12-Point Checklist for Buying Commercial Real Estate

Introduction to Buying Commercial Real Estate

Investing in commercial real estate is a significant financial decision with the potential for profound impacts. When correctly navigated, finding the ideal property can lead to substantial benefits. However, the journey is complex and requires careful consideration. Adhering to a buying commercial real estate checklist is crucial to avoid overlooking important details that could lead to regrettable decisions.

Understanding the nuances of commercial property investment is essential. The process demands thorough due diligence, and following a structured buying commercial real estate checklist equips you to make informed choices. Coupling this approach with the expertise of seasoned professionals ensures that your investment is profitable and sustainable, both in the short and long term.

This guide provides insights into the complete buying commercial real estate checklist. It’s designed to illuminate the distinct steps necessary for securing the perfect commercial property, whether you’re a first-time investor or have experience in residential real estate. Remember, commercial and residential real estate are different realms, and it’s a red flag if you’re told they’re the same.

Embracing this checklist is about more than ticking boxes; it’s about embarking on a journey with confidence and clarity. It demystifies the complex process of commercial real estate acquisition and offers a roadmap of what typically unfolds in these transactions. So, let’s remove the mystery and explore the essential steps in the buying commercial real estate checklist.

Checklist for Buying Commercial Real Estate

1. Running Comps on Commercial Properties in the Area

Understanding the market value of commercial properties in your target area is a crucial step in your buying commercial real estate checklist. For those experienced in residential property transactions, this will be a familiar task. To obtain reliable comps, consult with a Commercial Real Estate Broker. While there’s no centralized database, platforms like Crexi and LoopNet can offer valuable insights. The goal here is straightforward: ensure the property you’re interested in is priced appropriately.

Consider these key questions:

• Are there high vacancy rates in the area?
• Can the area support the rents necessary for your investment to be viable?
• If there’s competition for rents, what unique features does your property offer?
• If comps suggest unfavorable rent support, does this property have unique advantages to command higher rates?

Note: Low vacancy rates can be promising, but they’re not the sole success indicator, especially in areas with few properties.

2. Determining Your Investment Goals

Before diving into property hunting, defining your investment goals is essential. This step helps focus your search on properties that align with your objectives. Ask yourself:

• Are you an owner-user or an investor?
• What are the intended uses for the property? Common uses include office spaces, retail, multifamily units, industrial areas, flex spaces, hospitality ventures, mobile home parks, farms, ranches, or land.
• Are you seeking value-add opportunities or a more straightforward investment?
• Which markets and submarkets are you targeting?
• What returns or cap rates are you aiming for?
• What is your price range?

Answering these questions clarifies the type of property you need, moving you to the next stage of the buying commercial real estate checklist.

3. Seeking a Financing Letter of Intent (LOI)

Before starting your real estate search, obtaining a financing LOI from a commercial lender is advisable. This step is akin to getting pre-approved but in the commercial real estate context. Research various commercial lenders, understanding how they might underwrite your financial situation and the terms they offer for commercial loans.

When evaluating potential loans, consider the following:

• Loan to Value (LTV) ratio offered.
• Term length of the loan.
• Interest rates.
• Monthly interest and principal payments.
• Any financing-related fees or points due at closing.
• The type of loan.

Comparing these aspects across different lenders ensures you secure the best terms for your investment.

4. Consult With Your Consultants (Building a Network)

Your professional network is invaluable in the commercial real estate sector. The right network of consultants can guide you through the entire process, from redevelopment to navigating complex rezoning. Key consultants to include in your network are:

• Mentor/Advisor: Choose someone with extensive experience, capable of guiding you through various challenges and expanding your network with competent professionals.
• General Contractor: Essential for managing construction aspects, including permitting, renovation, and dealing with subcontractors.
• Commercial Real Estate Broker: Stay informed with their updates and actively engage in discussions about potential properties. They can provide critical insights and access to off-market deals.
• Commercial Real Estate Attorney: An expert in navigating legalities, including purchase agreements, zoning restrictions, and environmental issues.
• Property Manager: Vital for operational management. Even if you don’t plan to hire one immediately, account for this in your financial planning.
• Market Studies Expert: While not always necessary, market studies can provide a competitive edge and uncover unique opportunities.

5. Begin Your Commercial Real Estate Search

The search for the right property is a crucial step in your buying commercial real estate checklist. Most commercial properties are listed online, searchable by location or industry. However, don’t overlook the advantage of working with a broker who may have access to unlisted properties. Remember, many deals happen off-market.

Use the criteria established in earlier steps to guide your broker. They can then present properties that align with your goals.

6. Check the Zoning Regulations

Understanding zoning regulations is a key component of the buying commercial real estate checklist. Ensure the property’s zoning aligns with your intended use. Consider the following:

• Multi-Family Housing: Requires zoning suitable for apartment buildings, townhouses, etc.
• Retail, Restaurants, Office Buildings: Requires commercial zoning. Be aware of the specific type of commercial zoning needed.
• Industrial Use: Look for appropriate industrial zoning for manufacturing, transportation services, etc.

In addition to zoning, consider building restrictions like FAR (Floor Area Ratio) and height restrictions. If the property isn’t correctly zoned, explore options like speaking to city officials or applying for a variance.

7. Assess the Property

Once you’ve identified a potential property in your buying commercial real estate checklist, it’s time for a detailed assessment. Key areas to focus on include:

• Property Title: Begin by examining the property title for a history of ownership, debts, and legal issues. Investigate any liens or pending lawsuits.
• Location Suitability: Ensure the location aligns with your intended use of the property.
• Property Condition: Assess the condition of the building. Older properties may require significant repairs, impacting your budget.
• Net Operating Income (NOI): Calculate the NOI by subtracting the property’s expenses and vacancy rates from its gross rents. This gives an idea of the revenue potential.
• Capitalization Rate: This rate helps determine your investment’s potential return. Calculate it by dividing the NOI by the property’s value.
• Types of Leases: If renting out the property, understand the existing lease types and the level of landlord involvement they require.

Your commercial real estate broker can provide valuable insights during this assessment.

8. Value the Property

Before making an offer, work with your broker to accurately value the property, an essential step in your buying commercial real estate checklist. Consider these three valuation methods:

• Income Approach: Value the property based on its potential income generation, considering the NOI and current market cap rates.
• Land Approach: Assess the land value by comparing the price per square foot with similar properties in the area.
• Building Approach: Determine the value of the building by comparing it to similar structures in terms of zoning and price per square foot.

Your broker can guide you through these approaches to arrive at an accurate valuation for your potential investment.

9. Make an Offer

Reaching this stage in your buying commercial real estate checklist is a significant milestone. Once you’re ready, instruct your commercial real estate broker to draft a purchase and sale agreement. Your broker will then present your offer to the seller, who may accept it or propose a counteroffer. Rely on your broker’s expertise during negotiations to reach a mutually agreeable price.

10. Conduct Due Diligence

Upon submitting your offer, the due diligence phase begins, which is crucial in your buying commercial real estate checklist. This phase typically includes:

• Building Inspection: Hire a building inspector to examine the structures on the property. Key aspects include construction quality, HVAC systems, roofing, electrical wiring, and plumbing. The inspection should confirm that everything meets code standards and identify any necessary repairs.
• Environmental Inspection: An environmental inspection assesses the property’s environmental condition, revealing any non-compliance with regulations or potential liabilities.

Your broker can coordinate these inspections. Based on the inspection outcomes, decide whether to renegotiate with the seller, withdraw from the deal, or proceed with the purchase.

11. Secure Financing

After your offer is accepted, finalize your commercial real estate financing. Work with your chosen commercial real estate lender to complete the loan application process. This includes providing detailed financial information and undergoing a final assessment of your and the property’s credentials. Ensure you understand all terms of the loan agreement before signing.

12. Closing the Deal

The final step in your buying commercial real estate checklist is the closing process. This typically involves signing a lot of paperwork, including the deed, loan documents, and other legal papers. Your attorney and broker will guide you through this process to ensure everything is in order. Once all documents are signed and the payment is made, the property is officially yours.

Conclusion

Buying commercial real estate can be a complex and nuanced process. By following this comprehensive checklist, you’re more equipped to navigate the intricacies of commercial property investment. Remember, each step is crucial in ensuring that you make a well-informed and profitable investment decision.