7 commercial real estate surprises to avoid
Even experienced entrepreneurs face unexpected expenses when buying commercial real estate for their business.
Hidden costs, construction overruns, longer-than-expected downtime—it’s hard to anticipate every outlay you may face. That’s why bankers often advise putting aside a contingency fund for such eventualities, worth 5 to 10% of the total forecasted budget for your project.
A little planning can also help you avoid hidden expenses and the potential for disruption to your operations. Here are some of the costs you may face and how to prepare.
1. Renovation overruns
Companies are rarely able to move into a new location and start operating right away. This especially holds true if you are in a strictly regulated industry that has exacting standards. Other renovations may be needed if you are renting part of the building to other tenants.
With the help of an advisor if needed, prepare a detailed budget for renovations, including meeting tenants’ needs. You should also budget for the possibility that rental spaces may remain vacant and not contribute revenues.
Seek contractors or builders familiar with your industry. They should be experienced, have a solid reputation for delivering on time and be financially solid. Clarify what the purchase price or quote covers. Don’t forget work on such areas as the parking lot, landscaping, signage and mechanical components.
2. Downtime
It’s common for entrepreneurs to underestimate how much of their attention a move can demand and how much employee and equipment downtime it will involve. Carefully plan for such disruptions to avoid surprises during the move.
3. Defects
Building condition defects and environmental problems can be a major source of financial headaches and play havoc with your moving schedule. Before finalizing the transaction, you should get a building condition assessment, the commercial equivalent of a house inspection. You should also get an environmental assessment to check for any contamination on the property, past use of toxic products at the site or nearby, and the presence of any problematic building products, such as asbestos.
4. Poor layout
Before you start renovations and move in, consider hiring an operational efficiency expert to help organize your layout to streamline production and reduce waste. Such an exercise can significantly reduce future operating expenses.
5. Zoning
If the use of the new building or land changes substantially when you move in, you may run afoul of zoning or land-use regulations. Before signing the purchase agreement, make sure to investigate your ability to run the business in the new location and any costs or delays related to such occupancy issues.
6. Operating costs
Your costs for operating, insuring and maintaining the new building may surprise you, especially if it is larger than your old location. Ask the vendor for a detailed list of recurring overhead costs and recent work and repairs.
7. Extras
Other unexpected costs can include utility service, requirements for noise and emission reduction, new signage and equipment, taxes and legal fees. Some expenses are simply impossible to foresee—another reason to include a contingency fund in the financial package for your new building.