With commercial real estate often being one of the biggest purchases that a business makes, understanding the types of costs associated with owning and operating a building is crucial to that business’ profitability. In this article, we help identify each cost that may come up at different stages of building ownership.
Other than the price of the property, a business owner may have to pay hefty amounts for due diligence, environmental and building condition assessments, appraisals, and title searches. During this stage, it is important to assess all tangible and intangible factors including the physical condition, property liens, tenant mix, and previous insurance claims. Allocating an appropriate amount of time to the due diligence process directly aids in mitigating any future replacement costs, neighboring property issues, or credit/default risk in commercial tenants.
Prior to the commercial real estate purchase, a Zoning Certificate of Occupancy from the respective municipality is required to determine if a business can operate in a particular area. To further understand commercial zoning requirements, read our previous blog here. Additional permits for property encroachments and easements identified in commercial real estate agreements may be required.
Ownership and Operation Costs
Once the purchase is complete, real estate costs fall into two categories: fixed and variable. Fixed costs are simple enough in that they include property tax, insurance, and mortgages. Note that in Ontario, property tax is calculated based on a general municipal tax rate, an education tax rate, and the property value which is determined by the Municipal Property Assessment Corporation (MPAC) every four years.
In terms of variable costs, property management is a big-ticket item for most building owners. For example, renovations or repairs may be necessary due to building condition defects, a poor layout, or production requirements. The roof, windows, foundation, siding, plumbing, electricity, heating, ventilation, and air conditioning are commonly repaired. Property management also includes the cost of maintenance for snow removal, landscaping, garbage disposal, etc. Lastly, the cost of managing the building itself, which includes collecting rent, paying taxes, and cleaning the facility is just as important.
First, building and property maintenance, which includes things like snow removal, landscaping, garbage/recycling removal, and small repairs. Second is the cost of managing the building itself and any tenancies, which includes things like collecting rent, paying taxes, and making sure facilities like washrooms and common areas are maintained. Our team deals directly with prospects and tenants to provide property management assistance – for more information, visit our website.
Even experienced business owners face unexpected expenses when buying commercial real estate for their business. That is why it is important to work with the right team that understands the commercial real estate landscape to help you through the process of buying property. Visit our team page to learn more about how we can help your business.