Small Biz Funding and Small Biz Advice and Small Business

WOJTOWICZ: Is it time to buy rather than lease space?

November 28, 2009

Q: My lease is about up on the building that houses my business. It includes a small office and limited manufacturing and assembly space. It’s big enough for our needs, but my landlord wants to boost my rent somewhat and is asking me to sign a five-year contract. Frankly, I wonder if this is the time to look for a building and buy property instead of tying myself to another lease. By the way, I’m in a fantastic location and my landlord maintains the property, so I have no complaints in that regard.

Should I continue to lease or buy my own building?

A: At first glance, now seems a good time to buy. Commercial real estate prices and interest rates are both low, and will probably be higher if you wait five or 10 years. Buying now will start you toward building equity, yielding immediate tax advantages and leverage for business growth. But you need to step back and honestly look at how your company’s situation may change.

First, update your business plan: Is your company growing and likely to need more space in the next five to 10 years than you can afford to purchase right now? If you buy now, will you be able to sell the building when your business outgrows it? If not, are you willing to become a permanent commercial landlord?

Or, can you afford to buy more square footage than you need and sublet until your company requires the space? Would you like to be a landlord until then?

As you decide, here are steps to take now in preparation for purchasing commercial property. Even if you wait—or you can’t get credit now—you’ll be ahead of the process when you are ready to buy.

• Know the territory: Talk to a seasoned commercial real estate agent about prices, comparable lease rates and demographics in different areas of town.

• Ask a potential lender to give you a checklist of required documents.

• Obtain approval up front: Many lenders will examine your paperwork and issue preapprovals for loans. You will discover what you can afford and that will be a big help later.

• Look at financing options: The SBA 504 program, the SBA 7(a) program and others are available. For example: The SBA 504 program provides up to 90-percent financing on equipment and property and also provides a low, fixed-interest rate on part of the loan.

• Consider establishing the ownership of the real estate through a separate company: If you decide to sell your business later, you can retain your real estate company. You might want to use it as a retirement asset, providing regular rent checks.

You may have to work hard to get credit. Banks and other lenders have been burned by the recession and will step carefully into the commercial real estate markets.

Obviously, your accountant or bank lender should help you explore all the options. They should also be willing and qualified to advise you candidly, considering only your best interest.•

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Wojtowicz is president of Cambridge Capital Management Corp., which operates several alternative financing funds. She can be reached at 843-9704.

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