their decision making. By taking the analysis one step further and forecasting the growth in variable accounts driven by sales (headcount, workstations/offices, parking, meeting space, etc.), a business can better project its space requirements.

Generally, an LLC is the structure of choice for most real estate owners. It affords legal protection while also minimizing tax exposure - in addition to keeping the real estate and business assets separate.

6. Assemble the right team: Real estate is a team sport - every aspect of a transaction requires an expert. If you're thinking about buying a building, here are a couple of key team members to keep in mind:

8. Consider cash budgeting: Depending on the type of financing you receive, your business may be required to fund a down payment of 10-20% of the purchase price. If the space isn't move-in ready, there would be a capital need for any required upfit.

10. Consider the property condition: No different from buying a house, the age and condition of a property matter. Real estate is prone to functional and physical obsolescence, and if it hasn't been adequately maintained, it can become a serious drain on liquidity.

Older properties will typically carry deferred maintenance, while newer buildings and higher-end space will cost more per square foot. As a small business owner, you should understand the timing of your cash flow needs and decide what type of space may be better for your business.

As a business owner, you're used to doing more with less. And when faced with shrinking budgets and an uncertain economic future, cash conservation and the timing of cash flows become significant considerations.

Work with your real estate agent, attorney, and commercial broker to obtain the best possible financing package for your building purchase. The 504 loan offered by the Small Business Administration helps small businesses buy real estate, equipment, or machinery at below-market rates.

When businesses are first starting out, leasing is the perfect option because it gives the business a place to office without the need for any large capital investments or a loan. This is the ideal solution for a small business owner and those that are trying to keep the balance sheet as lean as possible.

It depends on the business and the available options. Owning a building can provide more control over the space and potential long-term cost savings, but it also carries risks such as a lack of flexibility and a potential need for major repairs or renovations.

Properties that can generate the greatest financial return are usually those with the most tenants. These types of commercial real estate may include multifamily projects, student housing, offices, self-storage facilities, sporting complexes, and mixed-use buildings.

It depends on the project. Building from scratch is usually more expensive than buying an existing structure, but if the existing structure requires extensive updates it could be more cost-effective to build from the ground up.

For instance, office buildings are typically classified as Class A, Class B or Class C. Class A buildings present the lowest level of risk, while Class C buildings come with the highest level of risk.

The LLC is able to depreciate the building, offering additional tax savings. The operating company pays market rents to the LLC and is essentially able to move money from one entity to another with reduced tax obligation. With a larger property acquisition, a cost segregation study can also help accelerate the depreciation to reduce your current year taxable income.

For business entities, the law known as the Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, provides welcome simplifications for small business taxpayers. To the IRS and FTB, businesses with less than $25mm in gross receipts qualify as a small business. As a small business, you gain additional relief by the exclusion of business interest limitations such as 163(j). As such you can deduct 100% of interest expense each year.

Residential property only includes single-family homes or those with up to four units. Usually, only families or individuals lease them. But commercial real estate (CRE) is generally for business purposes, including five or more units.

Sometimes, investors benefit from real estate in more ways than just financially. Others purchase a property for personal use. One method is the owner-occupied commercial real estate (OOCRE) investment strategy. In this, the owner uses the property to conduct business operations.

Buying a building has less risk in the short term, but constructing a building gives you more control, which may be better for your business in the long term. This makes cost analysis crucial to making the right decision as a business owner.

The construction phase for a new commercial building takes anywhere from 2-6 months, depending on the scale. However, there are a team of other factors at play, including the design phase, zoning approval and delays due to weather and supply issues. Unless your business has specific requirements that are hard to meet with existing construction, buying a building is almost always the fastest option. Give strong consideration to these upfront costs, especially if you own a small business.

When you lease space, the landlord is generally responsible for common area maintenance, including things like building repairs, HVAC and plumbing maintenance, etc. The landlord typically has a professional property management and engineering team that will handle matters, from tenant complaints to property-wide issues, on a day-to-day basis.

Most of the time, leasing a property offers you the opportunity to be in a more desirable area than you would in an owner-occupied building. Because substantial development has typically already occurred in these more desirable areas, the cost to purchase buildings or land in the area is going to be higher, often pricing out potential owner-occupants.

Additionally, owner-occupants typically need buildings that are smaller than traditional multi-tenant buildings, which are often 100,000 square feet or larger. There are far fewer small buildings to choose from that currently exist in the market. When considering purchasing land to build your building, it is important to know that land prices are based on the assumption that the purchaser will be constructing the largest building permitted per city zoning. This maximum size is often much larger than a particular user might need, thus making it unaffordable. 041b061a72


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