Investing in Commercial Real Estate

For the first-time buyer, commercial real estate can be a complex and intimidating process. While there is much to consider, the first question to ask is, why buy? Commercial real estate can help your business to grow, expand, or take advantage of favorable capital gains treatment and tax breaks such as property taxes, mortgage interest, and more. Direct control of your investment, including how to leverage the building and tenants, creates owner advantages. Commercial purchases require customized strategies for each property; however, there are some general guidelines to follow for first-time buyers.

Your “why buy” questions might include the following:
• What type of commercial real estate are you wanting?
• Is the property for your own business, for rent, or to build equity?
• What is the ideal location for your endeavor?
• What is your tolerance for risk? Determine how much can you invest.
• What part of the deal can you handle? Some skills can be hired or contracted.

Know Your Business Needs

With a clear idea of your purchase intent, it is important to research and prepare before making a purchase. Understand your business needs. Clearly define the type of property that will best support your business and its operations. Consider factors such as location, size, layout, and amenities.

• Do you need large office space for your business and employees?
• A retail storefront?
• Warehouse storage?
• Is there ample parking?
• Is disability access up-to-date?
Be certain that local zoning laws, easements, and building codes permit the type of business and changes you intend to bring from commercial office space to industrial warehouses. These considerations include making interior or exterior changes to the facility.

Determine Your Budget, Financing Options, and Income Streams

Budget considerations include the property’s purchase price and ongoing costs such as maintenance, utilities, insurance, and taxes. If you plan to lease part of the space to other businesses, then factor in rental income and property management requirements to meet any lessee’s expectations.

Your available financing options will be crucial to your success. Be sure you have a clear idea of how much you can afford to spend on a property, including realistic financing options such as a loan or mortgage through banks, lenders, or other investors. Factor in your budget’s ongoing costs not to overextend your financial position.

Before you even begin looking at properties, it is vital to understand how much you can realistically afford to spend. This assessment will help you narrow down your options, save time, and focus on properties that fit within your price range.

Look to leverage associated income streams to offset the property’s costs. There are many avenues to generate revenue on your commercial property. Advertising may be possible via billboard sales or other signage. You can sell ad space if you publish a services directory because you have multiple tenants on the property.

You can cross-market and cross-advertise with neighboring or local businesses where it makes sense. These strategies can lower your advertising costs and increase potential customer volume. Offer services to tenants or employees, such as the sale of premium parking spaces. You can sell maintenance and trash removal services to tenants.

Research the Relevant Market and Find a Reputable Real Estate Broker

Look at comparable properties in the area to get an idea of what similar properties are selling for and understand the local economic and demographic factors that may impact the property’s value. There may be circumstances when leasing is a beneficial strategy before purchasing.

Remember, an experienced commercial real estate broker will have knowledge of the local market and can help you find properties that meet your criteria. They can also help you negotiate the terms of the sale and handle the paperwork. Your agent’s expertise in commercial real estate helps prevent problems with contracts, agreements, and other matters. When a legal situation arises, they may consult or recommend a real estate attorney.

Obtain Further Expert Advice and Assistance

A commercial real estate deal has many facets involving different professional disciplines, so you need to assemble a team of experts. Financial matters may require a bank representative, accountant, or business financial officer to advise you on what you can afford, navigate you through tax benefits, and forecast your operating budget in detail.

Retaining a real estate attorney and broker creates a formidable team to represent the commercial real estate property purchase to your best advantage. A real estate lawyer can review your purchase process, ensuring the deal and property are legitimate and legal from beginning to end.

Hiring legal representation for the totality of your commercial property purchase event prevents you from becoming entangled in a purchase agreement that provides little benefit for your goals. These protections include any documentation that requires a signature. Deeds and other legal documents will require careful review, and copies to be kept on file with your lawyer to address any potential issues.

Perform Due Diligence Before Making an Offer

Before making an offer on a property, it is important to research the property and surrounding area thoroughly. This includes a professional inspection and reviewing any documents related to the property, such as a title report.

Verify that the seller is legally free and clear to sell the property. Fully understand the terms of the sale, including the purchase price, any contingencies, the closing process, associated costs, and responsibilities before generating the offer.

Negotiate and Close the Deal

Once you have identified a property that meets your needs and budget, it’s time to negotiate the terms of the sale with the seller. Make an attractive offer. No seller wants to entertain an offer that isn’t serious. On your behalf, your real estate attorney and broker or agent can negotiate broader terms using a Letter of Intent (LOI) and more specific terms using a Sales and Purchase Agreement.
Upon agreement of the terms, you will need to close the deal and pay for the property. Closing the deal typically involves signing the contract and receiving the legal documents transferring the property ownership. These final steps should run smoothly if you’ve prepared and researched before purchasing. You will be well informed to make a financially sound decision.

This article offers a summary of aspects of estate planning law. It is not legal advice and does not create an attorney-client relationship. For assistance, please contact our Natchez office at (601) 445-5011.