“We are currently looking to purchase a building to get out from under our terrible landlord and increase our business asset base. We have found a two-year-old building that meets our needs, but we are having trouble securing financing through the banks. In most cases, they want 35% down, which is out of our realm. We can afford about 20% of the $425,000 purchase price and are looking for ways to get private funding secured by the building. We have been in business for 15 years and have been profitable every year. Any suggestions?”
J. Rysyk, Toronto
Look for a larger building, and become a landlord. Yes, you will need an additional down payment, or a larger mortgage. But that is going to be due to the higher cost. Ever heard of a second mortgage? This second mortgage can count towards the 35% down payment (other cash source) the first mortgage requires.
Add the additional rent revenue to the company cash-flow/income projections, showing it as rent, and not subject to your specific product’s market cycle. Attempt to (conditionally) lease the extra space before you even make an offer on the property.
Then pre-apply for the mortgage, showing the rental business plan incorporated into the business-expansion plan to find out what your first mortgage credit limit would be, and know beforehand just what you can pay with your current cash flow, and projected cash flows.
With a larger-than-required building, renting the extra space gives you the option to take over the additional space once the company grows. This will save the relocation expenses and downtime in the future.
Another option is to give personal assurance, on either the first or second mortgage preferably the first so you don’t need the second. But if that is still a no-go, then give personal assurance on the second.
Another option is to locate away from the city core, where land/building cost are lower, but with basically the same plan.
Sandy Montgomery, Burlington, Ont.
We had a similar experience two years ago, only we managed to get our bank to put together a creative financing package that allowed us to have a smaller down payment. We had the Business Development Bank of Canada bid for our business (they came in at 100% financing) and our bankers really wanted the business so they found a way to put the deal together. Eighteen months later, a new account manager didn’t like the way we had financed the building, and now we are with the BDC. Go to the BDC and you will find extremely receptive bankers.
Basically, the financing is relatively easy, provided that you have a suitable building. I like the idea of purchasing a facility that is larger than your present needs. Moving is extremely expensive and disruptive. So if the combined rent of a sub-lessor and the rent that you are presently paying is equal (more or less) to the total REAL costs of the new building that you want to purchase, then the building works. And if the cash-flow numbers of the property work, then get yourself or partner, or wife a line of credit or even a Visa. Put the balance on there as an unregistered second. This is the way I purchased my first property. Basically it boils down to either (or preferably both) a) cash flow, or b) appreciation or c) combo of both. If there is enough cash flow (from sub-tenant and your rent payment), then you are fine, especially with the interest rates as low as they are presently.
However, if the cash flow is negative, and little opportunity for appreciation, forget the deal — renting can be a lot cheaper in the long run. OR better yet, my personal favourite is to purchase the building, paint, clean, carpets, etc., and re-finance. I have found this works great, and hopefully the re-financed building value is high enough that you can take out the cash that you put down on the property, thereby purchasing the building with no money down.
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