Unless you can operate your business from your home or online, you’ll probably need to find commercial space for offices, product development, or inventory storage. That can be tricky; commercial property investing is a specialized industry that presents a lot of challenges for newcomers or businesses without strong cash flow. Here are the critical variables you should consider if you want to make a smart acquisition that serves your business in the future.
Important Aspects of Commercial Property Investments
Commercial property is still part of the real estate market, so you always want to consider the health of that market. This means that pretty much all of the important factors of buying personal property apply: location, physical condition, utility, adjacent property, and financing. Other important factors to consider include:
- Layout: The layout needs to be functional for your employees, your business processes, your customers, and possible tenants.
- The law: Are you allowed to operate as you need? Zoning laws and building codes can be very restrictive. For example, lawyers need commercial office space; manufacturers need industrial space. The law may also limit your ability to modify the property.
- Responsibilities: You need to know whether your business is responsible for physical upkeep, parking lot maintenance, or inspections, and whether you need modifications before moving onto the property.
- Access to parking or public transport: Your employees and customers need to be able to arrive conveniently.
- Opportunity for expansion or leasing: If you grow quickly, can you add on or expand? If you don’t grow as fast as you think, can you lease out the extra room?
- Financing and cash flow: Down payments on commercial mortgages can be extremely expensive, and many businesses may not have enough savings, credit, or cash flow to handle the costs of investing.
Buying vs. Leasing Commercial Office Space
According to Jean-Philippe Ménard, BDC Vice President, you should consider buying an office space if you can get the right kind of financing terms. “It’s about balancing growth with cash flow,” says Ménard. “We often finance those kinds of purchases because we want to make sure our clients have enough working capital to grow.”The attractiveness of purchase options grew between 2009 and 2016 thanks to historically low interest rates. Those golden years of borrowing won’t last forever, so new or expanding business owners need to be wary of higher financing costs in the future. As a general rule, startups should favor leasing over buying; it is often too difficult to forecast cash flow for new businesses. It’s safer to not commit an enormous amount of capital to a new building. Businesses that grow too quickly should also consider leasing because it may be difficult to forecast how much room they’ll need in a year or two. Other businesses should strongly consider buying commercial office space. Stable businesses with a track record of strong cash flow are ideal candidates. Some businesses, such as those with strong IT assets or other security needs, may need the space because it’s well-protected.
Assembling the Right Team
You want to be as informed as possible before committing to a commercial property, and you may not have the time or inclination to learn everything yourself. Surrounding yourself with the right team of experts may sound onerous, but it’s very important to make the right purchase decision. If you don’t have an accountant to analyze the tax and operating aspects of the deal, consider finding one of those first. If the accountant can’t sign off, you may not need to bother with the rest. You should also find legal counsel to negotiate and navigate legal hurdles, and seek out a commercial broker to help you find the right property. Your purchase needs to make sense in the long term. That said, there isn’t any reason you can’t make a great investment for your company, assuming you go through the proper diligence, have a healthy balance sheet, and surround yourself with the right team.