Bank On It
Buying a Home for Your Business
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Making the decision to take the plunge and purchase commercial real estate property for your small business is one that requires much thought, analysis and consultation. If you are contemplating buying a “home” for your small business, we recommend first answering a few simple questions.
What are the advantages and disadvantages of buying versus leasing?
Leasing has some disadvantages. Rent is a variable cost that escalates over time. A lease has a termination date and, in certain cases, may require major capital improvements upon the renewal of the lease. As your business grows, your space may limit your growth. Unless you’re getting a sweet deal on your lease, buying may be a prudent decision.
On the other hand, advantages for leasing may include: having the flexibility to rent in a desirable area, where you may not be able to afford to buy; having the option to move if the business requires more space; and being able to conserve capital by not having to pay to maintain and repair property.
Advantages for owning include having a fixed cost; being able to deduct mortgage interest, maintenance and depreciation to minimize taxes. Owning also gives you greater control over improving the property on your own time schedule. Also, the real property should appreciate over time and prove to be an investment in the future.
Can I afford to buy?
Most lenders will require you to have 25 percent cash as your equity contribution, which will be applied as a down payment toward the purchase. The loan will be subject to a commercial appraisal report, which can be quite costly, compared to a residential appraisal. The lender will finance 75 percent of the lower of the purchase price or appraised value. There are additional costs involved in purchasing real estate, including: the appraisal report, the environmental report, title and escrow fees, loan fees, insurance premiums and professional/legal fees. In addition to initial costs, there will be ongoing costs. Depending on the condition of the property, you will need to maintain and repair it as you would your home. You will need to build up cash reserves for future improvements.
It is possible to obtain 90 percent financing through the SBA Certified Development Co. (CDC 504) loan program. The 504 loan program was designed to assist small-business owners in financing long-term, fixed assets (e.g., commercial real estate and/or equipment, remodeling, expansion or renovation of an existing building or commercial space, or for the construction of improvements) by way of a second lien position behind a direct lender. Benefits include lower down-payment requirements and a fixed rate for 10 or 20 years.
What does a lender look for?
Most lenders will ask for business financial statements from your last three years of business to review your company’s historical performance and trends in your business. The lender will determine if there is enough cash flow from your business to support the proposed loan payment, in addition to covering your company’s operating expenses.
In addition to your business financials, your lender will also ask for your personal tax returns for the last three years and a current personal financial statement. Your lender will determine if you have the capacity to cover your personal obligations in addition to your business obligations.
Who should I consult with before I decide to buy?
Consult with your attorney for advice on determining the entity that will hold title to the real property.
Your attorney will consider legal liability and the protection of your personal assets. Your CPA will advise you on the tax advantages and consequences. The tax rate on the re sell of the property can be substantial, depending on the legal entity that holds title to the property. You should enlist an experienced commercial real estate broker to represent you on the purchase and negotiate the terms of the contract on your behalf. Your banker can help determine a loan range before you start looking for property by reviewing your financials. Your banker will discuss the commercial loan structure, which is unlike the residential mortgage loan to which you may be accustomed. Therefore, see your banker when you’re ready to buy a home for your business.
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