By: WAYNE COX & DEBRA MAIRS
As the economy flourishes, many business owners consider how to best prepare for growth. With growth comes the need for space to accommodate more employees and equipment, so real estate expansion is often a logical next step. At FAIRWINDS Credit Union, we work with organizations throughout Central Florida to guide them through the expansion process and how to ensure their real estate decisions fuel, rather than hinder, their future growth.
There are three key questions business owners should ask themselves to determine whether or not a real estate expansion is right for them.
1. Is expansion the best way to achieve my company’s goals?
Start with your end-game in mind. Before embarking upon a real estate expansion, think through what you hope to accomplish.
If your goal is to maximize revenue, real estate expansion might not be appropriate. Real estate is illiquid, meaning it can’t easily be converted into cash when needed. Sometimes companies assume they need physical expansion when their investment would be better made in employees, equipment, inventory or other assets that could generate a profit more quickly than real estate.
Rather than adding square footage to your real estate assets, consider investing in the real estate you already have to make it more effective in meeting the needs of your team and clients.
It’s not enough to ask whether you need the additional space now. Think long term: Will you need the space in 20 years? Occasionally, business owners who have just landed a huge contract may want to double their existing real estate holdings. Be nimble, and avoid getting caught up in the excitement. Ask yourself: Can I adjust our expenses quickly when an unexpected change in revenue occurs? There is always a possibility that your new contract may not be renewed; however, the real estate commitment you made to support that contract can easily last decades.
2. What’s my company’s current stage?
Once you’ve determined a real estate expansion is the best course of action for accomplishing your company’s goals, you must determine whether your company is in its optimum stage for growth.
Don’t skimp on expansion if your business is truly growing and is stable. A well-timed expansion can make a significant long-term impact and can usher your company into a new era of productivity and growth.
Conversely, companies should be wary of making commercial real estate investments in feast-or-famine years. If your business is cyclical, don’t budget according to your historic high. Instead, assume you will make about 75 percent of your “normal” revenue. Don’t assume your business will always operate at its peak, especially if your industry is cyclical or seasonal.
The stage of your company’s lifecycle will also determine what kind of real estate commitment you need to make. Whether your business is in the growth, established or mature stages, options abound for expansion. You can lease, buy or build real estate. Each option comes with its own liabilities and benefits.
3. Do I understand my rights and responsibilities as a commercial borrower?
Even the most straightforward loan can come with hidden costs. Commercial real estate loans are not residential mortgages, and business owners do themselves a disservice when they conceive of them as such.
For instance: If you decide to buy, there’s no commercial equivalent to a 30-year mortgage on a residential property. You might find a 20-year loan, but these loans typically have balloon payments at five, seven or 10 years.
As a borrower, it’s your right to have an open line of communication with your financial institution. Demand full transparency regarding costs and obligations. If you’re considering taking out a loan to cover the cost of a real estate expansion, make sure you ask your lender about balloon payments typical to commercial loans. Remember that financial institutions will expect you to provide detailed financial statements on an annual basis as a means of renewing your loan.
Again, it’s imperative to think ahead. Your company’s needs and capabilities may shift in the future, and your industry as a whole might fluctuate in ways you didn’t anticipate.
Navigating a real estate expansion is no small feat. Done correctly, an expansion can keep your business growing and competitive. Asking yourself these questions is critical to knowing whether or not your business is ready to take this important step in its journey of growth and development.