Commercial Real Estate Is Not Always an Asset

As the economic roller coaster repeatedly dips and soars, the constant confusion it's causing is directly affecting small businesses. One night, restaurants are packed with jubilant customers celebrating their Wall Street winnings, while the next night sullen-looking diners can be counted on one hand while wallowing over their Bank of America losses.

Last week was one of the most tumultuous on Wall Street with the market fluctuating more than 400 points four days in a row for the first time in its history. But at the same time, interest rates on houses and commercial properties are lower than low and more attractive than ever before -- making a possible real estate purchase an attractive gamble. The building pictured to the right goes on the auction block at month's end. It sits a block from the ocean in York Beach, Maine and offers great restaurant space for anyone willing to throw the dice.

And there are dice-throwing restaurant owners still out there.

A fellow restaurateur had a better week on Wall Street than he did on Excelsior Boulevard and is now exploring the possibility of purchasing the building his restaurant occupies. The low interest rates and below-market valuation of the building are the carrots dangling before him.

It's been his long-time dream, so he is anxious to make that commitment. But it may be the worst move he will ever make.

Purchasing a building to house a restaurant concept is a risky proposition in any market. But with the fragility of the current economy the risks are higher and could be more detrimental than ever before. If the restaurant is successful and can accommodate the debt, or if a monthly mortgage payment is of no concern, then purchasing restaurant real estate is a wise move. But if the restaurant fails, the building could become a major liability.

Another friend in Dallas purchased a building 15 years ago at a very attractive price. The space was renovated and now houses his concept, which has been doing fair volume without showing a profit for the past five years. Currently, the wisest move the restaurateur could make would be to close the door of the eatery to get out from under the weekly losses. But since he has a hefty monthly mortgage payment, he cannot service the debt without the restaurant. It's a vicious downward spiral that continues to drain all of his liquidity. Without the restaurant he has little ability to pay the mortgage. The building cannot accommodate any other type of business without expensive renovation.

It's a culinary quandary that many owners are facing today. With that in mind, here are 10 tips I think you should consider before buying a commercial space for your restaurant.

1. Make sure the property you are considering is a worthwhile long term investment and has a restaurant use permit.

2. Does the property fit both your needs AND the needs of a possible future owner? The space needs to work for other concepts.

3. Do you have landlord experience? Even though you will be your own tenant you will need to know how to maintain the building, and you may someday need to be a landlord for another tenant. That's not an easy task.

4. Capitalization is essential. Banks seldom loan money to a restaurant unless it has a solid financial history,

5. Down payments on commercial space are more expensive than on residential spaces. Instead, explore the possibility of a contract for deed with the current owner.

6. Repairs and upkeep of a commercial building can often equal the mortgage payment. When running the cash flow numbers make sure to take upkeep into consideration.

7. Pay attention to rental trends involving neighboring properties. Is your mortgage payment close to the rents in the neighborhood? If it isn't how will you make up the difference if you someday need to rent the space?

8. Consider the impact of increased monthly payments. Can your restaurant handle a hefty mortgage payment that needs to be paid, on time, monthly?

9. Is your restaurant on a financial upswing? If your business is stagnant, purchasing the building is not going to increase your business.

10. Are there numerous commercial buildings for sale in the area? If there are, is an eventual sale of your building going to be profitable, or will it be another loss?

Real estate isn't what it used to be. And in most places, commercial real estate is nothing near what it once was. But for some it still may be a worthwhile investment -- if you have the right formula.