Jeff Beacom has a few words of wisdom for entrepreneurs looking to buy commercial real estate. "You don't start with choosing your location. You end with the location," says the BDC Vice President and District Manager.
In a market where real estate comes with a high price tag, business owners should first exercise due diligence at every step of the acquisition. "You want to get the bang for your buck. Buying a building or land can be a sizeable investment, so you need to be vigilant on every level and avoid errors that will cost you down the road," he emphasizes. Entrepreneurs who don't do proactive planning can be faced with problems such as a lack of financing, unexpected construction costs, inefficient layout or environmental law suits. "It just makes good sense to take the time you need before you decide on that location," he adds.
Even with rising costs of real estate, entrepreneurs still benefit from buying their properties as opposed to renting them. "You won't be faced with rental increases and your property may appreciate in value," says Beacom. As well, buyers should keep in mind that the loan, mortgage interest and depreciation in the value of the building may be tax deductible.
So what makes a successful acquisition? According to Beacom, there are five key areas where entrepreneurs should pay particular attention.
Understand the local market place
Before making that important decision on what to buy, entrepreneurs should pay heed to where they're buying. "Some of the important factors aren't always that obvious," says Beacom. For example, each local market carries its own specific tax rates, land inventory and environmental issues. Buyers may need to consider things like available skilled labour in that area as well. "One of your best bets is to get in touch with the municipality to dig up the information that you need," he says. For instance, municipalities can provide information on future industrial developments or environmental considerations. "It's vital to get a third-party opinion. After all, a realtor may be just looking to make a sale and may not always be working in your interests."
Get your financing in order
Affordability is a big issue in commercial real estate today, so before you go to a bank, you should have an accountant work with you to determine your budget. "As a rule of thumb, bankers will be looking for high quality financial statements. As well, they'll want to see that the profits that you're generating are retained in your company," he emphasizes. In the end, those factors will determine your chances of getting the loan that you want. "It may also help to go to a financial institution that doesn't necessarily follow formulas," he says. "Typically, bankers may want 35% from your pocket and finance the remaining 65%. That's still a major investment when you're talking about a $1 million property." As an alternative, BDC, for instance, offers financing that is based on the individual case of each client; that financing can cover a broad range of needs from land purchase to bridge financing.
Get expert help with tax issues
Tax implications can be a complex matter when purchasing real estate, emphasizes Beacom. "My first piece of advice is to see an accountant who will know the ins and outs. You want to maximize your tax planning and enjoy the benefits," he says. For instance, entrepreneurs will need to know if their purchase should be a corporate or personal estate transaction. Other issues include related succession planning. "You'll need to know down the road how you'll break up your assets when you sell your business," he says.
Plan your layout well
"When you're buying real estate, you have to be sure that your building layout has a competitive advantage, whether it's an existing building or one that you'll be renovating," says Beacom. That competitive advantage can be lower operating costs, the capacity to accommodate new products or your ability to deliver better quality. "How you lay out your plant, for example, has a direct impact on your operational efficiency," he stresses. Although entrepreneurs may be reticent about spending money on layout after a costly purchase, he feels that business owners usually see the payback fairly quickly. "What you spend on layout and production planning can be gained back in productivity improvements," he says. BDC offers entrepreneurs financing to help improve operational efficiency and consulting services that enable companies to eliminate waste and streamline their processes.
Choose the right builders
"Less time, less money and more value should be your guiding principles when choosing the right builder," says Beacom. "You should be looking for quality builders who have a good reputation and are responsive to your needs," he believes. The most obvious traits of a good builder are experience, timeliness and a knowledge of your specific industry. For example, if your building must meet the exact standards of the food sector, it follows that your construction contractor should have that expertise. "One factor that entrepreneurs often overlook is the financial history of the builder. You don't want a situation where contractors are taking your deposit to fund a previous job where they ran out of money," he says. If you have any doubts, says, Beacom, do a credit check on your builder.
"Ultimately, there are no sure recipes for making a successful building or land acquisition. However, if you pay attention to these five areas, you're more likely to make the most of your investment," he concludes.
