Buying a Building

[Mojo]

We wrote an offer on a commercial building a couple weeks ago and have been going through the financial process with the bank.
I had no idea what a royal pain in the ass buying a commercial building was.

We had an hour long meeting the other day with the commercial loan director. The records we had to supply was horrendous. Personal
records and then 3 years from each company we own of P & L's ( Profit & Loss ) & year end balance sheets. Then tax records for the last 3 years for ourselves and companies.

Everything is completely different with commercial buildings. I asked about the inspection and he said " If you want one go ahead. The condition of the building you are buying is all on you ". If the deal goes through then we start the headaches with the Government agencies and insurance company. The city has to inspect the building and then give an occupancy permit. The fire department has to inspect the building and give approval. The insurance company sends a risk manager to inspect the building as well.

What was different was that the bank is pushing us to form a 3rd LLC which will own the building. The 2 companies will then lease the building back from the holding company. This setup is used to provide an additional liability barrier in the event of an accident or claim/lawsuit by a third party. There are also some tax benefits as well.

In the end, if the deal goes through then we will have a much larger building that we desperately need for growth. Currently we are tripping on each other in a 1,600 sq ft building. The new place is 4,000 sq ft which will really allow us to work with more room, allow an additional 10 x 24 ft sewing table, a larger table for serger sewing, more parts inventory space and provide us with larger offices.

Should know soon if the deal flies or not. If not then back to the drawing board and looking for another building.

Mojo

[kodydog]

The bank wants 0 risk. The thing that killed us with commercial real estate loan was the length of the loan. 15 years compared to a 30 year residential loan. Making the payments double. Everybody likes to stick it to the business owner. You can bet the local government will have their hand out every time you turn around.

40,000 sf is huge. I wish you the best of luck. I know you've been looking for a few years. Where are you relocating to? Will you be able to convert current building into personal use?

[SteveA]

is it 4000 or 40,000 ?  best of luck.  Keep in mind you can have your lawyer write in the contract that you both sign that the seller is not aware of any issues with the building - isn't failing to disclose problems - and is assuring the transition will result in no immediate failures or deficiencies - if it's in the contract you should be further protected. 
SA 

[Mojo]

I wished it was 40,000 sq ft. It is 4,000 sq ft.

My best friend and running buddy is guiding me through the building purchase. He owns commercial buildings, burger kings, Jack in the Box, Popeyes and Dairy Queen buildings all over the USA. His wife is a CPA so she will guide us on the tax stuff. They are always doing deals and have had an excellent track record over the years.

My tech and shop foreman and I went over every square inch of the building yesterday and made note of a few issues. It is a well constructed building and laid out great. I think it will work great for us for 3 to 4 years until we expand into other businesses and build a complex of our own. At that point the building we are trying to buy will revert to rental property for us.

I am pretty amazed at how the local bank handles these deals. They have been awesome so far. Much easier to work with then the big National bank outfits.

Mojo

[baileyuph]

Buying commercial build is a different experience.  I am sure likewise for selling smaller commercial
property.

I bought mine several years ago, it is small.  I could triple my money today (maybe only double).  Most
buyers want the hottest location for their business and a much bigger building. 

I understand that because to grow  business part is dependent on location and size is really important.

Some commercial goes very high - seems location is critical.  Cost can be very high also.

There are advantages of staying small but it doesn't seem to be in the equation for bigger
business today. 

Can't believe what a big commercial on a very busy location (and near interstates and near where
people with the money shop) will bring regarding the higher prices.  Then, changes (all types) later
can be totally different - commercial that is.  That said and to add:  these big buyers for big operations
want and often get all the better tax advantages!

All said, I guess when I sell, it will depend on what the nearby owners want.  My frontage is only
about 200 feet and just a thorough fare.  It is close to residential as well as facing an interstate(but
difficult to interpret)?

Good luck Mojo,

Doyle

[Mojo]

It took us a year to find the right property that we could afford. Our requirements were wide roads, easy access, big enough to park buses on and turn around and a large enough building to maintain our business for 3 to 4 years. If we get this building then we will start looking for vacant land closer to I-75 sometime next year. I would like 10 acres so we have room for expansion as well as being able to develop 2 new companies / operations on.

I have always used a strategic planning process for business. I do 1 year, 3 year and 5 year strategic plans and then develop our operations to achieve those goals. We will be pretty much stuck in this new building for 3 years and once we can develop a new property from scratch then we can move and then rent out the other building.

Our next development is going to take some major bucks but will include several new businesses, all RV related. I am still shocked at the prices of commercial property around us. Even rent is crazy.

Mojo

[baileyuph]

I guess we all see your points made about cost- Mojo.

The cost increases just keep coming;  drainage fees, local lighting, and then the building/parking lot
maintenance all figures in.  Oh!  Business license in my area just seem to increase frequently.

All this described and the customer seems to think shop owners can hold prices steady for a number
of years.

The answer?

Doyle

[SteveA]

It's impossible to hold prices steady - materials, space, utilities, insurance, advertising, etc are always rising.  What about employee waste.  My buddy has a finishing shop 2-3 employees - he says he orders rags, and things like sandpaper, steel wool to no end - are the guys getting the most out of these materials ?  It's not the customer's fault but are those losses figured into the cost of doing business in a bigger shop. 
Growth turns a craftsman into a businessman - not saying it's bad to grow as long as you know the new challenges.  Two hands can only earn so much
SA 

[Mojo]

Doyle:

May & June are my " financial review months ". I go over the products we manufacture and sell and then do cost studies on each one.
July 1st is our price increase/decrease month based on the numbers I have crunched. ( Yes I have done price decreases if I feel market pressure ).

Once your sales start growing and your company expanding and more employees come aboard it is a necessity to review and study your products, production and pricing strategies regularly. It allows the business owner to calculate the rise in material, labor, building and other costs to make sure you are maintaining the right margins. We manufacture a total of 4 different products 2 of them being made from 304 stainless steel, 1 of aluminum and the fourth plastic. Obviously 3 of those have seen wild price fluctuations over the last 18 months because of tariff's requiring us to absorb the costs which in return hurt our margins. I just am completing new price increases for July 1st on all products with the exception of the plastic parts.

In regards to our awning company, we also have to review costs and prices there as well. We just experienced a 20 % price increase on some fabrics we use which required me to go back to our supplier and renegotiate based on volume pricing. When your biggest material costs comes from one or two areas you do all you can to minimize those price increases. We have a great deal of competition in the RV fabric replacement business so we constantly feel the pressure on product end prices. We are doing a price increase due to a rise in material costs but we are essentially tapped out on pricing and raising our prices anymore will hurt our overall sales numbers. That is why staying on top of material costs is so important, especially considering we burn through thousands of yards of fabric per year not to mention cases of Solarfix thread. Negotiating just a 50 cent reduction in fabric prices can result in thousands of dollars more in our pocket.

One other cost issue is labor. We pay our employees ( I think ) extremely well and this represents our biggest cost. We are approaching a $ 1/4 million annually in payroll and yes it hurts big time but it is part of the overall headaches that business owners have to deal with. We budget every year for pay increases and sometimes that hits our margins and requires us to ramp up our prices. With some products we are able to hold our prices and take a hit because we have such huge margins which allows us to hold our prices steady. On other products we have to revisit a price increase.

Interestingly and one item that Doyle will appreciate is when we look to increase our margins we sometimes do that through more efficient production. We are always looking for ways to speed up production and because we have awesome employees they too are always looking for new ways to cut production time by using new methods, new tools or changing a process in order to increase efficiency.   
I admit though that boosting margins with the type of production we do is much harder. Automakers and other industries can do it through automation, robotics, etc. but we do not have the money do employ those things.

With all that said we also have to consider the price increases in everything else which several of you stated above - rent, taxes, utilities, machine parts, etc. Once a business owner starts digging into all of his costs only then can he really price his products or services fairly.

Mojo