Buying commercial real estate can offer plenty of benefits, so it makes sense for many business owners to consider taking the step from renting to owning the business premises. A business owner who chooses to purchase commercial real estate can remove the stress of future rent increases, but there’s also the potential for the property to increase in value over time as well.
There’s also the added benefit of being able to deduct the value of the loan, mortgage interest charges, and any depreciation in the value of the building from company taxes.
While the benefits of buying commercial real estate can seem attractive, it’s important that buyers take the time to complete their due diligence at every stage of the purchase process. There are several key elements of the process to pay attention to.
Know the Local Market
Purchasing the business premises you’re currently renting can make a lot of sense for many business owners. However, it’s particularly important to take some time to understand the local real estate market before making a decision. Know what similar commercial properties are selling for in the surrounding area and ask the agents about tax rates for the local area.
If you’re buying a commercial property to move your business into, ask about any land inventory or environmental issues that apply to the local area. You’ll also need to comply with zoning laws and other rules, so check the allowable uses for the property.
Of course, if your intention is to buy commercial real estate as an investment, it’s important to check whether the existing tenant has a lease that suits your investment goals and requirements. You’ll also need to check the terms under the current commercial management company. Specialists like JGM Properties commercial real estate can provide assistance with existing tenants or with securing new tenants, if necessary.
One of the biggest challenges in buying commercial real estate is obtaining the right finance to complete the purchase. Before heading to the bank, take the time to discuss the business’s budget with an accountant.
Your accountant can help you prepare the necessary financial statements you’ll need to take into your bank to prove affordability. Many banks may require you to produce business and personal tax returns, along with balance sheets, fiscal year-end statements, cash flow statements, and financial projections before they’ll approve a commercial loan.
It’s also worth shopping around to ensure you get the right terms to suit your needs. While finding a competitive interest rate is important, the loan terms are equally as crucial.
Understand the Tax Implications
Many real estate transactions can result in tax implications, especially if you’re buying a commercial property. While you’re discussing your financial documentation with your accountant, take the time to ask about any potential tax implications that could impact your business.
Know the Property
Once you’ve completed your due diligence on the market and financial aspect of the transaction, it’s time to focus on the building. Be sure there are no issues with the property that have the potential to compromise your business in the future.
Ask the realtor to recommend a building inspector or engineer. Completing a full inspection on the property can reveal any environmental issues, wiring or plumbing issues or structural problems that could cause strife down the track.
It’s also a good idea to consider the future potential of the property. Is there the potential for expansion if your business grows? Alternatively, is there surplus space in the building that could be leased out while your business is still in the growth phase?
Plan the Layout and Fitting
Moving an existing business into new premises can be challenging, especially if the building’s layout isn’t optimal. Before completing the purchase process, work out whether the existing layout needs to be remodeled or renovated to suit your purposes.
Amending the layout to improve operating efficiency can be costly, but it also has the potential to increase productivity. It’s worth taking the time to know what’s needed and whether your budget is sufficient to complete the project.
Take the time to complete your due diligence throughout every step of the purchase process. You’ll increase your chances of minimizing any risks and making a successful acquisition.
Eli Russell is the leasing and marketing director at JGM Properties. He’s been with JGM for 14 years, and is one of the top leasing agents in Minnesota when it comes to volume of leases signed for office, warehouse, and retail space for rent or lease in Minnesota.