Buying commercial real estate is not like purchasing a family home. The costs are typically higher, obtaining funding is more difficult, and finding tenants may be necessary. Additionally, finding tenants may require legal services to assist with marketing, identifying, and securing new leases. Nevertheless, purchasing commercial property for a new investment or business endeavor can be a rewarding and profitable adventure if approached strategically and within the bounds of state, city, and local laws. To ensure success, a commercial real estate lawyer is essential to any transaction.

What is Commercial Real Estate?

Commercial real estate (“CRE”) encompasses property used for business purposes, rather than residential. CRE can be a small mom-and-pop store or a sprawling shopping mall, and includes restaurants, hotels, office spaces, hospitals, and doctor’s offices. CRE is generally divided into five categories: industrial use, multi-family rentals, office space, hospitality, and retail.

• Industrial Use. Industrial use properties are businesses that manufacture and store goods, such as manufacturing facilities and storage warehouses.
• Multi-Family Rentals. A multi-family rental is typically a large property with multiple smaller units that families rent for their primary residence. Properties can be small, housing only a couple of families, or large, housing hundreds of families.
• Office Space. Office space is often viewed as the most high-risk type of CRE. These properties are generally classified into three different classes based on location and condition: Class A for the highest quality buildings, Class B for older but still high-quality buildings, and Class C for older buildings in deep need of maintenance and care.
• Hospitality. Hospitality properties are meant for travelers and include hotels, entertainment sites, and restaurants.
• Retail. Retail properties include small stores, strip malls, and restaurants.

The Commercial Real Estate Purchasing Process

If handled correctly, purchasing commercial real estate can be a valuable investment. The process includes various steps that may vary depending on the jurisdiction.

Identification of a Property

The first step is to locate the property to be purchased. This may seem easy, but there are many factors to consider, including:

• The history of the property and whether it can provide a steady stream of income.
• The location of the property and whether this type of CRE is needed in that location.
• Any work that must be done to the property to make it ready for its intended purpose.

A real estate lawyer specializing in CRE properties can assist in finding the right property.

Initial Offer Price

While the property will have an asking price, the purchaser must do their homework to ensure they do not offer too much initially. Two of the most popular approaches are:

• Income Capitalization Approach: This approach involves dividing the net operating income (NOI) of the rent collected on a property by the capitalization rate.
• Cost Approach: This approach involves looking at what it would cost to build the CRE from the ground up. The cost of the land combined with the cost of construction, less depreciation, will yield the cost approach value.

Other offer price calculation methods may be employed depending on the CRE being purchased. Your commercial real estate attorney can explore all options to determine the best offer price.

Purchase and Sale Agreement

The purchase and sale agreement should include all terms of the sale and everything agreed upon between the seller and purchaser.

Financing and Inspection

Securing financing for the property can be complicated, but due diligence must be performed to secure the best terms. You should compare several lenders before deciding on one. You want to know the interest rate, fees, and whether there are any penalties.

Commercial property financing options that can be employed for various purposes include:

• Permanent loans
• Small Business Administration (SBA) loans
• Bridge loans
• Hard money loans (a last resort but could be useful in certain situations)

In most cases, the purchaser of the CRE will make a down payment of 20-40% of the purchase price and finance the rest of the purchase price.

Property Closing

Once all the terms of the agreement have been agreed upon and financing obtained, the purchaser can move forward with buying the property. Other important matters, such as a title search and execution of the documents, must take place before the keys are exchanged. Once the purchase is completed, the buyer can move forward with their plans for the CRE.

Factors to Consider Before Purchasing Commercial Property

Before purchasing CRE, various questions must be considered, including:

• Will this property meet the investors' needs long term?
• How hands-on are the investors willing to be with the CRE?
• How will local demographics impact this type of CRE's success?
• What are the zoning laws of the area where the CRE is located?

Other factors exist, which is why it is a good idea to hire someone who specializes in this area to provide legal and professional guidance during the purchase process.

Commercial Property for Investment Purposes

If purchasing commercial property for investment purposes, several different strategies exist that could prove beneficial. Some of the most common real estate investment strategies include:

• Land banking, which involves purchasing and holding land and is often used to protect and grow investors' money.
• Development, which is probably the most common and is where an investor purchases raw land upon which to build.
• Fix and flip, a tactic popularized by reality TV, occurs when a property is purchased, renovated, and resold for a profit.
• Buy, Rehab, Rent, Refinance, Repeat (BRRRR), a way to enjoy passive income through flipping properties that are rented out to tenants.
• Wholesaling, which involves purchasing a contract from a property seller below market value and reselling or assigning it to an interested buyer.
• Passive investment, where you do not want to be involved in the property, so you simply put capital into a real estate endeavor through a partnership with an active investor, crowdfunding, or stock market.

If you have not yet decided on how you wish to invest in commercial property, a real estate lawyer focusing on investment properties can help you determine a strategy most suitable for your goals. Each strategy involves different roles, responsibilities, and requirements, and so each should be carefully considered.

Seller Disclosure Requirements

Seller disclosure requirements vary from state to state. In fact, many states do not require the same (if any) disclosures for commercial properties as they do for residential properties. Some states specifically outline what information must be disclosed, while others leave it up to the seller to choose whether or not they want to disclose any information. Typically, most states still require disclosing any property defects or environmental concerns even if the property is a commercial one.

As a commercial property purchaser, it is imperative that you are aware of your jurisdiction's disclosure requirements and that you receive accurate information from the seller. You should also inspect the premises. All of this is even more critical if you live in a state that does not strictly regulate commercial property like they do residential properties.

Real Estate:

    - Residential Purchases

    - Residential Sales

    - Property Transfers

    - Commercial Purchases

 

__________________

 

Relevant Blog Posts:

    - Real Estate Blog Posts