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Many people, from business owners to investors, have considered purchasing commercial real estate but do not know where to begin the process. If it is their first time, the process can be a little daunting and it helps to know what to expect. While it is not difficult, there are many steps involved in making sure buyers get the right property for their needs and that they protect themselves from potential negative consequences in the future. A buyer would not be happy to make one of the largest investments they may ever make, only to find out they cannot use the property due to zoning or cannot sell the property later due to environmental problems. A methodical approach to purchasing will protect buyers against problems and ensure they get the best property for their needs.
Finding the Right Property
The first step is to find the right property. There are numerous commercial websites that will help in the search and my favorites are LoopNet (a national website), CPIX (a Michigan based website), and realestatetc.com (my website, local to northern Michigan). However, no single website will cover all of the properties in an area and it can be difficult to find everything that may be available. There are also properties that are not listed on any websites that are sometimes the best deals. Talking with a knowledgeable local realtor that specializes in commercial real estate will get you the most information. A good agent can also help look at demographics, traffic counts and growth areas to help guide the buyer into making the best decision for their business needs.
Financing
After determining the price range, it is important to talk to some lenders and make sure the buyer can get the financing that is necessary. Commercial loans can vary widely and differ from a house mortgage in many ways. Traditionally, a buyer will need 20% of the purchase price as a down payment. In some cases, if the buyers are using the property for their own business, they can finance it with as little as 10% down. It is also possible to have the seller hold the note for part of the purchase price if one does not have the minimum down payment. For investment real estate a bank might require as much as 25-30% down, especially if there is a large vacancy or it is the first time the buyer has purchased this type of property. Another difference is that commercial loans generally have a fixed rate for a period of 5 years and then the rate will reset to market, although some lenders may fix rates for longer. Finding the right mortgage is an integral step to making any purchase a successful investment.
The Offer
After identifying the property and the ability to finance it, it is time to have a knowledgeable real estate agent write an offer on the property. This is done before beginning due diligence so that the owner does not sell to somebody else, while the buyer spends time and money to evaluate the property. The offer will have contingencies in it so that a buyer is not obligated to purchase the property if any of the due diligence is not acceptable. It would also be a good idea to speak to a real estate attorney about the offer as well as holding the property in an LLC or corporate structure and also an accountant about the financial aspects of the property.
Due Diligence
Due diligence for commercial real estate can be very involved. In addition to hiring inspectors to check the roof, foundation, mechanicals, structural components and other aspects of the building, the buyer will also need to study the title work, do environmental evaluations, check on zoning, order a survey and have a complete understanding of the financials.
Environmental Reports
In order to avoid liability for any existing contamination on a commercial property, it is important to hire a reputable environmental company and do a Phase 1 environmental report on the property. If the Phase 1 determines that there are recognized environmental conditions, the consultant will recommend a Phase 2 which goes into more depth and may include soil samples and testing for various contaminants. If the property has contamination, a baseline environmental assessment and due care plan will be prepared. These reports protect the buyer from future liability and outline steps to take to ensure the contamination does not spread or become worse. A large number of commercial properties have some contamination and although a Phase 1 & 2 can be expensive, this is a very important step and could be much more costly in the future, if a buyer does not complete the process.
Surveys & Zoning
In order to get a title policy without exceptions, the buyer will need an ALTA survey of the property. This is not always necessary but if the purchaser is developing or adding to an existing building, it is often recommended. It is also important to study the title work and determine if there are any deed restrictions, easements, or liens on the property that may affect the use or the value of the property. The buyer will also need to check on the zoning of the property to make sure it is zoned to allow the intended use. Sometimes a use that is not allowed by right can be done with a special use permit or as an accessory use.
Income Property
When buying investment real estate or property with existing tenants, it is going to be important to look at the existing leases, financials from past years, lease terms and landlord obligations in order to have a strong understanding of what the income will look like in future years. This should be shared with a knowledgeable accountant who understands real estate and can help adjust expenses, such as taxes and interest, to reflect the actual amount a new owner will pay once the purchase is complete and property taxes uncap.
Time Frame
With good guidance from a professional team and a thorough plan, buyers can get through the due diligence process and find property that will help grow their business and their wealth. The process usually takes a minimum of 30 days and can take multiple years if entitlements are needed for a large development project. On average most transactions in northern Michigan will take about 3-6 months to get through the entire process and to close on a well-vetted piece of real estate. As always, feel free to contact us with any questions about the process.
– Dan Stiebel, CCIM
