Buying Commercial Warehouse for my Business

25 Replies

Been some years since I posted here, and I did a search and didn't see a similar topic.

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I own a business that operates out of a warehouse in my home city. I've rented for almost 9 years now, starting out in a 6,000SF building and now occupying a 25,000SF warehouse.

My lease is up in 10 months and I've been evaluating purchasing a warehouse personally and renting it to my business.

I've found a broker that I like (interviewed a bunch), and have even located a few properties that make sense.

I've interviewed fellow business owners who purchased their own commercial buildings as well.

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Due to low interest rates, the savings I have stashed away over the years and the ability to put just 10% down with a SBA loan, I'm thinking now would be the time to buy. Prices have gone up a bit in the last 2 years, but it's a longer term play

Long term, I do plan on selling my business, but that might be 2 years or 5 or 10 down the road.

I could afford a $1M building now on my own, anything more I would need investors or equity partners. If I buy a $1M building, chances are only my company would occupy. If I bought a more expensive (and larger) building, I would occupy 51% and sub-lease the rest.

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I'm curious if anyone here has purchased commercial real estate specifically to house a company they own.

Best choice ever?

Worst use of capital ever?

Somewhere in between?

Trying to get all thoughts and ideas before doing a deal that will certainly impact me for many years.

HI Dean,

It all depends on your deal if you could buy a larger building and occupy the SBA 504 Program min of 51% and rent the rest it all depends on how much rent the remaining 49% of rentable sqft can get you in terms of debt coverage. If the other tenant(s) are paying more than 49% of your mortgage payment it could be good since your paying less than market for your use of your space then again what is their credit rating, how do their financials statements look currently, their financial ratios, and financial projections?

You could sign a 10 year lease for the remaining 49% sqft and find out they went bankrupt in the end of year 1 or 2 and now you're holding the entire mortgage. Then the question would be can you debt service the entire mortgage with your company's net income?

If not what is the market for the highest and best use of that 49% rentable sqft and how fast can it be rented while you're holding the bag. These are questions I would ask to do your risk analysis.

It all depends on what market rent per sqft of warehouse space in your town is while compared to the total cost of buying.

As pointed out, market rents and market will determine how great it can be. So long as you have the space it's better even if you were paying a bit more than rents just need to weigh that to other benefits.

Understand what will be required prior to contracting, bond/syndication, points, engineer reports, inspections, appraisals and closing costs are higher, they may require life insurance as well. Get with an SBA lender who has experience, not one learning how with your deal.

The issue too is finding a building suitable and then one that will or can have 51%+ vacancy at settlement! :)

What is the avg cost per square foot for warehouse space in your area? What is the average lease rate for larger floor plans like 20k+ sq feet? How do the leases compare to smaller spaces like 2500-4000 sq foot flex condos?

I have a lot of experience with doing exactly this .. My business occupies around 28,000 sq feet that I own outright now - which is mixed warehouse / mfg / offices. I only made it 6 months in business though before I became so annoyed with paying a lease that I bought my first building about 10 years ago now. I can only imagine how you feel paying a lease on 25k sq feet!!

thanks for the replies all.

I currently pay below market rent of about $.18/SF Gross ('Market' rate is about $.45/SF NNN).

My sweetheart lease will end in January and the landlord has proposed rent closer to ~$.30/SF. Still low, but now we're talking about $7500/month compared to what I'm paying now.

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The capital cost for a building this size (we're talking old, fairly unimproved industrial buildings) would be around $.80-90/FT. So figure $1M for 12,000SF and $2M for 24,000SF (it doesn't work exactly like that, but that's easy math for this example).

I've been saving my pennies for some years and have enough down for the 12,000SF place, but it will still raise the fixed costs on the business quite a bit. My business would fit fine in 12,000SF. I could speculate and go for the larger building (I'd have to have an equity partner to cover about 45% of the purchase), but there is a lot of upside potential (zoned nicely, up and coming area...).

I'm just trying to understand the decision making people go down.

a) I could probably make more money reinvesting in my existing business or starting another.

b) I don't want to be a landlord at all, hate that thought

c) If I do sell my company, I'd be interested in selling a building I own along with it, or at least signing a long term lease with the new business owner

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I am leaning towards seeing if I can renegotiate my lease at the existing place or find the right 12,000SF building in town to swoop in on with cash in hand....

Choices choices!

Hi Dean, I purchased a commercial premises for a business that I am starting. However I did so though using my pension funds so that income used was tax free. Can I ask how many employees you have ? There are alot of foreign investors that want to retire in the US who will readily loan or invest 500K to 1M to get their Green Card. Some of the rates they will be willing to accept is anything from 1 to 2 percent on the loan.

Not sure I follow your numbers exactly, but I think you are saying you can build new for $83 PSF, or keep renting at $0.30/ month or $3.60 PSF per year. Am I understanding your numbers? If so, renting wins.

$83 PSF for a hollow steel building/warehouse is insane. I've put them up for under $30 PSF with 6" slab and rebar. That's crazy contractor markup right there. I mean hell your not building a house!

@Annunciata R.

I've seen you mention the EB-5 visa program a few times on previous posts. Have you obtained funding through the program? I came to learn about the program through a New York City hotel developer who had set up their own program many years ago. They own north of $3 billion of real estate and have the ability and connections to get the funds. The EB-5 program is used a lot for hotel development because it instantly meets the minimum number of permanent jobs created by the investment and a lot of hoteliers are immigrants. The program comes with a lot of red tape and the funding is extremely difficult to obtain (from talking with people in the space). I don't think it's a viable option for funding needs under 20MM but I could be wrong.

@Chris Winterhalter I think you are referring to Regional Centres. They take an investors money, do not guarantee its return, offer very small return and don't actually create the relevant job requirements but use various calculations to get by. I am not surprised they are under a lot of red tape.

When I was looking to fund a business for $500K I decided not to put my money in here but I was approached by some small businesses who had proposals prepared. They were only seeking about $1.5M, so one or two investors. The only problem was their business plan was seeking far too much funds considering real estate was not included. The rates they were offering were also very low.

Any good investor simply wants a decent return for his money and I simply could not find it. In the end I had a hard time blowing my $500K. I purchased several lots in a Tax lien sale and one commercial building and have just crossed over the half way mark. Construction work should get me to touch down. Once my home is complete I will open care homes for the elderly which provides the relevant staffing.

At the moment my spend of about $300K has already more than doubled due to capital appreciation. I think there are limited opportunities that offer real estate as an underlying asset. If they did I think both investors Foreign and Local would find their needs met if they are willing to work together without attempting to take advantage of the fact that the foreign investor would be prepared to give away his money for the sake of a visa. Building a business is not for everyone but so far I am enjoying the process and my involvement in it.

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@Annunciata R. As a developer, how do you use the foreign funds on your projects, can you use them on real estate development or do you need to have a construction company that creates employment or ??

Great question Karen I am anticipating that answer

@Karen Margrave @Albert Bui A foreign investor can use their funds on developments if they will form the input cost of opening a business that will go on to hire 10 FT staff. However most proposals I have seen want to offer foreign investors equity partnership in the business where no share in real estate is offered. I am not attracted to this because if the business falls through I will end up with nothing.

@Annunciata R.

So to clarify you obtained an EB-5 visa though investing in a business on your own and not through a Regional Centre. The Regional Centre's essentially take qualifying investments for the foreigner to obtain a visa through the EB-5 visa program right? That is essentially my understanding of the process. From what I understood creating a Regional Centre was difficult and expensive.

Also awesome work on your investment!

Thank you Chris, still only just starting out in the development world and have a long way to go.

@Annunciata R. As recommended, look at the long term costs and business tax implications of leasing versus renting. And also consider how your business' space needs may change in the next couple of years.

I always tell clients in this position to be aware by buying a building you now have two businesses - property owner/investor/landlord and your regular business. The advantage can be that if your business slows or stops, you have a property that can bring you income through leasing or selling. If you buy smart you can lease space out through a broker/property manager and not have to deal with landlording.

@Dean George , Make sure your analysis includes a worst case scenario. A lot of my time in the market downturn was dedicated to assisting flagging businesses to re-purpose their owned or leased properties. The financial commitment on a 2-3 year lease is probably a heck of a lot lower than the commitment of a mortgage. Many of the folks who leased were able to weather the storm, negotiate the landlord for a reduce rent and/or move at the term of the lease. The folks who owned, anecdotally, did not fare as well. Having said that, it was not across the board. The folks I worked with who owned their own business properties and "seemed" to do the best in the downturn were those that had scaleable properties.

Here is an example ...an attorney client had his real estate law practice, title company and mortgage company in a 4 bay strip center. When the market turned down, he had to shut down his mortgage and title company. He was able to successfully find unrelated tenants for the other three bays and downsize his practice in to one bay. With the market back somewhat, he has taken over an additional bay and now has two of the four bays for his practice with the other two leased to unrelated entities. The scalability of the structure enabled him to avoid the hardship of that fixed overhead when the market went south. It also enabled him to grow his business back, without having to move his enterprise.

Bottomline is, you know your business better than anyone else. Is it pretty stable? Is the outlook for growth stable? If not, you really need to seriously consider the flexibility of leasing. Or, if financially, you find a deal you can't refuse to buy, make sure there is a Plan B, if you need to increase or diminish the size of space your business utilizes.

@Eric Odum I personally would have thought the reverse is the case, I havent had to lease or rent for well over a decade and would never consider going back. Infact the 4 unit strip I purchased sounds similar to your attorney clients but I purchased on the hunch that an appreciation in the value will occur. I havent been able to open any going concerns yet but since its purchase but the building has appreciated significantly. I paid cash for it so the pressures of finance was not a variable that I needed to account for when making that decision. I guess @Dean George will have to consider the cost of his finance and the timing. I would always recommend that a person purchases over leasing or renting but thats my own strategy because it has always worked for me.

in my case, my loan payment is about half of what rent would be. Ownership has been good for my business and my REI. I hear the warning though. Trying to refinance 4-5 years ago would have been a nightmare.

No doubt, @Jon Klaus . Refi in 2009 would have been a bear....on the other hand, lease rates and lease incentives were insanely good for tenants in 2009. I have more clients exploring purchasing today, b/c 5 year amortized lease deals can be as much as 25% more than the deals we were getting in 2009....definitely some tenant sticker shock going on in 2014, if the original lease was inked in 2009.

Hi All-

I'm sure you were waiting with baited breathe for an update from me :)

After months and months of looking, offers, counters, etc... (and a lot of frustration, but also more lessons learned than I can imagine).....
I'm currently under contract on 10,000SF building in Portland :)

Price per square foot is higher than I wanted, but it's in EG zoning - which here means residential use is not prohibited.  So, perhaps in 10-15 years I'll consider some redevelopment.

For now, going through due diligence and all that.

Doing an SBA 7A loan, even though I could swing conventional, just wanted to keep that cash for growing the business (or finding some residential apartments/plexes that might be a good investment while money is cheap).

Anyway, thanks for all the replies.  It's happening !

Congratulations, Dean!  Can you share any numbers with us?  When do you expect to close?

My 10k SF building is fully leased now for the first time since I bought it. Feels good that it's doing all it's supposed to be doing. 

Thanks Jon :)

I'm at $1.3M for a 10,000SF tilt up concrete building on 15,000SF.
Putting down 10% on the SBA loan and my company will occupy 100%.

Visible from the highway (I don't care particularly), and 2 blocks from the onramp/offramp.

Residential on the other side of the street, and mostly grubby warehouses around.  So, hoping as the city expands, in 10-15 years we'll be pressure in our area to redevelop.
Ideally I'd  like to buy some of the lots around the building as well, but can't at the moment :)

It's not going to throw off much cash for a while, but I'd rather own than keep renting.
For 10% down (and there are serious fees attached to that!), it made sense.

Once we are closed, I'll take a break and then start looking for the next idea :)

Hi @Jon Klaus,

Between a 10k SF office/warehouse and a retail strip center divided into 5 tenant unit (2000 sq/ft) which commercial type is the easiest to find tenants in your opinion to minimize vacancy? Which do you think is a better investment? 

I am much more interested in the office warehouse space as the entry points are almost half that of a retail strip center in my area. Thinking of possibly housing my business in one of the 5 units and renting out the other 4 units. I know that location is absolutely critical in commercial real estate.

Any input would be appreciated.

Thanks.

  


Originally posted by @Jon Klaus:

Congratulations, Dean!  Can you share any numbers with us?  When do you expect to close?

My 10k SF building is fully leased now for the first time since I bought it. Feels good that it's doing all it's supposed to be doing. 

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