Buying real estate is a costly undertaking, and business owners need to exercise due diligence every step of the way. Without proper planning, entrepreneurs can face a host of problems, including inadequate financing, unexpected construction costs, inefficient layout and environmental lawsuits.
"You need to be vigilant on every level and avoid errors that will cost you down the road," says Jeff Beacom, a BDC vice president and district manager. "It just makes good sense to take the time you need before you decide on that location."
Although real estate costs have shot up in recent decades, Beacom says entrepreneurs are still usually better off buying properties than renting them. "You won't be faced with rental increases and your property may appreciate in value," he says. Plus, a buyer can deduct the value of a loan, mortgage interest or depreciation in the value of a building from company taxes -- something that can't be done when renting.
So what makes a successful acquisition? Beacom points to 5 key issues that demand particular attention.
Understand the local real estate market
Before making that important decision on what to buy, entrepreneurs should pay heed to where they're buying. Each local market has its own tax rates, land inventory and environmental issues. The supply of skilled labour in the area also needs to be considered. Municipalities can often provide helpful information on future industrial developments and environmental considerations.
Get your financing in order
Affordability is a big issue in commercial real estate today, so before you go to a bank, you should work with an accountant to determine your budget. Bankers will want to see high-quality financial statements and evidence that the profits you generate are being retained by your company. All of this will play a big role in determining whether you get the loan you want.
It's also worth considering alternatives to conventional banks. A bank may be willing to finance 65% of the capital needed but ask you to put up the remaining 35% -- a substantial personal burden if a $1 million property is involved. BDC ***Financing for purchasing land or building offers more flexible terms than banks, based on each client's case; it also provides financing for a broad range of needs, including land purchases and bridge financing.
Whichever route you choose, resist the temptation to sway credit institutions in your favour with overly optimistic forecasts; payment problems later on can boost costs and reduce your manoeuvring room.
Get expert help with tax issues
Tax implications can be complex in real estate transactions. "My first piece of advice is to see an accountant who will know the ins and outs," says Beacom. Entrepreneurs will need to know, for instance, whether their purchase should be considered a corporate or personal transaction. Other issues include succession planning **Transition financing and decisions about how assets will be broken up when the business is sold.
Plan your layout well
Whether it's an existing building or one that you'll be renovating, you'll need a layout that gives you a competitive advantage. The right layout can lower operating costs and improve your capacity to produce new products as well as your ability to produce higher quality goods. A plant's layout has a major impact on its operational efficiency Optimize processes and reduce waste, and although entrepreneurs may be reluctant to make further outlays on layout after a costly purchase, they usually see a payback quickly when they make that extra investment. "What you spend on layout and production planning can be gained back in productivity improvements," Beacom says. BDC offers financing to help entrepreneurs improve their operational efficiency, as well as consulting services that help companies eliminate waste and streamline processes.
Choose the right builders
"Less time, less money and more value should be your guiding principles when choosing a builder," says Beacom. "You should be looking for quality builders who have a good reputation and are responsive to your needs." Key traits of good builders include experience, timeliness and a knowledge of your industry. For example, if your building must meet food-industry standards, your builder should have expertise in that sector. A builder's financial history should also be noted. "You don't want a situation where contractors are taking your deposit to fund a previous job where they ran out of money," he says. If you have any doubts, do a credit check.
"Ultimately," Beacom says, "there are no sure recipes for making a successful building or land acquisition. However, if you pay attention to these five areas, you're more likely to make the most of your investment."
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.