Among declining property values, historically low interest rates and numerous government programs that can assist efforts to borrow, today’s real estate market presents an unusual opportunity for small-business owners who are considering acquiring real estate assets for their operations, an economic-development and land-use adviser says.
"At the appropriate time in a company’s evolution, real estate can be a key component of a comprehensive business investment strategy," said Larry J. Kosmont, president and CEO of Kosmont Companies.
For many business owners, this is a good time to think about acquiring commercial real estate, "with many properties in cities throughout the country having experienced 30 to 40 percent drops in valuation since the valuation peaks in 2005/2006," said Kosmont, whose 25-year-old firm is based in Los Angeles.
Real estate is one of the largest operating-cost categories for most small businesses, typically behind only salaries and benefits, Kosmont noted. He offered the following advice when considering a real estate acquisition.
- Choose the model that suits your business: One major consideration for a small business is whether to buy or lease its business locations. If a business can afford to purchase, it is important to consider the short- and long-term accounting implications of ownership. Will the business own the property, or will a separate entity own the property and lease to the business? Should the entity be a corporation or a limited liability partnership? Does it make sense for the business owner to hold the property under his or her personal name? To answer such questions, it is essential for a small-business owner to understand the risks and benefits associated with real estate ownership, such as the amount of down payment required, tax benefits of depreciation and the effect of positive or negative cash flow from property-related income and expenses on running a business.
- Evaluate your business needs: When choosing a location for one’s small business, it is paramount to be mindful of fundamentals such as the location of customers, suppliers and employees. Channels for servicing customers, access to various modes of transportation, and neighborhood desirability for employees are just a sampling of important considerations. The physical characteristics of the building are critical. Overall shape of a property, square footage, ceiling heights, equipment needs, utility requirements, age and zoning must conform practically and legally to the operations of the business. Amenities and services such as parking and security may be additional drivers for attracting and retaining employees.
- Know your financial wherewithal: The primary limitation on real estate acquisition for most small-business owners is cost. Small-business owners need to be honest with themselves concerning their financial wherewithal. (One consideration: Whether buying a distressed property or one that is for sale through traditional channels, a buyer needs to plan for a down payment that can range from 5 percent to 25 percent of the purchase price.) Once this has been established, a small-business owner can focus on the property search. The owner would be wise to seek out the services of an experienced commercial real estate broker for assistance.
- Leverage your financial tool kit: In order to understand their real estate acquisition capacities, small-business owners should be aware of the financing tool kit made available to them by various government-sponsored and -supported entities, as well as by the private sector. Small- business owners should consider the various types of loans available from different sources. Small businesses should seek stable long-term sources of financing, ideally with low down payments.