Business Owners Purchasing Real Estate

I wrote this simple article for the Real Estate Board Briefs, fairly surface but might steer you in the right direction none the less. I can be contacted at david@naicommercial.ca if you have any questions...


Commercial Property Financing for Business Owners
by David Brumby, NAI Commercial (Victoria) Inc. and member of the Commercial Division

Many of us have clients who own their own business and are tired of paying rent. They would like to enjoy the benefits of property ownership as they have every confidence in their continued success.

This however is a substantially different financing process than that for a revenue producing commercial property. Often small businesses try to show as little profit as possible for tax and income reasons. However, this unfortunately creates a significant issue with regards to debt servicing which may be difficult to surmount. At least one fiscal year in advance, these borrowers should consult an accountant to discuss preparation for purchasing commercial property.

As the business typically will occupy the majority of the property, if not all, its ability to service the debt will be of paramount importance. A detailed history of the business financials must be provided as well as the usual personal financial information package required to obtain financing. The lender will be looking for enough “provable income” in the financial statements to support the mortgage payment and property tax. This income can come from a few different sources such as current rent, current operating cost charges and Business Net Income. Your client may wish to claim a number of “expenses” to be added back into the Net Income but this is the type of game which most lenders are no longer willing to play.

Given today’s economic situation, securing financing is much more time-consuming. The information required is extremely detailed and must include not only a full information package on the property, its economic viability, the quality of tenant, etc. but also a full information package on the borrower (the Business) and the principle(s) of the Business.

It is important to be sure the borrower is seeking financing from a lending institution which is applicable for their specific situation. This of course is not always easy to discern. There are lending institutions that have programs which are tailored to this exact type of lending however, these institutions are frequently not where your client does their Business banking.

Most business owners would love to own their own building and in most cases, it is more achievable than one would think. It takes planning, likely a different accounting strategy than is currently being employed and an understanding of how all the factors are considered by a given Lending Institution.


Cheers


View all of my commercial real estate listings on-line at www.naivictoria.ca.