Buying in: What Orlando small businesses need to know about purchasing commercial property
The contractor had leased an office with an unsecured parking lot in a part of town with higher-than-average crime rates, and the company was struggling as a result.
When the lease expired, the contractor moved multiple times before finally deciding to purchase its own office building — specifically one with gated parking. This decision solved a lingering problem and created new opportunities, allowing the company to invest in building a showroom to showcase its work and win over potential customers.
'Purchasing a building adds value to the business by allowing it to build equity through appreciation and have control over how the space is used,' said Giselle Gonzalez, assistant vice president, commercial loan officer, at Orlando-headquartered FAIRWINDS Credit Union, which helped the company finance the transaction. 'The company has a beautiful new space that's more secure and will be its permanent home for years to come.'
Gonzalez said more business owners may consider purchasing property for the first time given that Orlando's business base is among the fastest growing in the country. She and Jonathan Russell, senior vice president, lending, recently spoke with the Orlando Business Journal about what business owners should consider before making a purchase.
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How to know when the time is right to purchase
Business owners often decide to purchase a commercial property when they feel that owning aligns with their long-term objectives, Russell said. Key questions to consider include:
What are your long-term plans for the business?
How will property ownership affect your flexibility and ability to scale?
How will this piece of real estate help add value to your business?
Once owners have good answers to those questions, along with the confidence they can cover mortgage payments and maintenance costs, they may feel ready to proceed toward a deal, Russell said.
Reasons it may be time to purchase a commercial property include:
Your business is financially stable, with consistent cash flow and strong reserves.
Lease terms have become unfavorable or unpredictable.
You are confident in the market and location over the next five to 10 years.
You need more control over your space and operations.
The company has outgrown its current space, and you want to control how your new, larger space is designed or are looking downsize.
Market conditions, including property valuations and the interest rate environment, are favorable.
'It's often the combination of internal and external factors coming together that makes it a good time to buy,' Gonzalez said. 'Small businesses that take advantage of those conditions, just like the contractor, can create spaces that reflect and empower their brands.'
What type of financing makes sense?
The U.S. Small Business Administration (SBA) 504 loan is designed for small businesses to purchase owner-occupied commercial real estate. This financing involves a conventional bank loan from an organization like FAIRWINDS along with an SBA-backed loan that guarantees a portion of the financing.
'Maintaining liquidity should remain a priority for small businesses,' Russell said, 'so before the purchase, they must consider the cash outlay. What will they have to spend to bring the property up to their standards? How much will it cost for new flooring, equipment and other improvements? The 504 structure allows a business to keep more of its cash for working capital by allowing a portion of these expenses to be included in the financing. Financial institutions find these loans attractive because of the lower risk that comes with being at a lower loan-to-value ratio.'
If your business has strong liquidity, Russell recommends making a larger down payment and opting for a shorter amortization period. This approach reduces overall interest expense and allows you to pay off the loan more quickly. In such cases, a traditional commercial loan may be the most suitable option.
How to prepare to purchase a commercial property
Small business owners considering a commercial property purchase should pull together a team that includes a tax advisor, certified public accountant, attorney, real estate agent, insurance agent and banker, Russell said. FAIRWINDS can make introductions to these professionals if relationships haven't been established.
'Nothing is more local than real estate, and we want our small business owners working with people who understand the Central Florida market and its competitive landscape,' Russell said. 'We also want local partners who will take the time to learn your business so they can help you weigh all the risks appropriately.'
Having this knowledgeable team in place long before the purchase will benefit the business owner, Gonzalez said, as commercial real estate transactions involve many moving parts and can take months to complete. Once an owner is ready to make an offer, he or she won't benefit from hastily pulling together a team of advisers.
'If you don't have a relationship with a banker today, start one,' Russell said. 'Having a banking professional as part of your network gives you someone to reach out to for unbiased advice. This puts you in a position to understand what's needed to get approved and move faster when you're ready to make that transformational move for your business — purchasing your first property.'
At FAIRWINDS, we embrace a 'better together' approach, offering you a personalized, full range of small business and commercial banking services to help you reach your financial goals. We're your dedicated partner, supporting you every step of the way. Learn more.
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