RISMEDIA, May 27, 2009-In most communities, there is a high vacancy rate in the commercial sector. Not only have lease rates fallen dramatically, but there are also a number of unique ownership opportunities that have resulted from the economy and as a result of new urban planning. Many businesses have contracted leaving an abundance of available space including office, retail, industrial, and warehouse space competing for tenants at the very same time that jobs are contracting. This has impacted landlords as well as sellers creating better deals for businesses that continue to do well.
Factor in the looming possibility of commercial mortgages resetting to much higher rates forcing more owners to sell or abandon their commercial property.
Business owners who are confident in the future of their own enterprises may be wondering, “Should I expand my space, renegotiate my lease or is there a way I could stop paying rent and use my business revenue to buy my own facility”?
This could be the best time in decades to take a business to the next level. The financial shift from paying rent to building equity could be the most profitable decision a business could make.
Consider the case of my friend Max. Recently, he retired after 30 years as a neighborhood Veterinarian. Twenty-eight years ago, the strip mall that housed his office and other commercial operations came up for sale. After some agonizing, Max decided to buy the center just to have more control over it’s management. He located tenants, paid the mortgage, saw to the maintenance, and collected the rent. He viewed the situation as a chore related to his business and went about treating pets.
One of the tasks associated with his retirement was the sale of the strip mall. As he told me the story, his eyes grew wide with genuine astonishment as he said, “I made more money on the real estate than I did in thirty years of running my practice.”
Then he winked, leaned in close and said, “Turns out that the best reason for being a Vet was buying my building.”
Had Max leased the space from someone else, they would be the ones getting the primary benefit of his being in business; the tax benefits and the appreciation.
There are many reasons why business owners choose to lease rather than purchase. Among these are financial limitations or they may be anticipating changes in either the scope or the volume of the work, and they want to remain flexible. Perhaps there is no suitable space for sale in their desired location.
In some businesses, particularly larger enterprises, there is no long term incentive for management to want to capitalize real estate. If you are a fortune 500 CEO, you’d rather retain cash for your bonus than to put it to work for the benefit of the stock holder’s decades from now.
Small to mid-size businesses have the greatest incentive to pay rent to themselves. Given the current state of the economy and a shift toward more mixed use development, there are now greater opportunities for smaller business owners than had previously existed for them.
More options for ownership
Up until a few years ago, owning your own space meant having to buy an entire building or center. Class A office space, for example, is usually found in much larger, often multi-story buildings rarely within the means of most users.
Commercial Condominium Ownership
For the past several years, we have been witness to the growth of office and manufacturing condos allowing businesses to buy only the space they need. Now, the concept is moving to mixed use, adding the option of ownership to small retailers, as well
Live/Work
Live/work zoning can make a simple loft commercial, residential, or both. A typical live/work home might have a large open space on the ground floor adaptable to almost any purpose and residential quarters above.
Features and Benefits of Live/Work ownership
Generally, the largest category of cost for a business is the expense associated with operating physical premises. Many professions have given up bricks and mortar in favor of working from a home office. According to the U.S. Census Bureau, half of all businesses are home based so the principal is well established. But, not every business can operate from a strictly residential home. Live/work ownership provides an alternative, and a host of financial as well as time saving benefits such as:
-A single mortgage payment to make.
-A single utility bill.
-A single cable and phone payment.
-A single insurance payment.
-No commute.
-Residential rather than commercial mortgage.
-Favorable tax advantages.
Just eliminating the mileage associated with commuting will save on gas, oil, maintenance, wear and tear, and parking. Not going out for coffee or lunches could also result in significant savings. Factor in the additional time you could spend on business when you aren’t commuting, and you can understand why a report by the Small Business Administration found that home-based businesses have higher net incomes than those that are office-based.
Convenient, greener, and you make more money. Throw in the benefits of ownership, and it’s clear that the timing is right for live/work. And with other ownership opportunities such as office condos offering prices below cost, there may never be a better time for commercial tenants to move to ownership.
George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm.
Mantor can be reached at GWMantor@aol.com.
