NASE Blogs

From the Trenches ... Buying or Renting Office Space

Tuesday, November 16, 2010

Q.     I have been renting office and storage space for a number of years and now the building is being put up for sale. I use about 40% and three other businesses use the rest of the space. I am considering buying the building but am not sure what I need to take into consideration to determine if it is a good financial decision. What should I look at to help me make a decision?

 

A.        While there are lots of pros and cons, in the current economic times buying could be a good business decision as commercial building market is often under valued.

The first question to address is ... will the building meet your needs for several years and do you want to become a landlord? If you have been in the building and it works for you and has the space for you to grow over the next couple of years, you can dig deeper and start crunching some dollars and cents numbers. However, if the building won’t be a good fit over the next couple of years you due to your being limited to the amount of space that you could occupy, you might be forced into finding new space to accommodate your business needs. Again, this might not be bad if you can handle being a landlord.

If the space and new responsibility is a good fit for you start the number crunching to calculate the “annualized costs” of owning the building and potential cash flow or deficient. A good start for this is to get the last three years operating costs from the existing owner that will show you annual rental income and expenses so that you can project what you annual operating costs will be for insurance, utilities, repairs and maintenance, taxes, and all the other costs for the building. Of course you will want to subtract out your rent payments, as you will not likely be contributing to the revenue stream. You also will want to make some projections as to what your monthly mortgage payment on the purchase of the building will be and add that amount to the monthly cash requirement.

You will also want to arrange for a physical and mechanical inspection of the building to determine what additional money you might need to be putting in the business over the next couple of years. Example ... if the heating and air conditioning systems are old and on their last legs, you could find yourself investing a considerable amount of money over the next few years. You also need to know if when buying the building you will have to complete any local code upgrades. A good engineering inspection should determine all of these unknowns for you.

Once you have the basic numbers, get together with your accountant or tax person and have them give you their input and overview of your numbers. A good set of eyes looking over your shoulder can be well worth the few hundred dollars it will cost you.

At that point, it is up to you to look at the numbers and determine if buying the building will be a positive financial move. Whether or not buying the building or continuing to rent will be the best financial decision will come down to serious number crunching, a good engineering inspection of the structural and mechanical condition of the building, determining the future needs of your business and how well the building fits those needs, and finally your ability to negotiate the right price for the building and taking on wearing another hat of landlord.

1 Comment

  1. 1 Marley Williams 06 Oct
    I would follow his advice for sure. It's perfect when you are into buying a building.

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