Wednesday, July 7, 2010

The Buying Motivation

I am frequently asked by clients if they should consider buying vs leasing a location. I have carefully analyzed this over the years and have discovered several characteristics that most owners of industrial real estate possess. In no particular order, they are:

Time in Business:
Most owners of industrial locations have been in business at least five years. The reasons are simple. Size needs, financing, and cost regulation.
Size needs tend to become apparent after a company has a five year track record. If a company's size needs are fluctuating, the best course of action could be leasing a location with a series of options to extend. In this way, the company is not saddled with an illiquid asset that can hamstring growth. Once a company has been profitably in business for at least five years, a down payment can be generated as well as a track record for financing is created. Purchasing an industrial location with long term fixed rate debt is a terrific way to regulate the location cost of doing business!

Closely Held:
Most owners of industrial locations are closely held corporations and are not publicly traded. I am specifically referring to owner occupants as opposed to non occupant owners (investors such as Real Estate Investment Trusts). The reason is simple as publicly traded companies would rather avoid the earnings drain that depreciation of real property creates.

Market Conditions:
NOW is the very best time to purchase a location that I have experienced since 1984. Interest rates are at levels last seen in the Truman administration. Owners are extremely motivated to make a deal even at depressed pricing and banks want to rid themselves of non performing assets.