Preparing to buy commercial property

How much is it worth?

How does the process work?

When buying commercial property,there are a few points one needs to keep in mind. There are different indicators which contribute to the development of commercial real estate. First,one should determine the level of investment one can make. Payment can be done through two forms: lump sum payment or mortgage. This depends on the pattern of cash flows you have and the priorities you have for the future.

If the interest rates prevailing in the market at that point in time are higher,then it is better to pay in cash. If the interest rates are low,then it is better to go in for a mortgage.

If one is already running a business,the mortgage option will help in two ways: one,it can be charged against depreciation and that would reduce the income tax liability,and two,the interest payable also confers a tax advantage.

A word of caution though: Mortgage is not advisable,if the cash flows from ones business or other earnings are uncertain.

The next point after financing the purchase is the prospect of returns. The location of the property and the state of development in the vicinity would easily determine the price levels in the next 5-10 years. It is better to invest in commercial property where one can assume returns in 5-10 years. Risking ones money for a period longer than that can stretch the risk level too high.

A quick summary of the key points when looking for commercial real estate:

Location

This is one of the primary conditions. One would like to be close to ones customers,workers,and business associates. Convenience for customers is an important consideration,for the location should be such that the customer can easily reach. But depending on the type of business,access to metro and highway may be important,too.

Physical condition

After identifying the general location,it is important to take into account how the property was used,wear-and-tear,and whether there are any issues related to building maintenance.

Allowable uses

Say ones business is an accounting firm,one would likely need a commercial office space. A manufacturer,would need industrial space. Either way,one must be sure that the zoning laws permit one to carry out ones business activities.

Limitations on exterior and interior: Due to zoning laws or building codes or covenants,there may be limits to changes or alterations that can be made on the property. A good example is a building that is in a historic area and subject to restrictions on changes that can be made to the façade.

Parking

Look out for a building where parking facilities are available nearby or in the basement..

Opportunity for expansion or leasing: Suppose ones business does not grow as much as projected,can extra space be leased out?

Also remember that commercial real estate investing is all about the deal,the terms,and the return on investment. Be an investor instead of an accumulator of commercial properties. The whole idea of making investments is to produce an income or a profit. So,if one buys a property that produces no income or profit,it is just an acquisition,not an investment.

Understand that every property has a lifetime. One of the biggest mistakes one can make as an investor is to ignore the fact that over time,money will have to be spent on the upkeep of the building. So make sure you choose a building which does not need to be redone immediately. l

Author is Managing Director,Bajaj Capital.