COVER STORY, AUGUST 2005

BUYING COMMERCIAL REAL ESTATE FOR THE RIGHT REASONS
How to stay focused on investment goals.
David Lipscomb

Lipscomb

Experienced real estate investors have a pretty good understanding of how to analyze an investment opportunity. When considering investing in real estate, in most instances the cash flow of the property drives the price. In other words, will the building generate enough in rents to pay for all of the property-related expenses and still generate a return satisfactory to the investor? Is the property located in an area where renters are likely to remain? Will renters be drawn away by other buildings or to other neighborhoods? Does the existing rent roll justify the price of the building?

When it comes to owner-occupants, the goals change. Business owners seem to invest for a variety of reasons: it may be less expensive to own a property than rent it; perhaps a business is looking at incurring the costs of significant leasehold improvements and doesn’t want to improve someone else’s property; or a business may be looking at investing or moving heavy equipment into a property, and it doesn’t want to be at the mercy of the landlord as to when it has to move again. Or, in many cases, the business owner wants to invest in real estate through its own business.

The scenario in which a business owner is looking to make an investment through its business poses the most potential for a misguided decision. Of course, it is most important for a business owner to concentrate first on what is best for the business. A profitable real estate investment is secondary to the ultimate success and profitability of its business. After all, the successful management of the business usually is what has provided the business owner with the ability to invest in commercial real estate.

When entertaining the idea of buying a facility for their business, business owners should consider the effects of an acquisition. The mix of leverage and equity can affect the liquidity and cash flow of the business and the return on the investment to the business or its owner.

Owner-occupied properties often can be financed at higher loan to values in order to preserve working capital. Interest rates and amortizations can be customized to improve cash flow. As part of the decision to acquire a property for one’s business, the financing package available to the business should be considered in the analysis. Furthermore, a business owner should communicate his or her goals in acquiring a property to the lender, so the financing can be used as a tool not only to facilitate the transaction, but also to improve the financial position of the business.

If the business does not benefit from owning its own property, and the owner wants to invest in real estate, there are plenty of other real estate investment options available. Just because an owner’s business can be a great long-term tenant, the business should not be obligated to property costs that exceed market rents. If the primary objectives of an acquisition are forgotten, owning a property can become a burden to a business and a distraction to its owner.

The responsibility of assessing the viability of an acquisition does not have to lie solely on the investor or business owner. Real estate professionals and lenders can be a resource to help find the right property and leverage structure. Owning a facility can be good for a business and present a variety of advantages as long as the business owner remains focused on the success of the business.

David Lipscomb is a partner at The Lending Source, LLC, a commercial real estate lender specializing in owner-occupied properties located in Atlanta.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.