Building Vs. Renting: What’s Best For My Business?

Many businesses grapple with the decision of whether to find several Minneapolis general contractors and build a space or to simply rent an office. The decision will largely depend on the stability of the specific business, the current and future needs, and the business financial state.

Primary Advantages for Building Commercial Space

Having the stability of ownership is a major benefit for companies looking to buy commercial real estate. You can partner with a reliable Minneapolis general contracting firm to build the office of your dreams and have it for years to come. Additionally, there are no lease terms, meaning you won’t have to renegotiate or pick up and possibly move every few years as a renter would. You can establish yourself in the business community and make a name for yourself.

Financial Benefits to Building

One of the most obvious benefits to buying office space is the fact that the building is an investment. Partnering with the right commercial construction company that can build a beautiful and functional space can pay off in the long run. Depending on market conditions, you may also be able to make a return on your investment when it’s time to sell. Additionally, if you need to move on but don’t want to sell your property, you can rent it out to another company and draw additional income.

The government gives buyers tax breaks for interest, depreciation, and property tax deductions, which is another added benefit to buying instead of renting commercial real estate. Additionally, sometimes there are added tax credits for first-time buyers.

Like other areas around the country, the Minneapolis commercial construction sector has plenty to offer businesses looking to increase their property portfolio options. Investing in commercial real estate is a great way to diversify your portfolio.

Disadvantages of Building a Commercial Property

The closing costs for buying commercial real estate can be sky high, and for a business not financially stable that can be a big problem. Similarly, for a business not fully prepared to buy, property taxes can prove burdensome. It is important to ensure that your company is fully capable of handling all of the costs associated with buying.

Financial Benefits of Renting

Although you arent building equity in your leased space, there is also some financial benefit to renting. If something goes wrong in your building, you won’t have to foot the bill for calling a general contracting company to come out and make repairs, which could be costly.

Additionally, you won’t have to pay property taxes or city assessments, which can be a financial burden to companies that aren’t fully established. Perhaps one of the most evident benefits of renting is that your company isn’t subject to the whims of the financial and housing markets. A market crash can send your property values plummeting, and as a renter, you won’t have to worry about losing an investment.

Additional Benefits for Renters

With so many options available in commercial construction, it can be difficult for a business to definitively settle on a particular location. Another advantage to renting is the freedom that it allows. If after several years at one property, your business decides to move, it is much easier to do so as a renter.

Disadvantages of Renting

While renting does have some benefits, one major drawback is the lack of control you’ll have over your property. You are only assured of the space for the term of your lease, and, even if you re-sign your lease, your rate could go up significantly.

Startup costs for renting can sometimes be equally expensive. Deposits typically include first and last months’ rent, paid upfront and your landlord has the right to increase rent at any time, so there is not much control in that area of finances either.

For those grappling with this decision, it will largely depend on factors like how the current stability of the business, its needs, and desires, as well as its financial capabilities. Ultimately, these factors will determine the outcome of whether or not finding some Minneapolis general contractors is the right choice for you.

Cash On Delivery

In the normal world of commerce, “COD” means you GET something of value when you pay “cash on delivery”. As is often the case, the Internal Revenue Service has given a new meaning to “COD”. In their lexicon, COD means you pay them cash when you GIVE up something.

If you are the owner of commercial real estate financing with recourse debt and the value of the property is less than the mortgage amount, brace yourself for an introduction to the IRS version of COD. In the situation when the value of your property is less than the mortgage amount and you don’t have enough cash flow to pay the current principal and interest when due, you have four “traditional” options and one contrarian option.

First, you can raise new capital to subsidize the mortgage payments or to pay down the loan to a level that is serviced from the current cash flow. The obvious peril, in this case, is that you may be throwing good money after bad. If the value of the property is more than 20% below the mortgage amount, it may be a very long time before the cash flow grows sufficiently to bring the property value back even with the mortgage amount. This option is less attractive given that in many markets values on certain commercial property types have declined 40% or more and rents are flat or declining while most expenses are rising. Add to that fact pattern the reality that in order to refinance your property at maturity the property will need to be valued at 125 – 135% of the maturing mortgage amount, and you really have to challenge whether it makes sense to pour more money down a rat hole.

Second, if your lender is enlightened about the reality of property values and the length of time it is likely to take for property values to recover, you may be able to convince your lender to “write down” the loan amount. This is when you need to know all about the IRS version of COD, which is “cancellation of debt”. Whether your mortgage is recourse or non-recourse, the amount by which the loan is written down results in ordinary income to the owners. There are certain exceptions, such as bankruptcy and insolvency, to the current recognition of COD income. However, if the property is owned by a pass-through entity, such as a partnership or limited liability company, the exceptions for bankruptcy or insolvency are applied at the partner or member level.

Third, you can capitulate to foreclosure or do a voluntary deed-in-lieu (“DIL”) of foreclosure. In the common vernacular, you just hand the keys to the lender. However, the pain is not over and the IRS will be standing at the exit door to collect taxes on the COD and, in many cases, gain on the sale. If the property was financed with recourse debt, the measure of the COD is the difference between the fair market value of the property and the debt balance. In addition, since a foreclosure or DIL is treated for tax purposes as a sale of the property, in the case of property financed with recourse debt you will have a gain equal to the difference between the fair market value of the property and the adjusted tax basis of the property. In the case of property financed with non-recourse debt, foreclosure is treated for tax purposes as a sale of the property for an amount equal to the debt amount and you will have taxable gain equal to the difference between the debt balance and the adjusted tax basis of the property/

Fourth, the entity owning the property, either a partnership or limited liability company in most cases, may file a petition under Chapter 11 of the U.S. Bankruptcy Code. Debt canceled in a Chapter 11 reorganization case is not included in your income if the debtor is under the jurisdiction of the court and the cancellation of debt is granted by the court or occurs as a result of a plan approved by the court. For individual partners or LLC members, the bankruptcy exception to the recognition of COD applies at the partner or member level. Accordingly, if the partnership files for bankruptcy protection and achieves cancellation of debt under the supervision of the bankruptcy, the COD income will still be included in the ordinary income of the partner or member unless the partner or member is insolvent or has filed a petition under Chapter 11. Given the cots of prosecuting a case in the Bankruptcy Court, the stigma associated with bankruptcy filings, and the fact that the individual partners or members may still recognize ordinary income, the bankruptcy option may not be the best alternative.

Given the unattractive consequences of these traditional options to resolving distressed commercial real estate, a distressed borrower must ask what other options are available. There is at least one contrarian firm, Abacus Financial, LLC, that offers a compelling contrarian option. Abacus seeks to acquire well-located commercial real estate at a price greater than the debt encumbering the property, regardless of the value of the underlying collateral. The silver lining for the distressed borrowers is that they are relieved of dealing with the day-to-day harassment by lenders, unpaid vendors, and disgruntled investors AND they accomplish a sale at above-market prices while realizing capital gains, rather than ordinary income.

Before making any decision about how to resolve your distressed commercial real estate you should consult your attorneys and tax advisors and make a “reality check” on when you think the property may recover sufficient value to enable you to refinance without writing a huge check to your lender.

Main Things To Know When Buying Commercial Real Estate

Debt vs Equity Investments in Real Estate

Distressed-to-control or “loan-to-own” strategies where a fund manager acquires the debt, or a mezz piece of a failed commercial real estate project in the hopes of adding value via controlling the asset, or “turnaround” strategies where a fund manager will provide debt and equity investments.

Depending on how much equity you have available in your own home, you may be able to refinance or get a home equity line of credit (HELOC) on it to finance your rental real estate investments.

What is your debt minus the value of your stocks, bonds, equity, and any other investments you own? How much are you paying in taxes and what portion of your taxes could be lowered through the right real estate investments?.

Determine if Commercial Property Investing is the Right Strategy for You

Sound strategy begins with a sound grasp of the fundamentals. These four major commercial real estate investing strategies account for the lion’s share of activity in the sector, encompassing a wide range of risk tolerances and property types.

How to Find Buyers for Commercial Real Estate

So I have three rentals, two single-family rentals, and partnership ownership in some commercial storage units. That direct real estate is about $182,000 because I own one of the houses with no debt. The cash flow from these is great but that’s a lot of money in just two geographic areas, in Des Moines and here in Medellin, and most of it is in one property type. Also, while I’ve always taken the time to find good tenants, there’s still some management time that I have to spend every month on the properties.

Investors seeking to expand their portfolio new investors to commercial real estate that are seeking to take up a portfolio these property buyers are relatively easy to find if you have a methodical approach in your prospecting process. If you approach the prospecting process effectively and directly, you will find the people that can act in this market. Prospecting is a daily process and should never be delayed or put off. It is notable that most of the people you talk to when prospecting will not have a need for commercial real estate today. Perhaps only 2% or 3% will ever have an immediate need for commercial sales or leasing. On that basis, you can be lucky on the first approach to particular people.

There are many companies that own and manage real estate without operating as a REIT. The difference is, you’ll have to dig to find them and they may pay a lower dividend than a REIT. Companies that are real estate-focused can include hotels, resort operators, timeshare companies, and commercial real estate developers, for example. Make sure to conduct due diligence before you buy stock in individual companies, but this option can be a good one if you want exposure to a specific type of real estate investment and have time to research historical data, company history, and other details.

You may want to start looking for a property manager to proficiently manage the property. Your real estate investment advisor should present you with 2 or 3 local companies, each with its own suggestion. Your main aim is to decide which company you will employ. The property manager will be the main point of contact between you, the landowner, and the tenants. A good property manager is critical in keeping your property fully occupied at the highest market rent, the tenants happy and in turn helps you attain your investment objectives.

There are some points you must keep in mind when purchasing commercial real estate when you are a business owner.

Get prepared Most talented lenders can give you a checklist of their needed documents immediately. Full documentation loans are worth spending the extra time on in order to get organized and shave a couple of hundred basis points off interest rates. This will add up to tens of thousands of dollars, if not more, over the life of your loan.

Financing is the main requirement for the purchase of the commercial real estate. Take the steps of getting pre-qualified for your loan before you look around for the right property. This way you will look for commercial property that you can pay for.

Know the market – use an educated profitable realtor to find your new property. If you’re like most business owners, you don’t have time to go on endless drives shopping for a building. A skillful commercial realtor can save you time plus you with equivalent sales/ lease rates in the area, plans for new development in the area.

Buy commercial real estate for the right reasons if your likely exit strategy someday is not an IPO, but rather selling or simply closing your business, then it makes great sense to effectively “pay yourself lease” rather than some absentee landholder. As soon as you have the capital for the down payment, you should consider turning that rental payment into an advance payment that will at least give you something for your effort. By doing this, you no longer will be throwing away your rent payment monthly, but building equity in a significant asset that also offers multiple tax advantages.

Consider buying/building more square footage than you need right now — you can always grow into it, but this will also allow you to get some leasing income until that time.

Set up a real estate holding company or what is known as an Eligible Passive Concern (EPC) to own your new property — the formation of a master lease between an EPC and your operating company is how you’ll bind the two together. Only work with a commercial specialist your time is valuable so only deal with a lender that specializes in commercial loans. You can take the help of a specialized Property Management team. That will help you to fulfill all your needs.