Getting the right level of financing for your commercial real estate project
The right amount of financing can make or break your commercial real estate project. However, entrepreneurs often don’t realize just how much financing they’ll need until a cash crunch ensues. In such a case, you might have to get an emergency high-interest loan to cover the shortfall. You could even be forced to give up your prized new commercial space.
“Businesses often underestimate or overlook major costs associated with a new property,” says BDC Major Accounts Manager Jean-Sébastien Vincent. Marc Noël-Corriveau, BDC Senior Account Manager, concurs: “It’s common for companies to not get enough financing for real estate projects. That can put a lot of pressure on working capital.”
Here’s a checklist from Vincent and Noël-Corriveau to help determine the right level of financing for your commercial real estate purchase or lease.
1. Prepare a budget that reflects all costs
Make an effective budget for all the costs of your purchase or lease. These should include not only the property cost or base rent, but also all the extras—for example, environmental and structural assessments (if buying), incidentals (if leasing) and moving costs (for both).
“There are enormous soft costs,” Vincent says. “It’s easy to miss some of them in your budgeting.”
You also need to consider the cost of the transition—moving assets, setting up phones and the Internet, dealing with downtime during the move.
Also often underestimated are renovation costs to make the property suitable for your business. “It’s important to get an expert quote for renovations,” Noël-Corriveau says. “Some businesses think they can figure out the costs themselves on the back of an envelope. That can lead to major surprises.”
Plug the numbers into annual income statement forecasts for the next several years to see how they’ll affect cash flow. This will show how much financing you’ll need for both the real estate transaction and future recurring costs associated with the project.
2. Seek your bank’s advice
It’s best to meet with your banker before bidding on a property. Bring your financial statements, a solid business plan and details on the property.
Your banker will advise you on the right level of financing for the project. Banks typically offer to finance 75% to 100% of the value of a commercial real estate purchase, depending on the property’s condition, age and other factors.
You can also ask the bank to include some of your renovation costs in the term loan, especially if the work adds value to the property.
If you’re renting, it’s also possible to obtain a shorter-term loan to cover leasehold improvements.
For either a purchase or a lease, you can also seek a working capital loan and a line of credit to help pay for some of the soft costs associated with the move, such as due diligence, furniture or marketing of your new address.
3. Weigh the benefits
Work out the optimal level of financing for your project. Weigh your financing costs against your company’s rate of return. For example, if you seek more financing for a project, you can keep more cash in your business in the near term, which you can invest in growth.
The extra working capital can also pay off because it will reduce risks to cash flow, which may require a last-minute high-interest loan to stabilize if your project runs over budget.