Benefits of Owning Commercial Property as a Business Owner
Customers are lining up, product is flying off the shelves. Employees love their job, profits are above projections, it’s career nirvana. Your balance sheet is the envy of your peers. Thriving businesses like yours can’t be stopped until lease renewal negotiations don’t go as planned. Your leadership team thought the landlord would be excited to continue renting the space to you, after all you pay your rent on-time, the triple net lease you signed makes the property owner happy.
Why would she kick you to the curb, literally? There are a few reasons:
Market rates are skyrocketing:
Since you signed your last lease three years ago, the market shifted. The landlord is well within their right to ask for an increase, even when the increase is well beyond your budget for rent. It’s strictly a business decision. It’s not personal.
A new owner:
There is no assurance the property owner will hold on to the building to appease you. At some point it will be time to cash out of the investment. The owner may sell to finance another venture, the property may be passed on through an estate inheritance. Property ownership doesn’t equal immortality. The next of kin may not be interested in upkeep, he just wants to sell and walk away.
Deadbeat Owner:
The space may have been suitable when you moved in. Over time, unseen issues may arise, a sinking foundation, a natural disaster may damage the building requiring modern building codes to be implemented and paid for. Cheap property owners don’t like these scenarios very much. They can try to pass responsibility on to you now the space isn’t a money maker like it used to be.
Renovations:
The property owner may decide at the end of your lease to non-renew to rehab the space. The neighborhood is getting a makeover, so the landlord may decide to join the party. A redevelopment will likely take months and may require vacating for a rebuild.
Any of these scenarios is not your fault. Life happens. There are a few ways to mitigate the sudden shock of your business becoming homeless:
Option to buy: When signing your lease or renewing, discuss the option to purchase the property. The landlord may be open to the idea. It’s possible they have an exit strategy a few years down the line, now you gave them something to think about. If your bank account and projected sales don’t quite add up, consider a move to another space within your budget. Be mindful the cost to relocate and financing a new space. It’s OK to incrementally raise prices to make it work, be aware some customers may no longer be a patron whether it’s about the price increase or the new location, it’s to be expected. It is also an opportunity to reinvent the business. The all too common phrase (location, location, location) about selecting a space for a storefront or warehouse (for online retailers), the location may make or break your business.
Purchase a building: If a home is a man’s (or woman’s) castle, a business owned property is a kingdom. Talk about the best insurance policy for the longevity of your company, owning the space you inhabit. No one’s going to tell you when to move out. The opportunity to earn additional revenue by sub-dividing the space or buying a property with multiple units is a boon to your balance sheet. When investing in a commercial space, be cautious. There are differences compared to a personal property purchase. Commercial properties have their own set of rules. It’s wise to consult a commercial property real estate specialist, he can help navigate all the decision points to consider.
Save for a rainy day: Options one or two don’t peak your interest, the conservative route is the next best option. A cash infused business is best able to navigate a surprise rent increase or an eviction. Balance sheets running lean can be a great way to scale a business rapidly however, a surplus is an ideal situation. Just because the sales are mind-blowing doesn’t mean you need to act like an adolescent squandering his earnings from a week of selling lemonade.
There are of course hybrid scenarios to go with. There may be other unique factors making it a tougher decision, investor’s capital requirements, dissenting business partners, product or franchise licensing restrictions or any number of situations. A good way to start the process and the conversation with the people affected is to draw a “t” chart, weigh the pros and cons to own or rent a space.
