Frank X. Acocella, CounselPro Lending, Buying Commercial Property

Most public businesses operate out of commercial spaces. Those spaces include storefronts, factories, and offices. One of the most significant decisions when looking for commercial space is whether you should buy or lease your space.

It is important to remember the difference between buying and leasing properties and knowing the pros and cons between both. When property is purchased, it is either paid for in full with cash or financed through a loan. Properties that are leased are rented for a set term that must be renegotiated each time the lease is up. Several different factors go into both buying and leasing and what works for one business might not work for another.

Buying Pros
For many businesses, buying a property is the most logical thing to do. Not only does commercial real estate maintain its value over time, but it also becomes a long-term asset.

Building Equity
When a property is purchased using a loan as payment, a down payment and monthly payments help build equity in the property. When the property is refinanced or sold, the equity makes up the difference between the fair market value of the property and the remaining balance on loan. Equity will also help build up the overall value of a business as well.

Rental Income
When a business purchases a commercial property, their business might not occupy the entire building depending on what their business needs are. If there is leftover space, it can be rented out to tenants to create a secondary source of income for the business. This can help the business pay off loans or use the income to finance things for the business.

Tax Break
Purchasing a commercial property sets the buyer up for specific tax breaks. Buyers can deduct interest and non-mortgage-related expense on the commercial property. Unfortunately, a property owner can not deduct any costs that are associated with the mortgage and only the interest from the mortgage payment is deductible.

Buying Cons
Buying a property also come with an extensive list of disadvantages as well.

Upfront Spending
Typically a down payment on commercial property is 10% – 40% of the property’s value. The buyer is also accountable for the closing costs and any due diligence fees. The higher the value of the property, the more the buyer will be spending upfront to purchase the property.

Liabilities
Buyers should know that they are responsible for everything when they own a property. If a part of the property is rented, the owner is liable and needs to make sure the property is adequately insured. The owner of the commercial property is also responsible for the upkeep and repairs. If the property was purchased with a loan, the loan company might require a personal guarantee which makes the owner liable to repay the loan if the business can not make the payments.

While these are just some of the pros and cons that come with buying a business, it is important to remember that purchasing a property is not a one size fits all purchase.

Please stay tuned for part two which will discuss the pros and cons of leasing a commercial real estate property.