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Real estate investment banker, John Levy, who held onto a positive view of the commercial real estate market for a long time, has changed his perspective. He now believes the downturn will continue through 2010 and into 2011. As a lagging economic indicator, commercial real estate follows unemployment on a downward slope and follows re-employment on an upward slope. Since 90 of the 100 largest markets continue to experience severe unemployment, commercial real estate will continue to decline consistent with unemployment rates.
Rather than the negatives implied by ongoing economic repercussions, this period could bode well for any businesses experiencing a high percentage of recession resistance. If you’ve developed a recession-proof business and your ongoing cash flow will support mortgage payments plus property taxes and maintenance expenses, this may be the ideal time for your company to purchase real estate.
A rapid increase of foreclosures on commercial properties has begun. Some experts estimate commercial real estate in the first half of 2009 is comparable to the state of personal real estate during the second half of 2007. Talk with your banker and a local commercial realtor about properties in your region. If you have developed a rapport with your local banker and your bank is foreclosing on a commercial property you’re interested in, you may be able to arrange an acquisition of the property directly from the bank.
The Small Business Administration (SBA) offers a spectrum of loans that can be used by businesses to purchase real estate. You’ll see change has begun on the SBA website since Karen Mills was confirmed as SBA administrator on April 2, 2009. Greater accessibility to information is available and borrower-friendly changes have started. Much work is needed to re-build the SBA after eight years of gutting; the process is now underway. Local lenders have reported they do not expect access to Economic Recovery Funds until late May or early June. You’ll want to contact your local SBA Preferred Lender to determine their anticipated funding schedule.
With excellent personal credit, your company may qualify for SBA start-up funds – including money to purchase real estate. As a more mature business, you will need to submit comprehensive financial records, which your accountant can easily prepare for you.
As an established company, you might choose to forgo the SBA and purchase business real estate through a standard commercial real estate loan. Ask yourself these questions:
- Do you manufacture a necessity or provide a service that will sell in all economic climates?
- Is your company located in or near an area with depressed real estate pricing?
- Have you established excellent business credit?
- Is your personal credit very good?
- Does your company have the capital needed for a down payment and closing costs?
- Will your cash flow support monthly mortgage payments plus property taxes and maintenance?
- Will purchasing property decrease your operating expenses?
- Can you achieve operational efficiencies through purchasing property that you cannot realize through leasing?
- If you invest in property in the near future, is it likely to increase in value during the next five years? What has the five-year historical property value increase been in your area? Don’t include the go-go real estate years between 2003 and 2007, when analyzing increases.
- List all advantages that a real estate purchase will create for your company.
- List any disadvantages a real estate purchase will cause for your business.
If your personal credit qualifies you to purchase commercial real estate for your company, be sure to talk with your accountant to determine the best way for your business to pay for the property each month so financial records clearly establish the purchase is a corporate rather than a personal property. In addition, you want your lender to report mortgage payments on your business credit reports.
Just as you do with all business decisions, evaluate any real estate purchase carefully. There are time and money-saving advantages in being able to call your leasing manager or property owner to handle everything from a leaky roof to a frozen pipe to an HVAC system that’s on the fritz to a hole in your parking lot. You want to consider the advantages and disadvantages of owning your own property. Consult your accountant, attorney, banker, and friends who have made the plunge. If the positives outweigh the negatives in your unique situation, start your search for your perfect business building.