Considerations for buying commercial space

When owning your work space is the right decision

At some stage in their business, many 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; for small to mid-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, it certainly gives you better control of your overhead. It can also add to your company's equity position in the long term.

Location, zoning, and allowable use

Location may seem like an obvious consideration. However, 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 affect an area drastically. Increased density and changes to infrastructure can impact access and parking.

Zoning changes may even increase your tax costs. For example, transportation corridors such as the Lougheed Highway in Burnaby have been rezoned to allow higher density. While this had a potential positive impact on equity for existing property owners, it substantially increased annual commercial property taxes.

Allowable use is another consideration. As your business grows its operations may need to change. You should consider whether a property's allowable use will meet both your current and future needs.

Environmental concerns

If you are looking to purchase warehouse space, consider past use as some commercial properties sit on previously polluted land. Environmental regulations were not always as stringent as they are today and clean-up costs can be staggering. Older industrial areas and properties can be especially affected. As a buyer it is crucial to review the reports because clean-up costs may have to be negotiated into the purchase price.

Your financial position

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 and are revenues strong enough to support both 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 25-35%. 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 which can impact your return on investment.

Unexpected costs can also impact your business operations. As the property owner you are responsible for all repairs – even simple plumbing problems can cost tens of thousands of dollars.

Owner equity and retirement planning

Purchasing property builds equity, and for a business owner it can become an integral part of retirement planning. 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 are in business or the entire space when you retire. Both will help you achieve your retirement goals.

Benefits to buying

There are a number of benefits to purchasing your commercial business space; here are a few highlights.

More control

You gain more control of your business. As a tenant, there is always some risk as your lease agreement gets closer to expiry that someone else could take your commercial / office space away from you. You may have to give up a great location and incur the costs of moving and related expenses – and that simply disrupts your business rather than generating value.

Leveraging power

Commercial property ownership gives you leveraging power. In addition to building equity, you can use the asset to borrow against down the road - for example, if you need to renovate or purchase new equipment.

Risk diversification

And finally, you diversify your risk. When you purchase your commercial space, you have, in effect, two businesses – operating and real estate. Even if you choose to wind down your operating business, you could still act as landlord and rent your commercial space out to other tenants.

Market knowledge

After weighing all these issues, you may decide that purchasing makes sense for your business. Be sure that you 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 of the 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.