If you are a small business owner who is contemplating the purchase of a commercial property then you need to understand your choices concerning the future costs of leasing or buying. These choices will impact your company’s ability to serve your customers.
Although it’s a big decision to buy a commercial property, many small business owners and entrepreneurs are opting to purchase their offices and facilities as opposed to leasing them.
With leasing costs going up faster than ownership expenses it can be considered a no brainer. Business owners must review the escalation clauses in their leases and understand the possible increases in costs that will be passed on to them from their landlords.
Real estate leasing costs are typically the third largest expense a business incurs (after payroll and taxes). On average, rent payments typically increase by 3% or more per year, every year.
It’s not only stability, it’s also control
You will be able to do what you want to the building you own. You will never be “forced” to move because of landlord enforced limitations. Imagine not having to argue, beg or threaten to make updates or changes to the space that your business occupies. That alone is often enough to trigger the buying decision.
The owners of their own property are provided with intangible benefits such as a feeling of stability, control and pride of ownership.
The costs of moving are substantial
Many owners regret having to move whenever a lease term is up only to find a space that is more willing to accommodate their needs.
Moving can be expensive. The costs of relocating the phones, electricity, security, build-out, let alone the actual move itself can be substantial. Buy a space and you do this once. Lease and you may end up doing it repeatedly. Own your property and you eliminate eviction or non-renewal of your lease by the Landlord.
There are tax advantages
The purchase of your business’ property creates potential tax advantages with interest deductions & facility and equipment depreciation, amortization and 1031 exchanges. And depending on the employment opportunities you can offer, local state and county governments may compete with each other to offer tax holidays to your company to move to their respective jurisdictions.
A strategic acquisition of a building purchased by the spouse and kids and then rented to the company at above market rates, creates a way to legally shelter income with a spouse or kids who are in a lower marginal tax bracket. This, of course, requires planning and caveats but may well be worth investigation with your tax adviser.
Current low rates combined with historical inflation hedge
It’s hard to underestimate the value of the low cost of borrowing funds today. Rates are low and the Fed won’t stay on hold forever with near zero cost of funds. When that changes expect to see inflation.
Commercial real estate has a long history of being an excellent hedge against inflation. Over the long term, commercial properties tend to consistently outperform the rate of inflation. As a business that owns its location you will have protected yourself against increases in leasing expenses.
Financing Opportunities are available
Realistic financing options are currently available to help business owners purchase or refinance owner occupied commercial properties. Government backed loan programs exist to provide up to 90% financing for qualified owner occupied businesses. There is no need to worry about balloon payments as these loans are fully amortizing. Furthermore, these loans are available for acquisition and construction of businesses’ owner occupied properties.
We know which lenders are actively financing small businesses, the small business loans offered and how to efficiently navigate the loan process. Call me to discuss how the purchase of a commercial property can assist the success of your business.