...by Warren Kirshenbaum
There are great deals out there for qualified buyers in the residential market. But businesses, are often able to capitalize on real estate deals during depressed and booming markets. There are many advantages and opportunities for businesses in financing, leasing and ownership today’s real estate market.
Lease Vs. Own
Depressed market conditions can create an environment in which some businesses that typically lease properties would wish to take advantage of the low prices and become property owners. Prices for commercial real estate in some markets are attractive, and businesses are often able to secure loans with as little as 10% down. Owning real estate as a business asset can provide certain financial advantages, including financing options and tax incentives.
The value of real estate does not necessarily increase simply because the business is doing well. The success of the business does not automatically increase the value of the real estate where it is situated. The decision to lease or purchase is complicated, and businesses need to compare the short- and long-term costs associated with each and consider the opportunity cost of ownership.
Anticipating Future Needs
Large businesses spend lots of money researching trends and determining where the next hot spot is likely to be, or where a hole exists in a given market. Often, these businesses are ahead of the curve when it comes to finding out about new housing developments. Retail space, for example, is likely to become more expensive when a new condominium is built nearby - new condo equals more customers. A business that sees this coming in advance can purchase land or retail space before the values skyrocket in response to the new development.
Economic incentives from local governments can encourage businesses to expand or open in a new location. Municipalities that are trying to retain or add to their employment base may offer incentives, including credit against the payment of income taxes, credit for building "green" properties or property deals that aren't available to the general public.
Many businesses are able to secure percentage rent leases where they essentially share profits with the landlord. Generally, a base rent is set, and a percentage of the monthly or annual gross sales made on the premises is added to the base. For example, a property may have a base rent of $20 per square foot, plus 5% of sales over $250 per square foot. The idea behind a percentage rent lease is that the landlord and tenant can both take advantage of the property's location. When sales are up, more rent is paid, and during slower periods, the rent is reduced. This type of lease can help businesses gain traction in new locations and weather slow times without being burdened by high rents. Landlords benefit by attracting and keeping tenants and receiving potentially greater returns, particularly as the business grows.
The U.S. Small Business Administration's (SBA's) Loan Program is a long-term financing option designed to promote economic development within communities. The 504 Program provides businesses that have a net worth of less than $7.5 million and an average net income not exceeding $2.5 million with long-term, fixed-rate financing. The loans can be used to purchase land and existing buildings, or to finance the construction of new facilities or the renovation/modernization of existing structures. Businesses must contribute at least 10% of the project cost, and the total amount of the loan may not exceed $1.5 million, $2 million or $4 million, depending on the type of business and the level of job creation and/or economic impact.
Businesses are often able to leverage more attractive lease terms. Tenants who have paid rent consistently and on time are often able to negotiate with present or future landlords for favorable lease terms. Particularly in markets where landlords have difficulty finding reliable tenants, or where commercial space is plentiful, those businesses that have a proven track record can be rewarded with lower rents and better benefits and concessions.
What this all means
While many businesses prefer to lease rather than purchase properties to avoid tying up cash, there are instances where ownership makes economic sense. Businesses can take advantage of real estate opportunities through special financing options, being in the right place at the right time, economic incentives and negotiating for more favorable lease terms.