In 2012, there were 5.6 million commercial buildings, and 8.7 billion square feet of floor space in the US. With analytics forecasting a drop in commercial property prices along the coasts by 2020, now is the time to prepare for any future investment.
Here are four things to consider before making any commercial property purchase.
#1) To Buy, Or Not To Buy; That Is The Question
There are pros and cons to both leasing, and owning, a commercial property.
Financially, as a property owner, you’ll get advantages through write-offs, tax benefits, and more. However, you’ll have less liquidity. You won’t need to pay rent every month, but you will have to pay for routine maintenance, repairs and other expenses.
Consider if the purchase will spread your resources too thin, and take the focus off your existing business, or other commercial properties you may already own. It may make more sense to re-invest in your current business, or portfolio of properties.
#2) Can You Afford This Short Term, And Long Term?
For the short term, accurately determine affordability. Break the sale price down into cost per square foot, factoring in any necessary renovations into this cost. Compare this combined cost per square foot with equivalent properties in the market.
To evaluate long term affordability, get an accounting of on-going operating expenses, taxes, and any other financial responsibilities. Add in renovations and debt service. Calculate your Break Even Ratio. If it exceeds 80%, you are treading dangerous waters.
#3) Existing Tenants
Examine all leases to determine what responsibilities and potential liabilities you may have, and what rights to relocate, purchase, or exclusivity the tenant may have. Be sure to review all financial records and history, including rent rolls.
#4) Beauty Can Be Skin Deep
Go beyond first impressions when assessing a potential property. It may look great, but what is its physical condition and structural integrity?
Make yourself aware of any systems or environmental issues. Uncover any possible hidden problems with the survey, title, zoning, liens, easements or governmental regulations.
Check the area’s demographics for insight into the local market to make sure it can support your business
Experience = Success
Gathering and analyzing this critical information is essential to a successful negotiation, and transaction. Commercial real estate Brokers, Attorneys, and MAI/SRA designated appraisers will inform and protect you every step of the way.