Learn about the process of buying commercial real estate from the perspective of an owner-user
Those who have ever purchased a home will see many similarities in the commercial real estate purchase process; the differences are primarily in scale and details. The process is similar for investors, but the criteria for choosing a property are different. You’ll want to visit our Investor Center for details on the investment real estate purchase process from the perspective of a commercial real estate investor.
The main steps of the purchase process:
- Form your team: One of the first steps is to identify the team of people with whom you need to work. At a minimum, you will want to have an attorney to help review contracts and an accountant to help advise on tax and financial issues. If you are borrowing funds to purchase the property, you will also need to have a loan broker/lender. You may also want to have a commercial real estate agent such as Tellus Real Estate Solutions to help you through the process, especially to help you find desirable properties and to help you to negotiate the purchase.
- Set your budget: You must decide just how much money you are willing to spend and how much you are able to spend to purchase commercial real estate. You need to decide the amount of down payment you have and what your loan costs will be. You will need to understand how much you can afford to pay each month for principle, interest, property insurance, etc. You will also need to know how much you are able to spend for due diligence, attorneys fees, brokerage fees and closing costs.
- Arrange preliminary financing: You will need to arrange financing. Begin talking to one or more lenders and understand what your loan fees, interest rate and other costs will be. Make sure that you thoroughly understand the lenders’ criteria for a loan as different lenders have different criteria and offer varying rates. Take the time to find the right financing option that works for you. This will also help you set your budget. It also important to understand how much time is required for closing and what due diligence steps the lender will require in order to finance your purchase.
- Identify your needs and requirements: The needs of every commercial property owner are different. Some of the factors to take into account are:
- Location: Do you need to be located in a specific place because of where clients, employees or owners are located?
- Demographics: Are the demographics of the location important?
- Size: How big a building do you require?
- Features: What are your special needs? Are you a restaurant in need of a Class 1 Hood? Do you need Phase III power? Do you need special zoning? How much parking do you need? The list of possible needed features is endless.
Take the time early on in the process to identify these needs and requirements so that you are able to more efficiently choose the commercial property that is right for you rather than wasting time evaluating properties that don’t fit your needs.
- Search for properties that meet your needs and budget: With a list of features and a budget set, you can then begin the search for properties that meet your needs. In the Pacific Northwest we are fortunate to have our own commercial real estate exchange (CRE), the Commercial Brokers Association (CBA), which functions similarly to a residential Multiple Listing Service (MLS). You might also search utilizing national databases such as Loopnet.com or CoStar.com, among others.
- Make and negotiate an offer on a property: Once you’ve identified a property that meets your needs and budget, then its time to start negotiating the real price and terms by making an offer. With commercial real estate, this typically starts with a more informal Letter of Intent (LOI), sometimes called a Memorandum of Understanding (MOU). This allows the buyer and seller to work out the structure of the transaction in layman’s terms before creating a formal contract. The contract may be written by either the buyer’s or seller’s attorney, or it may be a standard contract provided by the local CRE. In either case, both buyer and seller should have the contract reviewed by an attorney and an accountant prior to signing.
- Perform due diligence:The due diligence process is likely to vary a bit from property to property, and from lender to lender, but typically the steps are as follows:
- Perform a preliminary environmental study (Phase 1)
- Perform any physical inspections of the physical property, the building and any outbuildings
- Verify zoning and any business requirements with city/county
- Review the title
- Request an appraisal
- Complete the purchase: The final step is closing the transaction. The closing process is similar for both residential and commercial transactions. You will provide any funds needed for closing to the attorney or escrow company handling the closing and sign final loan and transfer documents. Depending on your transaction, there may be other last minute hoops to jump through, but not many.