Purchasing a commercial property is much more complicated than buying a home. It can be a life-changing investment with many income opportunities, but it takes a lot of research to find the right place.
Business owners and industry professionals must remember these six financial considerations when seeking a new workspace.
1. Find a Property That Fits the Company’s Needs
There are many different commercial property types, but for clarity’s sake, they can be placed into five primary categories:
- Multifamily: Apartments, duplexes, assisted living facilities and other residential complexes with multiple units.
- Office: Buildings with enough multifunctional office space to accommodate several businesses at once. They can widely vary in size.
- Retail: Shopping centers, plazas and other spaces that sell goods and services. Location is especially important for this category.
- Industrial: Factories and warehouses where businesses use heavy machinery to carry out industrial tasks.
- Hospitality: Restaurants, hotels, vacation rentals and other spaces serving travelers or customers looking for a pleasant one-off experience.
Real estate professionals also group commercial properties into three classes based on quality. Class A properties have state-of-the-art facilities and the best locations. Class C properties are old and rundown. Class B properties fall somewhere in between and make up most of the local real estate market.
2. Learn Why the Owner Is Selling
Proper diligence is always crucial when buying any sort of property. Business owners must learn why the owner has chosen to sell before they commit to anything. This information will provide much-needed context about the building’s recent history and expose any issues that might impact negotiations. These red flags are common in commercial real estate:
- Incomplete documentation
- Multiple vacancies in the building
- Few or no tenant testimonials
- Outdated property management software
- No recent repairs or renovations
- Unfair maintenance agreements
- Strict local zoning laws
It’s always helpful for buyers to view the situation from the seller’s perspective. People tend to think irrationally and neglect to consider all the factors when browsing the real estate market. Knowing all the “whys” behind the property listing forces buyers to pause and think about the long-term consequences of the purchase.
Something is probably wrong if the current owner is secretive about the building’s other tenants or repair history. A transparent owner is a good sign that the property is a viable option.
3. Compare Multiple Lenders
Once a fitting property is found, the next step is to partner with a lender and secure financing for the purchase. Reach out to multiple lenders and compare their interest rates, loan-to-value ratios and other fees that might come into play. The loan structure must also be the right fit:
- Permanent loan: Although not technically permanent, it’s a long-term mortgage that could extend to 30 years. Businesses that plan on staying in the same location often opt for this type of financing.
- Federal Housing Administration (FHA) loan: This mortgage has a low down payment and requires the government’s approval. It’s a good option for people with low credit scores.
- Small Business Administration (SBA) loan: Loans from the SBA can be extremely helpful to growing businesses. They require a long-term commitment but have low interest rates and additional referral or debt relief programs.
- Bridge loan: Bridge loans are short-term loans that only exist until the company pays off its financial obligations or secures another form of permanent financing.
- Hard money loan: This type of loan is another short-term option with heavy influence from the property’s value. It’s often reserved for house flipping and other risky business endeavors.
No matter which lending option is the best fit, swift action is the most important thing. The commercial real estate market will become more competitive as COVID-19 headwinds slow down and more people return from remote work.
4. Get Help From Multiple Professionals
Hiring multiple professionals will ensure the purchase goes through without hiccups. The initial expenses might be higher, but the long-term ROI is worth it. Aside from a real estate agent, businesses should consider hiring these individuals:
- Mortgage broker
- Property manager
- Contractor or subcontractors
This A-team of professionals will help navigate the legal and logistical complexities of buying commercial real estate. They will also become long-term allies and help keep the property in good condition, physically and financially, for years to come.
5. Inspect the Building’s Condition
A commercial structure has many moving parts that can influence property value. A thorough inspection is a nonnegotiable step before finalizing the purchase. This checklist covers every essential element of a commercial space:
- Exterior landscaping
- Parking areas
- Roof surface
- Structural framework
- Utility systems
- Floors, walls and ceilings
- Floor plans
- Evacuation plans
- Recent repair documents
- Building permits
Business owners should also look for building materials and architectural designs with proven track records. For example, built-up roofs can last up to 30 years with proper maintenance. Office spaces with appropriate ventilation and lots of natural light can help with employee productivity. These small details impact the company’s success more than most people realize.
The property should also have some flexibility. It might not be the best fit if it was designed for a specific business model. The best commercial structures allow new tenants to add employee-friendly resources to the space without significant alterations.
6. Negotiate the Property Value
Once the inspection and financing are complete, it’s time to negotiate the final price and make an offer. Write out a letter of intent and a purchase and sale agreement. The accountant and attorney will be great resources during this process. These formulas help buyers calculate fair estimations of a property’s value:
- Market approach: Look at the values of comparable properties and make a similar estimate.
- Cost approach: Calculate how much it would cost to rebuild the whole structure from scratch.
- Gross rent multiplier: Divide the property’s listed price by its current gross income.
Entering the final transaction with a clear number in mind lightens the tension and provides a clear starting point for negotiations. It’s always better to negotiate in person to read the other party’s reactions and ensure all documents are in order.
Find a New Space for a Business
Every successful company has a commercial setting that complements its business model. This is why similar organizations gravitate towards common designs. Finding a new space can be difficult, but these six steps will uncover a fitting property in the right location.