Management - Buying Office Space

Tips For Making A Smart Purchase

Buying Office SpaceTaxes, location, payment options – there are so many considerations that go into buying that first piece of business real estate. Weighing the pros and cons of a deal often provides the best starting point. "It’s not for everybody, just like owning your own business is not for everybody," says Michael Harper, executive director of Summit Marketing (asi/339116). "There’s a reason why a lot of people rent."

But if you’re convinced that owning your own piece of business real estate is in your future, here are a few things to keep in mind during your search.

Turn to Local Government Agencies
Mike Emoff, CEO of Shumsky (asi/326300), says cities typically welcome the revenue that new businesses bring, and will often work with you to make your office space purchase more affordable. "There are all kinds of things that cities do. Some provide zero-interest loans. Some give grants, which I’ve had happen before," he says. "They want the income tax revenue that’s generated from the employees you hire."

Special local designations might also help your cause. "There are areas within communities that are business rehabilitation areas called HUBZones," Emoff says. "Cities look to put businesses in those areas, and they’ll give you tax credits and grants."

Emoff suggests contacting local development offices as well to get an idea of the most business-friendly areas. "It’s different with every city, but you can talk to your local city officials about what they offer," he says. "Sometimes small businesses can’t afford certain things, but this is a way they can afford it."

Seek a Prepayment Option
In researching office space loan options, Harper recommends going with a bank that offers a no-penalty option for making early payments. "The last loan we had was a 15-year amortization, but it had options so that you could prepay up to $50,000 on the loan every year to help pay down the principal without any penalty," he says. "It depends on what your needs are and what you can negotiate, but some banks are very open to that."

Not only could prepayments save you tens of thousands of dollars on interest, but if you’re looking to keep the office space long-term, it could lead to an additional revenue stream. "Say the building is paid off in 15 years. You can continue to pay rent to yourself, and now you have a cash flow that’s coming into you or your LLC," Harper says. "And if for some reason cash is tight and you need to come up with money, you don’t necessarily have to go to the bank. You’ve got revenue coming in that would be available to internally finance your company. It allows you to control your own destiny."

Create a Location Checklist
If you’re deciding between a few properties, experts say you shouldn’t base everything on having a stately storefront. Why? Because the Internet has drastically changed how firms approach their sales strategies.

"I think in the last five years, we’ve seen clients rarely come to a promotional products distributor. I think you either go see them or you do it all online," says Bruce Cohen, director of dealer sales for Motivators Inc. (asi/277780). "It’s so easy to send them proofs and everything they need online, that office space locations and showrooms have become less important. We’ve done without showrooms for years."

Here’s a checklist of other office space location factors to consider:

  • Employee accessibility. "I always considered easy access to highways for my salespeople to get in and out to go see their clients," Cohen says. "And if you’re going to build a sales force, a major factor is the ease for the salespeople to get there. If there was an hour commute, they wouldn’t come. They’d either work from their home or come to a company that was closer."
  • Target audience. "Look at it from the perspective of managing the daily operation of the clients and their clients," Emoff says. "If they have a targeted list of certain clients, why not be in the middle of that?"
  • Proximity to shipping services. "We were located next to a post office because back in the ’80s when we bought our building, it was important to be close to a post office," Emoff says. "Today, maybe it’s more important to be close to a UPS hub."
  • Office parks vs. freestanding buildings. "I always was attracted to office parks as opposed to single-standing buildings because you can do general business in your own office park," Cohen says. "It’s not significant business, but it doesn’t hurt. The last office park we were in probably had 100 potential clients, and we had 10 that bought from us."
  • Room to grow. "If I were working for a private high school and some space opened that was contiguous to our property, if we could afford it, we’d be nuts not to buy it. It’s the same thing with an office," Harper says. "If you’ve got the kind of space that’s one level with parking up front, and the lot next door came up for sale, and you saw the need to expand and have more office or warehouse space, that can always give you flexibility. But it’s got to be the right deal."
  • Visibility. "One of the reasons we rented our warehouse where we did is because it’s got a highway frontage sign, so we had a free billboard," Emoff says. "You can see it from the highway, and that was important for us."

Carefully Consider Taxes and Fees
Emoff says the expense that sneaks up on buyers more than any other is county property tax. "If you own it, you have to pay property tax, and a lot of times that amount changes," he says.

Fortunately, Emoff says buyers can appeal property tax increases. "We’ve successfully done that many times, and we have to fight that all the time," he says. "The appraisal by the county oftentimes is higher than the resale value of the building, and the taxes are levied based on that."

Of course, utilities are an additional and often unpredictable expense from month to month, but one potential way to cut those costs is to make the lighting in your office more environmentally-friendly. Cohen recommends asking your real estate agent about these possible savings during the buying process. "You can do upgrades to your building and get a benefit just by going to the service providers and asking," Emoff says. "There are all kinds of incentives. Some are tax incentives, and some are just reductions in cost, but they could all be significant."

Buying vs. Renting
Industry experts break down some of the pros and cons of buying office space.

PROS

  • Long-term control. "You have an element of control over one of the largest expenses that you can have other than labor," says Mike Harper, executive director of Summit Marketing (asi/339116).
  • Revenue following succession. "It could be part of a succession plan if you have family that comes into your business, and then you can retire with a stream of income that’s not going to upset the normal stream of revenue that comes in to the organization, and you don’t burden the rest of the family," says Mike Emoff, CEO of Shumsky (asi/326300).
  • Ability to renovate. "Managing growth is another consideration," Emoff says.

CONS

  • Can stunt growth. Bruce Cohen, director of dealer sales for Motivators Inc. (asi/277780), has always leased his office buildings because he doesn’t want to limit his company’s ability to grow when required. "I think you buy your home and lease your office, just because you want the flexibility to downsize or upsize very quickly, and in leasing, you can do that," he says.
  • Responsible for repairs. "When you become your own landlord, it’s your problem. You’ve got to fix it yourself," Harper says. "If you’re leasing, you just pick up the phone and say, ‘The toilet’s not working and we need it fixed.’ It’s very similar to buying a house vs. renting an apartment."
  • Selling can tie up funds. "If you have to sell the building and move into another one, you’re tying up capital if you have to put money down," Harper says.

Case Study
Choosing to Rent

If you decide that buying office space just isn’t the right decision for your company, leasing can have its upsides. "In leasing, you get a better location," says Bruce Cohen, director of dealer sales for Motivators Inc. (asi/277780). "With the times we’ve looked to buy, the price range and the area we wanted to be in – a higher-traffic location – would’ve been extremely expensive, but in leasing, we had the ability to do so."

The catch to leasing, according to Cohen, is you have to be willing to live with what’s already there. "The less you do to existing office space and the fewer renovations you do, the more free rent you can get," he says. "If you can live with the existing space and you’re willing to live with some things that aren’t perfect, you can get a great deal."

Cohen says it’s also crucial to ask your landlord about an expense that many renters tend to overlook: common area maintenance (CAM) fees. "When they give you a rental, they may or may not tell you what the CAM fee is, and that could be 30% of your rent, which is significant," Cohen says. "Overhangs, a restroom outside your office – you’re paying for that, and if you’re paying $10 per square foot, that could be an additional $2 to $4 per square foot."