It’s all over the Canadian headlines today – BlackBerry (who owns more than 20 buildings and reportedly controls 15% of the total office market in Waterloo, Ontario) is selling some real estate. Aside from the fact that many of us (myself included) are very disappointed to see where BlackBerry has ended up, are there some lessons here with respect to businesses owning real estate? We quite often get inquiries from business owners who are considering purchasing real estate to turn their lease payment into a mortgage payment and hopefully build some equity for the future. We are not in the real estate sales and leasing business but providing mortgages and loans to businesses is something we do all the time and here are some rules of thumb we have learned:
1. Weigh the long term costs of ownership
In a low interest rate environment, many businesses will make the case that ownership is cheaper compared to renting. That maybe true while interest rates are low but not when they begin to rise. It doesn’t take a very large increase in interest rates to significantly change your monthly cost of owning real estate. In the long term, the interest cost of purchasing a property needs to be weighed. You may be surprised to see that your business has paid twice for something that they maybe could have paid once for.
2. Interest rates play a major role in cash management
Take any mortgage calculator and see the difference 1.0% makes in the monthly payment and long term cost. Then punch in a 2.0% increase to the interest rate. The point here is that most businesses live and die off cash flow. More to the point they live and die off of the timing of their cash flow. If your business has not demonstrated stable cash flow over the past few years (including during the down turn) then maybe ownership is not the answer. If interest rates were to change and the cash flow of your business is already sensitive you may be forced to sell the real estate at a loss just to get your cash flow sorted out.
3. Consider the unknown costs
As a tenant you get the opportunity to pass off the burden of maintenance to a landlord. When you are the landlord these costs become yours and always come at the worst time. Need a new roof? New HVAC system? Make sure your business can write the cheque. As well, when you purchase a property you most likely will pay a commission and other costs that can quickly add up. Even at 5.0% you have to make sure you believe that the value of your real estate will increase over and above your initial costs to preserve your equity.
So what do we learn from BlackBerry selling of its real estate? To me it continues to reinforce the same basic principal. Have a plan, know how you are going to pay for it and don’t wait until the last moment to knee jerk decisions.
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” ― Abraham Lincoln
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