Thursday, August 6, 2009

Commercial Real Estate: expanding the office headquarters

Worthy of note:

"At the moment transactions have dried up in the commercial-property market as owners try to avoid selling at a loss. Those owners are implicitly assuming that a rebound is imminent, yet the downturn may be prolonged."

--"Commercial Property: A concrete problem," The Economist, August 1, 2009

This is of particular relevance to me today, as I'm looking to obtain a new headquarters for my company. I'm increasing staff and need a larger space. Lease vs. buy is a relevant consideration. Because prices are somewhat depressed, it would seem a reasonable time to buy. But as the article cited points out, low prices may be around for a while:
"In Japan land prices are still nearly 60% below the peak they reached in 1991."
Granted, I'm not in a market that was among those severely overheated. Cost of living here is about 15% below the U.S. average. Asking prices for small commercial office space (2000-5000 sq. ft.) are around $45-60/ sq. ft. That said, the general principle is to compare rent vs. buy on similar properties. There's little point in locking up cash in real estate equity if you can rent a comparable space for less. It's just finding comparables that's the trouble.

The jury's still out. I'm leaning toward putting down an offer to purchase, knowing full well that it might not become much of an investment. But I'm prepared to walk away if I can't transact on my terms. I'm counting on the prospect that I will be needing office space for my business for the long haul; I'm betting on the success of my company, and the assumption that it'd be better to own the space than rent from some unknown landlord. But leasing remains an option.

The advice I've been given, from attorney and accountant, is to establish a separate LLC as holding company for any real estate purchase, then lease back the property to the main business under a triple-net lease. The key is establishing a reasonable fix on going lease rates in the area so as to neither overcharge nor undercharge in rent. That separates the office property from the core business, and permits additional investors in the real estate to be distinct from the ownership of the core business.

We'll see how it goes.

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