Many successful small business owners who have outgrown their existing facility or want to expand into a new market wonder if they should stop leasing and buy a commercial property instead.
There are several advantages to buying a commercial building, including the building of equity by making monthly mortgage payments, which is an asset that has value to you and your business.
Many business owners have leased for so long, they could own their building now if they had opted to buy in the first place.
A commercial property also can be a good investment for future retirement. When many of our customers sell their companies, they maintain ownership of the commercial building and use the cash flow from the lease to fund their retirement.
If you’re thinking about buying a commercial property, there are several key issues to keep in mind.
Location, location, location
Good sites are hard to find, so cast a wide net in your search for a new location. Talk to real estate brokers, your banker, accountants and real estate lawyers.
Do your homework
If you’re considering a specific building, research public records to get an idea of its fair market value. Ask your banker to help calculate how much you will need to borrow and your monthly loan payment. If it’s close to your current monthly lease payment, it’s time to consider buying.
If there’s a big difference, look at your company’s profits to determine if you can truly afford to purchase.
Use your resources
Most lenders expect you to make at least a 25 percent down payment on the property. However, some lenders also provide loans that are backed by the Small Business Administration. An SBA loan requires only a 10 percent down payment and can be combined with other loans for financing up to $5.2 million.
Broaden your scope
Most lenders will only write a commercial mortgage for 50 percent of the value of a “special purpose” building, such as a bowling alley, restaurant or gas station (SBA loans often are available for up to 85 percent of the value). Such properties have limited use, are hard to remodel and more difficult to sell later. Your best bet might be to buy a quality, multi-use building that will be attractive to other businesses when it comes time for you to sell.
Build your financial health
Most lenders will want to see that a business customer has at least three years of profits and cash flow before providing a commercial mortgage. A firm with a shorter track record of success might qualify for an SBA-backed loan.
Know your needs
Don’t over-buy. Many business owners purchase a building that is much too large for their current needs. Then they have to scramble to find another business to sublease space to help them meet their cash flow requirements. It’s better to purchase a property that suits your needs now but also has room for future expansion if needed.
Make sure it’s sound
Be certain the property does not have an environmental issue that would make it difficult to finance, use or remodel. Make your purchase subject to a satisfactory environmental review.
Obtaining a commercial real estate mortgage is a complex transaction. It involves unique underwriting, valuation and appraisal methods that all take time. A conventional commercial loan can take up to 45 days to fund after approval – some SBA deals can take longer. Providing all the financial data your lender requests will help speed the process.
Tawnie Nelson is the Wells Fargo business banking manager for Clark County. She can be reached at 360-759-4820 or Tawnie.Nelson@wellsfargo.com. Wells Fargo is one of the top commercial real estate lenders in the nation.