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Is buying commercial real estate worth the potential risks?

A small business might have questions about how it should approach commercial real estate; namely, whether to rent or to buy.

To the extent that a business has the capital to consider a commercial real estate purchase, an attorney can help explain the potential liabilities and benefits. In a market still on the upswing from the 2008 crisis, a business might be able to purchase a commercial property at a lower price. Over time, that investment might spare the business from paying increasing rent prices when the market rebounds. In addition, a commercial property might present tax benefits like depreciation.

Owning a commercial property can also be a source of additional income from commercial tenants. An attorney can help a commercial property owner negotiate a commercial lease that offers protections like a longer lease term.

On the other hand, buying a commercial property can also mean a long-term commitment to a certain location. If the neighborhood becomes undesirable, a business may find itself unable to sell the property and relocate to a trendier location. Investing in real property also ties up a business’ liquidity, as many lenders require 30 percent or more as a down payment. Zoning laws may also change and make it harder for a business to conduct its operations, forcing a business to resort to real estate litigation with the applicable zoning authority.

These competing concerns underscore the need for an attorney’s due diligence. That diligence will produce metrics to help a prospective commercial property owner make the decision of whether to rent or buy. Such data may include the net operating income of a commercial property and its capitalization rate. 

Source:  Investopedia, “7 Steps To A Hot Commercial Real Estate Deal,” Brian O’Connell, copyright 2015, Investopedia, LLC

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