In this BusinessWeek edition, Karen Klein interviews me, Chris Hurn, on my opinion and the advice I have to offer for owning your own property for your small business. She asks whether it is a good idea to buy property for your small business with low interest rates and real estate prices. I cover the importance of becoming organized, pre-approved, and knowledgeable about your local market. Additionally, I emphasize the need to consider financing options and establish an ownership entity.
Business Principles, Tools, and Techniques in Participating in Various Types...
When It's Time to Buy Instead of Lease
1. When It’s Time to Buy
Instead of Lease
With interest rates and real estate prices low in many places, consider
whether buying property is right for your small business
BY Karen E. Klein SMART ANSWERS | December 12, 2008
Q: My business lease is nearly up and I days of going to a large national bank for a Not every small-business owner will qualify for
planned to renegotiate for a lower payment. loan are pretty much over for now,” Hurn said. this program, but most do, Hurn says.
However, now I’m wondering if we should try “Smaller community banks and specialized
Establish an ownership entity. You should
to buy office property instead, with interest lenders like our firm are where business is
own commercial property through a separate
and prices so low? being done.”
real estate holding company, not through
—I.N., Prescott, Ariz. He offers his clients some tips when they your current business entity. That way, “If you
are considering the purchase of commercial decide to sell your operating business later,
A: Meet with your accountant and look at your
property; you can take many of these you can maintain your real estate company,”
long-term business plan for help answering
steps now and even if you can’t get a loan Hurn says. The property can eventually
this question. Is yours a growing company
immediately, you’ll have a jump on the process become a retirement asset for you, generating
likely to eventually need more space than
when money becomes more readily available: regular monthly rent checks.
you can afford to purchase now? Can you buy
more square footage than you need and sublet Get organized. Ask a potential lender to give Another thing to think about, if your assets are
until your company expands? If you outgrow you a checklist of required documents. “Full- not sufficient to provide the downpayment on
the place, will you be able to sell it, or will you documentation loans are worth spending the a property you’d like to buy, is partnering with
be happy becoming a commercial landlord? extra time on. The more thorough you are, the another successful business owner. Two or
better you look to a lender,” Hurn says. “You more of you could form the real estate holding
Purchasing commercial property builds
may also be able to secure a better interest firm to purchase the property together.
equity in an appreciable asset that offers
rate, saving thousands of dollars during the life
both tax advantages and income-sheltering Karen E. Klein is a Los Angeles-based writer
of the loan.”
opportunities, says Chris Hurn, president who covers entrepreneurship and small-
of Mercantile Commercial Capital, based in Get pre-approved. Knowing what you’ll be business issues.
Altamonte Springs, Fla. If you foresee that able to afford early on will save time later.
you’ll pass your business on to your children “Lenders have become especially efficient with Contact Chris and Mercantile Commercial Capital
or eventually shut the doors if you can’t issuing pre-approvals for commercial loans for more information on how to get an SBA loan:
sell, paying yourself “rent” now and owning quickly, assuming they receive the documents 1-866-622-4504, or info@mercantilecc.com, or
equity in a tangible asset later can be a great they need,” he says. visit www.504Experts.com.
advantage. And commercial interest rates
Know your local market. Talk to an
are at historic lows, Hurn says, between 6%
experienced real estate broker who specializes
to 6.5% for a 20-year fixed mortgage vs. an
in commercial property and can go over prices,
historical average around 8.5%.
comparable lease rates, and demographic
Still, taking on substantial debt, subleasing, information with you, so you’ve got an idea
and supervising property maintenance is not whether buying is worth it and what the best
for every entrepreneur. And all real estate locations in town are.
is profoundly local: While some parts of
Consider financing options. Hurn is a big fan
the country are seeing large discounts from
of the SBA 504 loan program. “It provides
commercial developers, other choice locations
up to 90% loan-to-cost financing with longer
will always be very costly.
amortizations and below-market interest rates,
Credit Crunch will preserve more of your capital for better
uses, keep your cash flow high, and allow you Christopher Hurn, President,
Then there’s the problem of credit availability, to redeploy your capital savings into other CEO, Cofounder, Mercantile
which continues to be extremely tight. “The profit-generating business activities,” he says. Commercial Capital