November 15, 2011
Start with the end in mind, advises author Stephen Covey in his self-help classic The 7 Habits of Highly Effective People. That’s certainly good advice for an entrepreneur who is considering the purchase of commercial real estate.
A long-term vision for your business is essential whether you are planning to buy a building or embark on the construction of new premises.
Dan LaBossière, a BDC Assistant Vice President in Winnipeg, has guided scores of entrepreneurs through the planning and financing of successful real estate acquisitions. He offered some tips on ensuring your project goes smoothly and contributes to the success of your company and your financial security.
Location, Location, Location—There’s lots to think about when you’re choosing a location. You will want to consider customer convenience as well as your shipping and receiving needs. Will your business have access to all the services it requires? Is the land zoned for your type of business? How about your staff? Is there public transit service and adequate parking?
Room to Grow—It’s essential to consider your real estate needs and what you can afford, given your cash flow and strategic plan for the future. While you don’t want your mortgage payments to squeeze your working capital, you do want adequate space and features now and in the future.
“That may mean, for example, being able to add a second floor or build an addition,” LaBossière says.
Due Diligence—Once you’ve chosen a building or a piece of land, it’s time to investigate its condition. For a piece of property, you will want to invest in an environmental site assessment to find out whether there’s contamination or other surprises that could come back to haunt you. “It’s a small cost to understand the history of the property,” LaBossière says.
For existing buildings, LaBossière recommends that entrepreneurs pay for a building condition assessment. “It’s like a home inspection,” he says. “It gives you a good idea of what you’re getting into and what kind of investment you will have to make in the coming years to keep the building at a satisfactory level.”
A Clear Eye for Costs—Beware of unexpected expenses when planning building improvements or construction on the acquired real estate. LaBossière says he will typically structure real-estate loans to include a healthy contingency fund to pay for cost overruns and upgrades.
Entrepreneurs should be diligent in questioning contractors about what’s included in the purchase price or construction quote, he says. Items such as parking lots, landscaping, signage and even certain mechanical components may not be included and cause the final bill to balloon. “You can never spend too much time understanding the costs and what’s included.”
The End Game —It’s often wise to place your commercial real estate into a holding company separate from the operating business, LaBossière says. This can facilitate the eventual sale of your business. That’s because many buyers will want to acquire only the operating company. For some, it makes for a more affordable acquisition; for others, it makes it easier to move your operations across town or to another city.
It also makes it easier for an entrepreneur to hold on to the real estate and use it as a source of retirement income after the sale of the business. “I’m a strong believer that this is a great source of retirement income down the road,” LaBossière says. “It facilitates the succession of the business.”