by Mark Lawson “Dear landlord, please don’t put a price on my soul; my burden is heavy, and my dreams are beyond my control” — Bob Dylan
In my last column, I outlined some of the difficulties in running an art gallery in Riverwest. Most of the challenges that face a would-be gallery operator are common to any area of town, in any city across the country. One piece of advice that I and others who have operated galleries in Riverwest would give is to buy your own building to eliminate problems caused by landlords. Landlords usually have agendas other than the welfare of your business venture. I don’t mean to imply that are no responsible or honest landlords in the neighborhood; in fact, there are many. However, their interests and those of your business are not always the same. In this column, I will outline some of the ways in which business operators can effectively deal with building owners, but also look at what it takes to purchase a building of your own. Advice for tenants Robert Frost wrote in one of his best-known poems that good fences make good neighbors. In commercial real estate, good contracts make good landlord-tenant relationships. Review your lease and all other documents relating to your tenancy carefully, taking a few days if necessary. It is advisable to hire a good attorney who is familiar with that area of the law and have them review the contract as well. A contract is an agreement between two parties; you have the right to object to the terms and offer your own clauses or changes. Verbal agreements are great between family and friends, but difficult to prove in court. Put everything you want in writing and have the landlord sign the agreement. If you don’t leave a meeting with a copy of a signed contract, you have no evidence that such a contract exists. Get a signed copy of any agreement. Any verbal communications relating to your tenancy throughout the entire period of your occupancy should be followed up with a letter reiterating the conversation and your understanding of the agreement reached. If it is an important issue, or you have your doubts about the person you are dealing with, send this correspondence through registered mail, so the receiver has to verify his or her receipt of the letter. If there are major improvements needed to make the building usable for your business, consider your position very carefully before doing any of these yourself. Essentially, you are improving someone else’s property and need to be certain that your investment will be worthwhile. Commercial tenants regularly improve property they rent, so you need to get every responsibility down in written form. There are countless stories of artists who have been brought into rugged loft studio buildings and who have completely renovated their portion of the building, only to have their rent radically increased and their space rented to a more upscale commercial tenant. This is one of the primary reasons which buying your own building may be the right answer for you. Buying your own gallery or studio space If you decide to purchase a building, you will quickly discover that the requirements are much more difficult than purchasing a residential property. There are two primary reasons for this. Residential loans are almost always sold on the secondary mortgage market, which is a major source of income for the mortgage lending industry. For consumers, this practice tends to keep the cost of purchasing a home much more affordable. Commercial properties are generally regarded as a business venture, and as such, are considered a more risky proposition for secondary market investors and for lending institutions. For that reason, an initial down payment of at least 20% of the purchase price is required of commercial property purchasers. This is much greater than the 3% to 10% generally required of residential buyers. In investments where the risk is greater due to the nature of the property or business, or the credit-worthiness of the buyer, the down payment may be even greater. Coming up with that large of sum of cash to purchase a commercial property can be a very daunting proposition. There are a few other ways to accomplish this equity position. I recently spoke with Steve Koski, loan officer for the Brewery Credit Union. In addition to the standard 15 or 30 year fixed rate loan, they also offer a five year balloon loan. The major difference between the two is that the standard fixed rate loans must conform to the requirements of the secondary market, which has very demanding conditions for the 20 %-plus down payment requirement. With the balloon loan, the lending institution keeps the loan itself and can establish its own requirements, often based on the unique situations of individual purchasers. For example, the 20% may come from equity in a property already owned, the pledge of equity from co-signers, or even borrowing portions of the down payment can be acceptable in some circumstances, according to Steve. These are practices routinely followed by large investors with deep pockets and considerable collateral. They can also be valuable ways in which a small-scale business entrepreneur can accomplish the difficult task of purchasing a commercial property. Another rather long-term strategy is to raise the funds through some other business venture. The rapidly increasing property values in Riverwest offer one such opportunity. Consider buying a residential property, particularly one that you may be able to purchase at a below market rate because of repairs needed. Increase the value of the property by improving it. There are many low cost city programs available to help you out with this sort of investment, especially if you are a resident of the property. Leverage the equity you establish in this property to purchase a commercial building. Obviously this approach will take time, but unless you have other resources, buying commercial properties is a very time-consuming process even when everything goes smoothly. It may be difficult, but the final result may be the long-term security and economic health of your gallery or studio. Riverwest Currents – Volume 1 – Issue 10 – November 2002
by Mark Lawson