Should your business buy the building it operates in?

For many owners, rent is one of the largest fixed costs in the business. Buying the building can turn that cost into an asset. It can also tie up cash, add debt, and make the company less flexible. The right answer depends less on the real estate and more on the business: how stable it is, where it is headed, and what else the capital could do.

Start with the business, not the building

Before looking at properties or loans, answer a few questions about the company itself.

• Will the business still fit in this space in five to ten years?
• Is the location tied to customers, staff, or licensing, or could the business move?
• How predictable are earnings through a slow year?
• What would the down payment otherwise fund, such as hiring, equipment, or an acquisition?

If growth is likely to outrun the space, or the location may change, a lease often keeps more options open. Ownership tends to work best when the company is settled in a place it expects to stay.

How owner occupied purchases are usually financed

Lenders treat an owner occupied building differently from an investment property. The business pays the rent, not an outside tenant. So the lender underwrites the operating company as closely as the real estate.

Common paths include:

• Conventional bank loans. A bank lends against the property and looks hard at business cash flow. Banks often want the operating accounts as part of the relationship.
• SBA 504 loans. A bank and a Certified Development Company share the financing. The program is built for owner occupied real estate and long lived equipment, and it can reduce the equity the owner must bring.
• SBA 7(a) loans. These are more flexible in how proceeds are used. They can combine real estate with working capital or other needs in one loan.

Each path has its own rules on occupancy, guarantees, fees, and prepayment. Compare the full terms, not only the rate.

Consider holding the property in a separate entity

Many owners buy the building through a separate holding company that leases it to the operating business. This can help keep real estate liability apart from operating risk. It can also make a later sale of either the business or the building cleaner. The lease between the two should be documented at a fair rent and on real terms. Entity structure has tax and legal consequences, so bring the CPA and attorney in from the start.

Weigh what you give up

Ownership has real benefits. Occupancy costs become more predictable, principal is paid down over time, and the owner controls the space. The trade offs deserve the same attention.

• Cash. The down payment and closing costs leave the business. Keep enough liquidity for a weak quarter.
• Concentration. More of the owner's wealth becomes tied to one company in one location.
• Guarantees. Owner occupied loans usually require personal guarantees from significant owners.
• Flexibility. Selling or subleasing a building takes longer than letting a lease run out.

A useful exercise is to compare the full cost of owning with the cost of leasing over the same period. Include debt service, taxes, insurance, and maintenance on the ownership side. Then ask what the business could do with the cash it keeps by leasing. If that cash would do more inside the operating company, the lease may be the better use of capital.

Plan the exit before you close

Think about how the building fits a future sale of the business. Some buyers will want to lease the building rather than buy it. That can leave the seller as a landlord with a single tenant. Other buyers will want both. Some owners later use a sale leaseback to free up capital. Knowing the likely path shapes how the loan, the entity, and the lease are set up today.

If you are weighing a purchase, our capital readiness tool is a good place to organize what a lender will ask for. When you want a second set of eyes on the structure or the financing, reach out to us.

Thomas Capital Holdings is not a registered investment adviser and does not provide investment advice or recommend securities. Consult your own advisors about your situation.