When entrepreneurs are in the early stages of starting a business, one of the last items on their mind is buying and financing a building. However, as the business grows, this is frequently a logical and profitable step in the financial picture of the business.
Before buying a building, look at the payment. In many cases, you can buy a building and make a mortgage payment equal to what you’re currently paying in rent. In most cases, banks want to see at least 51 percent of the building occupied by the owner.
Also consider offering rental space. This provides additional income and could allow you to buy a larger building than anticipated. However, you must be willing to assume the tasks of managing the building.
Secondly, consider plans and projections for future growth. While buying a building that is just the right size for now can be attractive, think about whether the business and its space requirements will grow. If you purchase a larger space, the portion that is rented initially can be used down the road to house the business as it grows.
A third issue to consider is who will own the building. It’s common for it to be purchased in the name of the owner and leased back to the business. This structure can provide retirement income for the owner if he or she sells the business but keeps the building.
Often, a new entity is formed to own the real estate. An attorney and/or accountant should be involved in this decision since there can be tax, legal and financial consequences.
When financing, the bank will request several items from a prospective buyer. Typically, the required down payment is about 20 percent. The bank will ask for a full financial package, including at least three years of tax returns for the business and the owner, along with a personal financial statement.
If there is construction or renovation involved, plans and price quotes are required, as will copies of leases if a portion of the building is going to be rented out.
When approaching a bank for an owner-occupied commercial mortgage, ask that the application be considered from a credit and financial standpoint before expenses are incurred. Once both parties are comfortable with the numbers, due diligence can be completed.
Request an estimate on the total costs associated with the loan, ask for a written proposal and consider how long the terms and rates will be honored. For loans under $250,000, it’s usually easy for the lender to get comfortable with a property value without spending a lot on a commercial appraisal. This can be done through tax values and previous appraisals.
If you do need an appraisal, ask the bank to get quotes and compare price and time frames. On larger loans, environmental issues become more important, and a phase one assessment might be required. Again, ask for several bids.
Most financial institutions offer 15- to 20-year terms on owner-occupied commercial mortgages. Rates can be locked in anywhere from one to 10 years. Consider the entire package when choosing the bank, including the rate, the term and the fees. How to reach: Jane Bittcher is vice president and manager of the business development group for Fifth Third Bank. Reach her at (614) 233-4562.
