January 5, 2010

With commercial real estate in a tailspin, if you’ve been toying with the idea of buying a building, you’ll find plenty of bargains. Just ask Craig Cooke. The CEO of  Rhythm Interactive, a 12-employee marketing company in Irvine , Cal, bought a building in March at a discount of 40% to 50%. “The state of the economy worked to our advantage,” he says.

In addition, there are a myriad advantages to buying. For one thing, it’s one cost you can control. Years of annual rent increases were one reason Cooke decided to purchase a building. Plus, if it’s too big, you can always help pay the mortgage by renting. More important, it can be a long-term investment—especially if you buy at a bargain-basement prices. 

But there’s a caveat. No deal is worth it unless you know that purchasing a building, instead of renting space,  is the right move. “It’s OK to buy—as long as it makes financial and business sense,” says Eric Gall, a broker with  Florida Business Exchange in Estero, Fla.

To make sure buying your space is the best approach, consider these points:

Do the math. If, for example, you’re short of cash, renting is a better bet.  Purchasing a building involves hefty upfront expenses. You’ll need money not only for a down payment, but for an appraisal, building inspection, loan fees and other costs, as well. “If you’re not well capitalized, it’s probably not a good idea to buy,” says Gall.

Even a well–established company might want to tread carefully. Take Abel Zalcberg, who runs OFM, a 26-employee furniture distributor in Holly Springs, NC, who has built two facilities over the past seven years. Recently, he decided to buy a building for operations in a nearby area the company entered five years ago. “We’ve grown our revenues enough in the new location that we’re comfortable making the move,” he says. “Your expenses have to be in line with your profit margins before you can purchase your own building”.

Consider how fast you’re going to grow. If you’re likely to be bursting at the seams in the near future, buying might be inefficient. Instead, you might rent in a building with extra space you can lease when you need it.

Still, even if you outgrow your building, there are other options. You can lease your old space and buy a new one. Or you can expand your facilities. John Vence, president of College Bed Lofts, a n Elmira, NY-based 10-employee manufacturer, bought a building in 2007. Soon after moving in, the company decided to add a new product line, an expansion that required more space.  What happened? Vence decide to stay put and increase the building size by 20%.

Determine whether you’ll need to do lot of work on infrastructure. If you have to make a major investment in electrical wiring, lighting, and other costly measures, it might be better to do that work on a building you own. Otherwise, you’ll just end up going through all the work again in your next rental.

If you decide to buy, you’ll face the challenge of financing the effort. That’s particularly difficult now, because banks are still reluctant to lend to small businesses.  Your best bet may be trying to get a loan under the SBA’s 504 program, aimed at helping small businesses buy  real estate, equipment, or machinery at below market rates.. But be prepared for hassles. Cooke spent about four months working with both the SBA and his bank. During that time, he had to fill out reams of paperwork and deal with a constant back and forth. The effort took so long that the developer almost canceled the deal. “It was very stressful,” he says.

In some cases, you might have no other option but to buy a building—and figure out how to pay for it. That’s what happened to Crystal Kendrick, who runs the Voice of Your Customer, an eight-employee marketing firm in Cincinnati, Ohio. As a participant in a federal government program that is obligated to spend 3% of its budget in so-called underutilized business districts, she had to set up her office in one of those areas. When she couldn’t find any acceptable rental space, she decided to buy.

But, although she was eligible to receive hefty tax abatements and grants for renovation from city and county government programs, Kendrick didn’t even bother asking a bank for a loan. Instead, Kendrick, who is in the process of finalizing the deal, plans to pay the $27,000 purchase price for the 4,000 square foot building with her own cash. “As a service based business, I own no collateral,” she says.  “I have no other choice.” 

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