The decision to buy a commercial property for your business is not a decision that should be entered into lightly. Purchasing commercial property is a serious step for any business, and one that should only be undertaken after carefully considering all the ramifications.
The most important consideration is the financial commitment. The financial commitment of purchasing commercial property is far greater than the financial commitment of leasing. For instance, most commercial property purchases require minimum down payment of 25% of the total purchase price of the property.
For instance, a commercial property valued at $250,000 would require an immediate, out-of-pocket down payment of at least $62,500. This is in addition to all other closing costs and legal fees associated with purchasing a property.
Of course, purchasing the property is only the beginning of your commitment. Property taxes and ongoing upkeep and related expenses (such as landscaping) also need to be factored into the purchase.
The Pros of Purchasing
The key reason to purchase commercial property is to add asset value to the practice when the day comes to sell the business or alternatively offers you (as the property owner) the opportunity to sell the practise and retain the property ownership and collect rent from the new business owner.
Additionally, knowing one has ownership of their business property is the only way to secure peace of mind mentality knowing their business is secure and free from the perils of the landlord’s issues and problems.
Ongoing Financial Responsibility
However, the one major downside of buying (versus leasing) – the ongoing upkeep, repairs, and the many unexpected expenses that frequently crop up are the sole responsibility of the owner. For leaseholders, that would mostly be the responsibility of the landlord, not the tenant.
In addition, any remodeling or building modifications needed to make the building better suited for a medical or dental facility, such as additional plumbing, networking, or electrical wiring can also add to your property acquisition budget.
Purchasing commercial property also requires a good, established credit history, which can be a problem for a new practice. Commercial lenders will also usually require you to submit a special credit worthiness report from a certified public accountant verifying that you are financially sound before extending the credit needed for the purchase.
Due to the significant financial commitment of purchasing a commercial property, it is normally not something that should be undertaken by a new or relatively new business.
Fortunes can change very quickly for a new business. A facility that you purchase today may very well be inadequate for your future needs or, even worse, may add an undue financial burden that can cripple your future growth potential.
Property purchase is best left to well-established businesses with the deep financial reserves needed to bear the burden of debt it will impose on the practice. Alternatively, a relatively new business with two or more partners who can jointly bear the financial burden may also consider property purchase.
However, for nearly all new practices, leasing will offer the financial flexibility needed to flourish during those first lean years as the practice builds.
You may also want to consider a lease-to-purchase option, which has the added benefit of allowing you to ‘lock down’ a property while working towards the day when you can purchase it.
NOTE: First and foremost, you should consult a professional financial advisor/planner who is familiar with your business when considering commercial property purchase or leasing.