There are some long-term benefits to buying a commercial building to house your business operations: you'll be master of your own domain, you won't face rental increases and the property may very well appreciate in value. Also, costs associated with the loan as well as mortgage interest and depreciation in the value of the building may be tax-deductible.
The downside of owning includes the initial capital investment which can negatively impact your cash flow, and you'll be responsible for fixing and improving the building for your own and any other businesses in the building.
Due diligence
Presumably, the building that you've found satisfies your must-have and some of your wish-list criteria: it will help you do more business, it projects an appropriate corporate image and can do it all economically. However, before any transaction is finalized, you'll have to perform some due diligence to minimize risk to your business and ensure the building is a sound investment.
Beyond the physical condition of the building, many intangibles have to be evaluated. This means learning the history of the property, and examining all liens and obligations to ensure the property meets your requirements.
Building owners with commercial tenants are vulnerable to sudden economic downturns; a fully-occupied building with a major tenant can become an under-occupied building if that tenant goes under. So the relative security of that income stream has to be evaluated as well as the physical assets. Payment histories and tenant credit files should be examined to determine the degree of risk involved.
For older buildings, the insurance policy may very well contain a list of claims that have been filed, pointing out building defects and potential liabilities. As you can imagine, it takes time and effort on your part and this is good reason for using the services of a professional adviser such as a lawyer to help you through the process.
Take 30-days to perform due diligence
If possible, give yourself a period of thirty days between coming to an agreement with the seller and actually finalizing the deal. If you do this, you'll have time to examine all the documents in detail, including leases with existing tenants, maintenance contracts and insurance policies as well as the title documents, all of which should be provided by the seller.
And make that thirty-day period start when the final document in the series has been delivered to you. Again, your professional advisers should know which specific documents to request in your jurisdiction.
If the seller is unable or unwilling to provide those documents, then that increases the risk associated with the building which provides you with an opportunity to re-negotiate the price.
Assign tasks to your acquisition team
As you examine the documents, build a list of questions to be asked and items to be verified. The list can include the need to verify the presence of survey markers, checking the boiler maintenance contract and examining the guarantee for that roofing job. Make sure each item is assigned either to a staff member or outside consultant such as your surveyor, building inspector, environmental firm, lawyer, accountant or realtor. Make sure they know their task-completion dates and follow-up with them frequently.
Financing your purchase
Your business plan and cash flow projections should provide the numbers that dictate what you can afford. It is a good idea to go over the numbers with your accountant. Try to take into account all of your future growth projects and future borrowing needs; keep in mind that a large real estate loan on your balance sheet could limit your future borrowing capacity since it affects the debt to equity ratio.
Prepare a short synopsis of your financing needs and your assets for presentation to a lender. Apart from assessing interest rates, repayment options and the personal guarantees required, it's advisable that your notary (Quebec) and lawyer also be involved in any final agreements with the financial institution.
If possible, try to get a pre-approved loan so that you know exactly how big your budget is before you begin your search. And be realistic about those financial forecasts: unforeseen costs can eat up profit very quickly in the year following the purchase.
It is a good idea to check with your lender prior to signing an offer of purchase in order to ensure that you have met all of the lender's conditions. For example, some financial institutions require an environmental assessment and/or building inspection that is produced for them. The inspection could reveal major work to be done which can sometimes be included as part of your financing. You can further protect your business' cash flow during this transition period by obtaining a complete quote for moving expenses and then including this aspect in your long-term financing (it can be very expensive for a company to move equipment, set up electricity, etc).
Ownership of a commercial building can be a risky business, but if you follow the right steps in acquiring that building, you'll be able to reduce that risk, profit from multiple revenue streams and grow your company.
If you need planning advice or financing your commercial property investment, BDC provides flexible term financing which also includes business expansion, plant overhauls, the purchase of existing businesses and the acquisition of fixed assets.
