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Owning your own commercial building is not as easy as it sounds. As a broker who has completed over 500 leasing projects, I can tell you that about 350 of those clients started the project with ?let?s find a building to buy?. Insert eye roll here. Not to be the old, jaded guy, but when 3 of 350 tenants end up completing a purchase, you can start to see a pattern.
Owning your own commercial building sounds great. Why pay rent when you can pay yourself? It is the business version of owning your own home. Besides, when your lease comes due you hope that the landlord will not hold you ransom with the renewal rental rate. Owning your own building will give a better destiny, right? It's an appreciating asset, right?
Would you be OK with your broker only showing you 10% of the available options for lease? You would be missing out on 90% of the market. As a general rule, about 90% of the market will be available for lease and only 10% (if you are lucky) will be purchase options.
Tenants who are sick of paying rent or who are in love with the novelty of owning can be blinded by just the options for sale, without truly evaluating those options as viable locations versus the best options available for lease.
Given that the pool of available options for purchase is always so much smaller than the leasing options, the simple reality is that the best options for your business are likely to be buildings for lease.
Ask yourself this: if you want to move forward on a purchase option ? would I lease this property? If the answer is no because there are better leasing options, think long and hard about the trade off of purchasing this property against the best leasing opportunities.
With too much money chasing too few available properties, many commercial buildings are just priced too high to make any sense.
Business owners in these cases convince themselves there will be value in the equity they will build and in the amount the building will appreciate. This may be true, but nobody can see into the future. Real estate does not just automatically go up, contrary to popular belief.
Ironically in some cases the more inflated the purchase price, the more attractive the building is perceived to be. It offers more snob appeal ? the purchaser can brag about the purchase price as a sign of having ?made it? in the business world, which puts upwards pressure on purchase prices, and thereby making leasing a better financial choice.
Would you agree to pay a year?s worth of rent before occupying your next commercial space?
That may be a cash flow issue for most companies. When falling in love with an option to purchase, many people are in denial about the cash required for the down payment (not to mention closing costs, land transfer taxes, etc.). Minimum down payments will vary by state, province and country, but you could be looking at a 25% down payment.
Most commercial spaces for lease require some kind of construction work to be done. If the work is minor the landlord may absorb it within the rental rate. If it is considerable work, the landlord usually has the capability of delivering the space in the condition you require.
When you buy a building you are now the landlord. Buildings for sale always have more work to be done than spaces for lease. That is because you are now dealing with the entire building envelope, mechanical systems, electrical systems, etc.
Don?t forget about the parking lot and landscaping as well. Not only are these big cost items, but they take away from your time and focus that has always been dedicated to your business.
Location. Location. Location. Probably the number one clich? for real estate, right?
Purchase options just tend not to be in the perfect location. Maybe it does not matter for your business. Maybe you manufacture and distribute widgets. Maybe you go see your clients and do not have visitors.
The best locations have been developed and densified over time. For example, it is unlikely that you will find a suitable boutique building in your city?s financial core. Those buildings have been acquired for their air rights and have been knocked down to build high rise towers.
If your employees currently have a 5-minute walk from their commuter train and you are in the central business district, then buying a building will likely double or triple their walk to work (or worse). While you are adding to the employee commute time, you are likely also taking away from their nearby amenities and you may be threatening their safety ? buildings for sale ?off the beaten path? tend to be in neighborhoods that are not that safe.
Buying a building may be a wise financial move for your business. It is too bad though that your employees couldn?t care less. While owning your own building may promote a family atmosphere while at work, getting to and from work and to and from outside meetings during the day can be inconvenient.
Millennials want a short walk from their public transit, a wide range of choices for lunch, ability to meet up with friends for drinks after work, and your business should be in close proximity to the gym. If your business is too far to satisfy all of these elements, it will be a challenge to retain the next generation workforce.
Imagine if business is booming. Everyone wants to have that problem. How does your business scale? What if you outgrow your building? Buying and selling commercial buildings is a bigger commitment than bouncing from lease to lease. What if you decided to buy or merge with a competitor? It may be the best business decision, but you may not have enough room to put everyone into your building.
Conversely, what if you want to sell your business? It may be more attractive for a competitor to buy your business at the end of your lease. That company may not want to buy your building or deal with selling it.
Here is the problem nobody wants to have ? business is not going well. You have lost some employees and now the mortgage payment per employee is worse than if you rented space and then downsized to a smaller lease. You may not want to sell the building because the market is currently soft, or you may lose money because the market has been flat but now you have to pay realtor commissions on the sale.
Most people view renting as expensive an unfortunate ?waste? of money. They also believe that owning is a great use of money (?why pay someone else when I can pay myself??). That is an oversimplification ? people see that a mortgage will eventually get paid, and then the building can also eventually be sold.
But what about the operating costs for a building during the lifetime of your use? The problem with the perception about renting is that the costs are consistently paid every month in a stable fashion. If you rent space on the 3rd floor of a 40 storey tower, you pay a per square foot amount every month. If the roof needs to be replaced you are not charged any more ? that was already factored in.
In the case of you moving from that space to a building you now own ? there may be no charge for a roof for years?but when it does come it is certainly more than when you were in that tower. As the owner, there is one roof and one person to pay for it. The replacement cost of the roof will be much higher in the tower, but the number of tenants to divide that cost across will be much more beneficial for you than being on your own.
The reason we do not perceive ownership to be as bad as it is?
It is because he hear about it only from the people who are actual owners. People do not like to admit that they bought a building and they made a mistake. They want to be proud of their accomplishments. So when a business owner has major repairs for a building they purchased they tend to stay quiet about it.
Many properties are not just for you. There are other commercial units or perhaps some residential space above your store front. Super ? a nice way to subsidize the mortgage payment. Do you have experience being a landlord?
Remember, if you have always leased, you have received space as a service. Now you are the service provider. Any time taken away from your business to focus on being a landlord will hurt your business.
And that is if your tenants remain as your tenants. If and when they leave, you are now in the business of finding new tenants. Until you find replacements you have also lost that supplemental income, which must now come out of the cash flow from your business.
Doesn?t it just seem easier to lease? That is why 99% of companies do! If you are still interested in owning your own building - good luck (but don't say I didn't warn ya!)
Additional resource: Pros and Cons of Investing in Commercial Real Estate