1. What you may not know, but need to:
Here’s some questions and thoughts to consider:
- Assuming you haven’t owned commercial real estate before, run a lease vs purchase analysis to see if there is a cost benefit to ownership. A qualified commercial real estate broker can help with the analysis. When looking at a 10 year timeframe, and assuming a modest annual increase in property value, you might be surprised at the amount of overall financial gain from ownership vs leasing.
- Do you have enough cash up front to purchase? If you occupy 51% or more of the property, that is considered owner-occupied and may qualify you for the best financing in terms of down payment, interest rate, length of loan, etc. Typically you can put down as little as 10% of the property value with good credit. For an investment property, you will be looking at more like 25% down and up. You will also incur costs associated with the feasibility phase of the purchase including a building inspection and possibly a phase 1 environmental assessment and appraisal. These are not large expenses…you just need to be aware of them. In addition to the down payment, you need to consider what improvements to the property need to be made in order to satisfy your needs.
- If you have a unique requirement or have the time and patience, you can consider constructing a new building. While it can be extremely satisfying when its all said and done, building from scratch takes many months to plan. If going this route, make sure you have competent advisors (see Item #2 below).
- Always, Always, Always think about your exit strategy. If you buy commercial real estate, you (or someone associated with you) WILL sell it one day. If there is an issue or concern today that is not rectified for example; inadequate parking, out of date architecture, dis-functional floor plan, limited zoning, flood plain issues, etc., then the day you go to sell, it could be an issue for a potential buyer.
2. Line up your experts
Buying commercial real estate is often a complex process. You’ll likely need to hire experts.
At the very least, you’ll need to hire a commercial real estate broker, accountant, mortgage broker and commercial real estate lawyer.
If the property needs renovating, you will want to bring in a contractor (for pricing purposes). If adding to an existing building or are building from scratch, bring a civil engineer and architect to the team to understand the zoning, set backs, impervious cover, height restrictions, fire code hurdles, potential parking, etc.
3. Financing First
If you’re like most people, you’ll need to get some financing help to be able to purchase the property.
Understandably, many people want to know what properties are available for sale to “wet their appettite” before they get too serious about the process. Have your commercial real estate broker run a report of available properties that fit your parameters. If you a property or two that peaks your interest, then you want to understand the financing side of things before you go any further.
Likely your existing banking relationship is a good place to start. Most lenders, whether credit union or traditional banker, have a commercial loan group. They can provide you with information on the loan qualification process and loan terms. Keep in mind that local and regional lenders can be more aggressive (in a good way) with loan terms than the big banks so shop around. Another avenue is a mortgage broker. A good mortgage broker will do the shopping for you and find the best terms that match your financial situation with the appropriate lender.
4. Offer time
Once you have searched the market and found the perfect property, you have several ways to proceed.
You can have your commercial real estate broker draft a Letter of Intent (LOI) outlining the offer price, financing terms, time frame for title review, survey, inspections, etc OR have them fill out a commercial real estate promulgated contract (for Texas it’s a form issued to Realtors by the Texas Association of Realtors). Either way is usually acceptable, but in a competitive situation where other buyers may be interested in the property, you might want to go with the promulgated contract to “lock” the property in.
Regardless of which way you make your offer, have a qualified real estate attorney review the document. The attorney will explain all details of the written agreements so you know exactly what your rights and obligations are.
5. Doing your Due Diligence
This is where it gets a little more real. Money is about to change hands. Once a contract is executed, the clock starts ticking. You will have so many days to do your review (or Due Diligence) to know as much about the property as you possibly can.
You will first contact your lender to start the loan process. They will need a copy of the executed contract and will ask for various documentation want to line up a property inspection. Your lender will set up the appraisal and phase 1 environmental inspection (if they require it).
The seller will submit an existing survey, if they have one, to the title company for their approval. If the survey is not acceptable, the party responsible for ordering a new survey will need to do so as soon as possible.
As information comes in on the property, you will want your experts to review the documentation to determine if any further action is required.
If something strange or wrong comes up in your inspection of the property, review of the title or survey, that is unreconcilable, you have the right to cancel the contract and get your earnest money refunded.
6. Pre & Post Close
Once you are satisfied that the property you are buying meets your needs and doesn’t have any “deal killing” issues and you have past the feasibility stage, you are in the “pre-close” stage. During the pre-close you are primarily working with your lender on firming up the financing. If your property will require repairs or modifications, you will want to meet with your architect and contractor to line up the work needed so once you close your contractor can hit the ground running. Right before the close, don’t forget to contact all utility companies to transfer over utilities.
High speed internet access such as T-1 and fiber can take up to 30 days to install.
At the closing table, make sure you get all the keys and security equipment information so you can access the building and rekey/recode everything.
After the closing, you have the obvious task of moving your personnel and equipment. Keep a folder for the property with the closing documents, maintenance contracts, plans, building insurance, etc. for future reference.