Should Your Business Own Real Estate?

By: Nick Banks

Have you ever added up all the rent you have paid to your landlord over the lifetime of your business? If you’ve been in business for a number of years it’s a big number, isn’t it? Have you considered purchasing real estate for your business? Before you go out and buy something there are several points to consider so you can determine if ownership is the right choice for you and your business. Here are some pros and cons for you to consider.

What are your space needs?

If your business has been in existence for several years, you probably have a good idea of what your space needs are. Medical professionals, for example, tend to have very static space requirements. Typically, unless they decide to bring on a partner, their space needs are relatively stable. Conversely, there are many businesses that experience drastic fluctuations in the number of employees for which they need to provide office space. If you experience these fluctuations in your business, then ownership is probably not for you—you are better off leasing space to maintain maximum flexibility.

Does your business rely heavily on location?

Sometimes you have to move if your customers move, which means you may not want to be locked into a location for a long term. A client of mine has moved his office west several times over the course of the last several years to follow his customers.  Leasing has been his best option.  Sometimes mobility of location is not so important. If you happen to have a business where you are typically meeting customers at their place of business, you may want to consider purchasing. With this type of business, purchasing a building in a central location or buying an office close to home could be a good decision.

What is your cash-flow?

If you are in a business that requires significant capital outlay for research, product development, etc., you may not want your business or personal capital tied up in real estate. Once you tie up capital in business real estate, it is often difficult to access. That frozen capital may be put to better use elsewhere.

What is your succession plan?

What are your plans for your business when you retire? If you have a business you intend to sell one day, then owning real estate is a great option. You may be able to sell your business and have the buyer enter into a long-term lease on the property that you own. This could give you another source of income to enjoy during retirement.

How long is your investment horizon?

Are you thinking you will be in business a long time or a short time? Do you plan to sell the company any time soon? To consider buying a building for your business, you should always be looking at it as a long-term investment. As we have learned over the last several years, real estate is not always a very liquid investment. If you do make the decision to buy something, plan to use it and own it for a long time.

Have you considered the tax advantages and consequences?

Owning any type of real estate creates tax considerations. Most business owners who purchase real estate will hold title in a new entity created as a “Single Asset Entity” that only owns the property. As an example, let’s call that entity XYZ, LLC. Your business would pay rent to XYZ, LLC which would be an expense to the business. As the owner of XYZ, LLC you would have the rental payment as income but you could write off depreciation and other expenses that could create some tax benefits. Every business is different, so you should consult your tax professional for help in determining how ownership would directly impact your business.

Do you understand your financing options?

We are in a challenging lending environment, however; owner-user financing for businesses is still very attractive. Lenders see these types of loans as less risky than investor loans on commercial real estate and they are offering aggressive terms. Assuming you and your business qualify, you can expect to borrow up to 90 percent of the purchase price with rates in the 5.5 percent—6.5 percent range as of the writing of this article. Remember, to be considered an owner-user, your business must occupy at least 51 percent of the property.

As you can see, owning is not for every business—there are times when renting does make more sense, for financial and flexibility reasons. However, if you fit some of the parameters outlined above, you should at least consider the opportunities
to own.

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Nick Banks is the Managing Director of Front Street Commercial Real Estate Group and a 17-year veteran of commercial real estate sales. Front Street is a full service commercial-only real estate firm based in Gainesville that offers investment sales, leasing, financing and property management services to clients. He can be reached at nickb@frontstreet.net

 

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