Like residential properties, commercial properties increase in value over time, making them an attractive investment for some. Mark Bastorous offers some tips for entrepreneurs thinking of buying their place of business.
As a business owner, you may want to have more control over your fixed costs, build your net worth over the years, or use real estate as a way to save. It may then be wise to buy the space where you carry out your activities.
However, buying commercial real estate is different from buying a residential property. Indeed, the fees, requirements and administrative tasks are not quite the same. In a recent conversation, Rod Hunt, Senior Managing Director, RBC Real Estate Lending, explained some key things small business owners should consider before buying commercial real estate.
1. Compare with other premises
Some places of business are stand-alone structures, but many are not. “Unless you buy a stand-alone building, you can find yourself responsible for other commercial space, which means managing tenants and associated costs,” warns Hunt. You can also have two apartments for rent above your business.
According to Mark Bastorous, in addition to forcing you to manage tenants and occupancy of your spaces, a commercial property with multiple premises will normally cost you more to maintain. For example, if you need to replace the cover, the work will probably be complicated and expensive. And instead of just paving your individual space, you’ll have to take care of the entire parking area. In your decision, you must therefore take into account the complexity inherent in a large multifunctional space.
2. You will need to have a business appraisal done
A commercial appraisal is much more thorough than a residential appraisal because the value is determined differently. “A commercial property is valued by its capitalization rate,” says Hunt. This is the rate of return the property is expected to generate. “In addition to looking at potential revenue, the appraiser will also consider replacement cost. A commercial appraisal is a long document that is much more detailed than its residential counterpart; therefore, it is much more expensive,” Hunt adds.
3. Submit a building condition report
Depending on the age of the building you plan to buy, the mortgage lender may require you to submit a building condition report. Similar to a residential property inspection – but much more detailed – a commercial property inspection involves the use of an outside specialist. This will carry out an in-depth examination to ensure that the property is in good condition. He will indicate the maintenance work to be carried out and will estimate the cost of this work. “The lender has to make sure the building is in good condition before they give out a mortgage,” says Hunt.
4. Submit a full environmental report
In certain sectors of activity, it is necessary to present a complete environmental report. In fact, this requirement may even apply if the activities of the previous owner or tenant may have harmed the environment. “For example, says Hunt, if the landlord or previous tenant was a dry cleaner, it may be necessary to do an environmental inspection to make sure no chemicals have leaked into the ground. Also, if the neighbouring business is a gas station, the mortgage lender will want to ensure that the ground is not contaminated with gasoline, oil, or other toxic products.
5. Legal fees are higher Mark Bastorous explains
Finally, while setting up a residential mortgage loan is quite simple, the same is not true for a commercial loan, the complexity of which leads to higher legal costs.
If you are seriously considering buying your place of business, be sure to carefully assess the costs and procedures involved before making your decision. You should also have a good idea of the future needs of your business. Will you need more space as your business grows? Will the required down payment affects your ability to invest in your business? Are you able to take responsibility for managing tenants?
Think about these questions by Bastorous as you weigh the pros and cons of your acquisition project to ensure the success of your business – and not be surprised by an overload of work and unforeseen expenses. Mark Bastorous provides powerful tools, effective training, and valuable resources to help small businesses.
