Congratulations! You are considering buying a commercial building for your business. This is a big step, one that should be thoroughly researched beforehand to ensure you are covering all your bases. What are some things you should be asking before purchasing property? We’ll address four of the most important questions to help guide you through the process.
Question 1: What Location(s) is Best for my Business?
Where will your business be supported and grow? This is the first question to ask when looking at commercial buildings to buy. There are a series of checks to make sure you are gravitating to the right area:
- Zoning restrictions have to be taken into account. These will automatically rule out areas that don’t comply with your needs in terms of noise level, waste management, building appearance (e.g., height, size, and proximity to each other), parking, and air quality.
- Look at the tax rate as well. Even with the restrictions placed on tax increases by California’s Proposition 13, rising property values are edging taxes upwards in some areas.
- Consider demographics. You need a site that is accessible to your customer and employee base, and you want it to remain that way for the foreseeable future. In some California cities, the cannabis industry is having a profound impact on industrial areas. If you are looking at that type of real estate, you may see an even larger presence of cannabis manufacturing plants in the future.
Question 2: What Does The Building Need To Get Up And Running?
Once you have chosen a location, it’s time to assess the building and determine how much work is necessary before it can be up and running. Understanding exactly how much work needs to go into your building will factor into questions about building cost and financing.
- Investigate any liens against the property, which might result from delinquent tax payments. Also look for litigation involving the property, or other legal risk factors such as safety or environmental issues.
- Check the building’s physical condition. Are there structural issues, such as bad plumbing or wiring, a leaky roof, or a compromised foundation? Even if they aren’t deal-breakers, they need to be discussed during negotiations.
- What unique upgrades would you need to make? Think of your business living there and what would make your business most efficient. You may need to move interior walls, create accessways, or rewire. These costs also need to be factored into your budget.
Question 3: How Will I Finance My Building Purchase?
Of course, one of the most important questions about your potential new building is: can I afford it? Many business owners might imagine owning a building is beyond their means, but there are some great financing options you can take advantage of.
The most affordable and accessible financing option is the Small Business Administration’s (SBA) 504 loan program. It is specifically designed to help small businesses by providing capital with advantageous terms to acquire land, new construction, existing real estate, and equipment.
A 504 loan is a partnership between a conventional lender and a Certified Development Company (CDC), which is a nonprofit organization that administers the 504 program on behalf of the SBA and services the loan. The loan has three parts:
- The first is a loan from a conventional lender for 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
- Your CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, or $5.5 million for manufacturing or energy efficient projects, at a fixed, below-market rate. This will be your second mortgage.
- Then you, the borrower, contribute a 10% down payment. Certain types of facilities, such as hotels or gas stations, are classified as single-purpose properties by the SBA and require a 15% down payment.