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Salt Lake Valley
As Utah business owners emerge from the financial crisis with renewed confidence, we are increasingly fielding requests for new investment opportunities that did not seem as attractive years before. Over the past year, more business owners have been taking a second look at owner-occupied spaces.
With interest rates still at historical lows and a flourishing real estate market buoyed by a revitalized downtown Salt Lake City and nearby tech centers, we’re seeing an increase in the number of business owners who are considering whether they, too, should take the plunge to purchase their own commercial space.
For many reasons, owning your own building can be one of the most sensible decisions a business owner can make. By controlling your space and locking in many fixed costs, business owners can be free to focus on ways to grow their businesses—as well as benefit from a long-term investment. Consider the following about owner-occupied space:
It can be an excellent component of a retirement strategy. At some point, business owners will retire and choose either to close their business or sell to someone else. But if an owner has purchased real estate, that investment remains—and can continue to provide rental income long into retirement. Real estate ownership is a way business owners can add to their investment portfolios.
It can promote stronger cash management. Having greater control over monthly expenses is one of the most crucial issues facing business owners, especially small-business owners. Owning your own property means you know what your mortgage payments will be for the length of the loan. Though there will be fluctuations in the overall cost of ownership, such as property taxes and maintenance, the peace of mind and certainty that comes from having a regular mortgage payment helps drive more efficient cash-management decisions.
It can be cheaper. Obviously, every business and location is unique. But because the current cost of capital is very low, business owners may find that buying their space is ultimately cheaper than leasing from a landlord who will likely press to increase rents. In addition, there can be considerable tax benefits to owning, including tax credits from city and state leaders who want to promote development.
That said, there are other important considerations for owner-occupied units. The most important is for a business owner to evaluate whether the business is sustainable with sufficient cash flow to take on long-term debt.
One of the most common pitfalls that I see is business owners who consider buying property too soon in the life-cycle of a business. Let’s say you own a technology company in the Silicon Slopes, and you are considering a 20-year mortgage that would amortize in 10 years. You must have a strong sense that the business will be around long enough to pay off the loan.
In addition, I strongly recommend that clients carefully weigh the costs of lease vs. own scenarios. Bank of America has developed an easy-to-use tool that can help with this. The tool asks detailed questions about down payments, interest tax deductions, utilities and prepaid rent requirements. This tool takes into account the issues that can affect business facility expenses and provides business owners with a clearer sense of which decision is right for them.
Once a business owner decides to buy, there are other ways to maximize the purchase.
Establish a separate entity to own the building. A tax consultant or attorney is needed to provide you detailed guidance, but generally speaking, separating the owner of the building from the owner of the business makes sense for liability purposes and to better manage the accounting of the business.
Determine in advance your equipment needs and access to credit. Certainly, businesses such as manufacturers already own much of their equipment, even when they are leasing space. But it’s important to understand how your access to credit, such as a line of credit or equipment loan, will be affected by owning the building—and how to maximize the benefits overall.
Research avenues to come up with the down payment for the facility. Many commercial loans require at least 10 percent of the purchase price down, and some require even more capital. But there are ways to come up with the down payment, such as through a “carry-back” from the seller that can result in higher interest rates. All of these avenues can help free up capital at the time of purchase, which is very important to fund upgrades or renovations.
Many times, I have seen the pride of ownership extend to business owners in owner-occupied space, from having the freedom to draw wider parking spaces, create more environmentally friendly workplaces for employees, or plant azaleas instead of geraniums outside the front door. Those touches also improve the experience for your customers and employees and, coupled with the financial benefits for many business owners, can make the lease-vs.-buy decision an easy one.
Chris Christiansen is a senior client manager at Bank of America Merrill Lynch.