Commercial Real Estate: How to Buy Big When Your Business is Small
Small businesses come in many sizes, offer different goods and services, and operate out of all sorts of spaces. Some conduct business out of the home while others share rented office space or temporary locations. If you decide that you have outgrown your existing place and are looking for a bigger, more long-term solution, there are things to consider before buying commercial space. A small business attorney will help you with all of your real estate decisions from taxes and insurance to location and protection. This post will discuss how to determine if your small business is ready for the transition to commercial real estate and how to secure the financing you need to make the purchase.
Five Questions Before You Make a Real Estate Investment
What is commercial real estate?
Commercial real estate refers to buildings or land intended to generate a profit. It can be divided into several categories, including office buildings, industrial, retail, restaurant, multifamily, undeveloped land, and more. Each type of commercial property is subject to numerous laws – contract, insurance, disclosure, landlord/tenant, and others – as well as Colorado state zoning and land use regulations.
How long have you been in business?
You are a well-established business in your neighborhood or district, and you have no plans to leave the area. Perhaps the space you have been renting suits your business, or you have found a great location nearby. Buying seems like a good idea, but even if you have been in business for 10 years, lenders will want to see that you have been profitable for at least the past few years.
What are your future goals for the business?
Be sure to align your business plans with your location. If you overestimate how quickly your business will grow, you may find yourself with too much space and a hefty mortgage. If you underestimate the potential success of your business in its new location, you may be unable to make necessary renovations and outgrow the space too soon. These two scenarios could be a big problem if the real estate market is down compared to when you originally purchased the property.
Will you benefit tax-wise from commercial property ownership?
If you are a C corporation (C corp) with 40 owners, it may not make as much sense to own the real estate as it does for a mom-n-pop limited liability corporation (LLC) that will benefit more from ownership. Talk with your small business attorney to determine if your business structure is the right one, especially for tax purposes.
Should you change your business structure?
The structure of your business will not only affect your tax obligations and liability, but it may also affect your ability to secure financing. As a sole proprietor, you are responsible for all debts and obligations, which is a deterrent to some investors. With an LLC, there is no limit to the number of owners; whereas, an s corporation is limited to 100 owners. C corporations are attractive to venture capitalists because of the unlimited number of owners and because there is no income tax liability. There are several other options for small businesses to secure financing.
Five Ways to Buy Real Estate as a Small Business
Small Business Association (SBA) Loans
SBA loans come in two types – the 7 (a) and the CDC/504. The 7(a) is a 90% government guaranteed bank loan, and the CDC/504 is a 50% first loan from a back and a 40% second loan from the government. SBA loans offer fixed interest rates, small down payments, the ability to finance building improvements, and a variety of lending sources. However, there is a lot of paperwork, employment criteria, and strict onsite occupancy rules.
These conventional loans are not as simple as they used to be. There are fewer commercial banks, and even those prefer SBA originated loans because the government backs a percentage of it. If you can afford a larger down payment and are in good standing with your bank, you may secure a loan with less underwriting criteria and more flexibility in repayment.
This is a direct seller to buyer arrangement. When sellers own a building outright, they can offer better interest rates than other lenders. Seller loans are even more flexible because you are dealing with an individual. While they are not as common as they used to be, these loans often entail fewer fees and a lot less paperwork
Much like seller financing, third-party financing does not come with as many stringent rules as bank loans. Although we do not all have a relative or close friend with a million dollars they would like to loan to our business, these loans can be made quickly without the same environmental or appraisal requirements other lenders would have. There are drawbacks, of course, as no one wants to drain their grandmother’s nest egg or have to endure a foreclosure experience with someone you know or love.
Purchasing the Building for Cash
Probably the most elusive way to buy today, paying for a property in cash is also the most simple. You could buy the property as a sole proprietor or LLC, the lease it to your company. If you can truly afford to do this, be sure you are not sinking 100% of your available cash into the real estate. One of the biggest benefits of this method is that you can charge your business rent, which puts cash back into your pocket.
When it is time to establish or expand your business by moving to a commercial space, your small business attorney will ensure you are prepared for the process in order to ease the transition and maximize the benefits.
If you need help with commercial real estate law, contact me, Elizabeth Lewis, at the Law Office of E.C. Lewis, P.C., home of your Denver Small Business Lawyer. Phone: 720-258-6647. Email: firstname.lastname@example.org
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