Ready for Real Estate? Now Could Be the Time for Your Biz to Buy

• Evaluating your business's financial state and goals can help you determine how much you can afford on a commercial real estate down payment.
• You can use a broker to help you navigate your commercial real estate search or manage the process yourself.
• If you're opening a second location, thoroughly assess your budget to ensure your business can handle the additional expenses.
• This article is for small business owners looking to purchase or lease commercial real estate.

Among declining property values, low interest rates, and numerous government programs that can assist borrowing efforts, today's real estate market presents an unusual opportunity for small business owners considering acquiring real estate assets for their operations, according to Larry J. Kosmont, president and CEO of Kosmont Companies and an economic development and land use advisor.

"At the appropriate time in a company's evolution, real estate can be a key component of a comprehensive business investment strategy," Kosmont said.

For business owners wondering if it's a good time to buy, Kosmont says that "many properties in cities throughout the country [have] experienced 30% to 40% drops in valuation since the valuation peaks in 2005 and 2006." 

If you're thinking about making the jump into commercial real estate, here are tips, best practices, and advice for getting started. 

Did you know? A real estate investment trust (REIT) is essentially a mutual fund that invests in real estate.

Tips for commercial real estate acquisition

Real estate is one of the largest operating cost categories for most small businesses, typically behind only salaries and benefits packages, Kosmont noted. He offered the following advice for those considering a real estate acquisition.

• Choose the model that suits your business. One primary consideration is whether to buy or lease your business locations. If you can afford to purchase, consider the short- and long-term accounting implications of ownership. Will your business own the property, or will a separate entity have ownership and lease the property to you? Should the entity be a corporation or a limited liability partnership? Does it make sense to hold the property under your personal name? You must be aware of the down payment amount required, tax benefits of depreciation, and the effects of positive or negative cash flow from property-related income and expenses.
  
  
• Evaluate your business needs. When choosing the right location for your business, you must be mindful of fundamentals such as the locations of your customers, suppliers and employees. Channels for customer service programs, access to various modes of transportation, and neighborhood desirability for employees are just a sampling of important considerations. The building's physical characteristics are also critical. Overall property shape, square footage, ceiling heights, equipment needs, utility requirements, age, and zoning must conform practically and legally to your business's operations. Amenities and services such as parking and security may be additional drivers for attracting and retaining employees.
  
  
• Know your financial wherewithal. The primary real estate acquisition limitation for most small business owners is cost. You must be realistic about your business's financial situation. Whether you're buying a distressed property or one for sale through traditional channels, plan for a down payment between 5% and 25% of the purchase price. Once you know your price range, you can focus on the property search. It's wise to seek out the services of an experienced commercial real estate broker for assistance.
  
  
• Leverage your financial toolkit. All small business owners should be aware of government and private-sector financing options. When choosing a small business loan, you should understand the various loan types and sources. For example, SBG Funding offers loans up to $5 million with flexible repayment terms. (Read our SBG Funding review for more information.) 

FYI: The best business loans offer stable, long-term financing – ideally with low down payments – and flexibility.

How to begin acquiring commercial real estate

Here's an overview of the steps you'll take during the process of purchasing commercial real estate.

1. Find a broker.

A commercial real estate broker facilitates the process of selecting and leasing a location for your business. Typically, a broker is paid a commission through the landlord, not by your business.

A commercial broker can also help you weigh your financial options and negotiate your new lease. To choose the right agent, consider their experience working with businesses like yours and their local market knowledge. 

Although a broker can simplify the process of searching for a property, you're not required to work with one. You could manage the process yourself to avoid broker fees. However, you'd be responsible for finding properties, scheduling tours with landlords, and negotiating contracts. 

2. Select a property.

Once you've found some potential properties for your business, you'll start touring sites. To determine if the location could be a good fit, imagine your business operating there. You should also compare the rent or purchase price to similar commercial sites.

Consider bringing a licensed contractor to site visits. This expert can advise you on the feasibility of your plans for the location. Once you have all the information you need, you'll be ready to finalize your location choice.

3. Negotiate your lease.

After weighing your options and finding a property you like, you're officially ready to negotiate your lease. Here are a few key parts of a commercial lease that you might want to negotiate.

• Length: The length of many commercial contracts is three to five years. If you're hesitant about signing a lease that long, you could try to negotiate a shorter contract. However, the rent for a short-term lease is often more costly than that of a longer lease, as a long-term lease often has a lower monthly payment.
  
  
• Rent: Research the rent that other commercial landlords in your area charge, and keep potential rent increases in mind. Most landlords increase the rent every year by an average of 2% to 5%, according to REoptimizer. You might want to negotiate a lower rate to keep your expenses within your budget.
  
  
• Termination clause: You should always be aware of the terms in your lease's termination clause. This way, if you do need to end your lease early, you know whether to expect penalties. From there, you can determine whether the termination conditions are reasonable and amend your terms with your landlord.

Key takeaway: Don't hesitate to negotiate the lease's terms. Many aspects of the contract, especially the length of the term, are negotiable.

What to do if you plan to open a second location

The decision to open a second location requires ample consideration. You might have big goals, but will your commercial real estate budget permit them? After all, having a second location is like having two of everything, especially expenses. Between increased inventory, more staff, and another lease, the additional expenses can quickly become overwhelming.

Even if you have a budget for your current location, your second location will need its own small business budget. This way, you can account for potentially greater expenses than when you made some of your first business purchases. With a budget in place, you're officially ready to contact an agent and follow the steps above.

Cynthia Bunting contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.