Commercial Real Estate: How to Buy Big When Your Business is Small

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.

Bank Loans
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.

Seller Financing
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

Third-Party Financing
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: elizabeth.lewis@eclewis.com

Contact Us Today

Law Office of E.C. Lewis, P.C.
Your Denver Business Attorney
501 S. Cherry St., Suite 1100
Denver, CO 80264
720-258-6647
Elizabeth.Lewis@eclewis.com

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How to Navigate Denver’s Commercial Real Estate Market

How to Navigate Denver’s Commercial Real Estate Market

There may come a time when your small business has outgrown its retail or home office space. This is great news as it means you are ready to expand. It also means you are about to jump into the competitive pool of Denver’s rapidly changing commercial real estate market. With developers scrambling to keep up with demand, every size and type of real estate – from historic manors and Beaux-Arts buildings to factories and warehouses – is being repurposed for trendy niche retailers and giant corporations alike. The average asking lease price for warehouse space in some neighborhoods jumped by more than 50 percent from 2010 to 2015. By the end of 2016, retail development hit its highest levels since 2010 with nearly 1 million square feet under construction according to the CBRE. Without a team of professionals on hand, like larger organizations have, a small business attorney can help you make decisions about location, leasing or buying, tax deductions and compliance, and protecting your assets. Whatever type of retail space, office, or other commercial property you may need for your flourishing business, consider these five helpful tips before you commit to a contract.

  1. Make a New Plan
  2. Choose the Right Location
  3. Decide Whether to Lease or Buy
  4. Have Exit and Dispute Strategies
  5. Know What You are Signing

1. Make a New Plan

Even if you have been in business for years, you need a revised plan for your expansion. Consider your needs versus your budget. Do you have the resources to close on a property or repay a loan? A solid business plan is an important factor for lenders who are considering your loan application. Within your business plan, lenders are looking to see whether you have a marketing strategy – have you considered your competitors? The habits of your targeted customers and neighborhood? A back-up plan to deal with the pitfalls? A small business attorney will help ensure your plans and real estate choices are realistic and the best for your business.

2. Choose the Right Location

When selecting the area or neighborhood for your business, there are many factors to consider. Demographics, surroundings, centrality, visibility, and compatibility with your desired image are a few of the areas you should research before choosing your location. You would also benefit by researching forecasts and trends for the district (e.g. new projects, funding, crime rates, and other public records that may affect your business). It is essential to be aware of the current and potential value of the properties you look at, especially if you are going to buy rather than lease.

3. Decide Whether to Lease or Buy

A storefront or office space can boost your business’s image. Commercial real estate not only provides a dedicated space outside of your home, but it can help with marketing. As with most real estate, buying commercial real estate is more expensive in the short term than leasing, but less expensive over the long term if you intend to stay in the location. While buying gives you more flexibility and an asset to use when financing other parts of your business, it also means you are responsible for all aspects of your property, including maintenance and additional liability. An attorney will help you decide whether leasing or buying is right for your business.

4. Have Exit and Dispute Strategies

It is important to have an exit strategy if your business does not perform as well as anticipated or your plans have simply changed. What if you can no longer afford the property? What if unexpected factors in the area are negatively impacting your business? What if you decide to sell the business? You should be prepared for these types of scenarios as well as any arising disputes. Tenants of commercial property have fewer consumer protections, and leases are binding contracts. To avoid conflict or severe penalties, be sure to have your small business attorney review any lease or purchase contracts before you sign.

5. Know What You are Signing

By this point in the process, you may be fairly familiar with the world of commercial real estate and its accompanying laws: landlord/tenant laws, disclosure laws, zoning laws, contract laws, insurance laws, etc. Leasing or purchasing agreements fall under contract law and can be very confusing. Your attorney will go over these contracts with you line by line until you fully understand what you are signing in order to prevent any surprises or compliance issues in the future.

If you need help with leasing or buying commercial real estate, 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: elizabeth.lewis@eclewis.com

Contact Us Today

Law Office of E.C. Lewis, P.C.
Your Denver Business Attorney
501 S. Cherry St., Suite 1100
Denver, CO 80264
720-258-6647
Elizabeth.Lewis@eclewis.com

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Trelora under fire for breach of contract

Trelora, a real estate brokerage startup located here in Denver that charges a flat fee for its services, appears to have breached the terms of its multiple listing service (MLS) subscription. What Trelora started doing was including, as part of its searchable home listings, the amount that home sellers are willing to pay a buyer’s agent when the property is sold.

In response, REcolorado, a MLS firm, is threatening to fine them, and suspend or terminate Trelora’s access to MLS data. Since then, Trelora had made some changes to meet some of REcolorado’s demands but was nevertheless continuing to post the commission rates to buyers on their website. Trelora lawyered up and was seeking to negotiate with REcolorado and determine where to go from there.

Since then, Trelora stopped posting broker commission information after they received a cease and desist letter from REcolorado. In response, Joshua Hunt, the CEO of Trelora posted an open letter on its website regarding the controversy. In it, he defended Trelora’s actions as fighting for transparency and consumer empowerment. He said, “Unfortunately, there are many in our industry who want to protect agents’ exclusive access to this important [financial] information.”

This live controversy taking place right here in Denver is a great example for how any time you sign-up for a data service like MLS, there is going to be a contract involved regulating what you can and cannot do with that data. Most of the time, there will be limitations preventing you from disclosing most, if not all, of such information to the general public. After all, there is probably a reason why nobody else has done what Trelora is doing. If you fail to comply with the terms of that contract by disclosing protected information, then you have clearly breached that contract and will be liable for damages. It is not surprising that Trelora finally agreed to take down this protected information, as they likely thought the legal battle they were facing would either be unsuccessful or cost-prohibitive to pursue any further.

If you are thinking about entering into a contract and you need help reviewing it and what you will be able to do going forward, don’t hesitate to   reach out to the Law Office of E.C. Lewis, PC, home of your Denver Business Attorney, Elizabeth Lewis, at 720-258-6647 or email her at elizabeth.lewis@eclewis.com.