Owner/user Financing - First Steps
You have been successful in your own operating business and now you’re ready to take the next step: owning your own commercial real estate. The key mistake we see from owner/users buying their first commercial property is not knowing or engaging the services of the right professionals to minimize risk and to ensure the transaction is successful.
1. Commercial Mortgage Broker: Your commercial mortgage broker is the quarterback of your real estate transaction. In addition to sourcing the best debt in terms of leverage (Loan-to-Value), loan pricing (the interest rate), recourse (guarantees) and other factors, your mortgage broker will be instrumental in coordinating the activities of the other professionals.
2. Commercial Real Estate Agent: There are many real estate professionals in the business who have completed a number of transactions similar to yours, and they are there to advise you on these significant transactions. In addition to identifying suitable properties for your business and pointing out various property features (including building construction type, location, zoning and other important factors), they will have a strong idea of what is going on in the market. Finding an experienced real estate agent is your first step in identifying and acquiring your first property.
3. Lawyer: A lawyer with experience in handling commercial real estate transactions is paramount to ensuring you get the right advice throughout the process. Commercial real estate transactions are much more complicated than a residential deal and it is vital to have someone who understands what is contained in the documents associated with the transaction. Transferring the title of the property is the easy part. You need an experienced lawyer who will minimize your risk prior to and after you've closed on the deal.
4. Licensed Appraiser: Most lenders will require you to provide an appraisal of value along with the purchase contract. The right appraiser will have the data and knowledge to value the property correctly. Depending on the asset, they will value it from a variety of different ways including the comparable sales approach (comparing the property you're interested in to similar properties that have recently sold); the cost approach (determining the cost to rebuild the exact property you're considering) and; the income approach (valuing the rental income of the building against a certain rate of return (capitalization rate)). Whether it is a piece of development land, an apartment building, a hotel, or an industrial property, having an appraiser who is experienced in the particular asset class is critical to establishing value. Another suggestion is for owners to read the entire appraisal and not just the executive summary!
5. Environmental Consultant: Most lenders require a Phase I Environmental Site Assessment (ESA) be completed on the property - this includes not just the building but the titled land as well. If your lender doesn't require a Phase I ESA, we still highly suggest acquiring the report. The Phase I ESA consists of a site visit by an accredited inspector and a review of historical data from various sources as to what was on the site and, just as importantly, what was near the site in the past. Buyers must be aware that they will become responsible for the environmental conditions of the site that they are buying. What was on the site previously could have contaminated the site and expose the buyer to clean-up issues and potentially very significant costs. For example, knowing if there was a gas station or a dry cleaner adjacent to the site may deter a potential buyer from completing a deal - the potential for unidentified environmental contamination to create a major cost liability in the future would absolutely exist. A Phase I ESA will assess if there are any potential issues and recommend further action based on what is discovered. A clean report will mean this item is checked off the list of pre-funding conditions required by the lender.
6. Engineer/Building Condition Report Provider: An experienced consultant will be required to make an assessment of the condition of various aspects of the building being acquired including the roof, building envelope, electrical systems, boiler system, mechanical systems (including the heating, ventilation and air conditioning units), code issues, and other items which may need repair. A sale price may look like a great deal but the property may have hidden issues which are not immediately obvious to an untrained eye. Some of these items, like a roof, will need an experienced set of eyes to get an idea of what state they are in. Additionally, if the asset being acquired is older, or if a purchaser requires unique building features (such as adding a crane or a make-up air system), a structural engineer may need to be consulted to see if the building can handle the loads.
The above isn't an exhaustive list of reports and professionals one should engage when considering acquiring a property. However, the above professionals and reports are a critical first step to ensuring you are as informed and protected as possible during and after the transaction. One final note of caution: not all professionals are created equally, and lenders agree! Before engaging any third-party reports, ensure that your chosen professional is on the lender's approved list. At NCMC, we have the experience and knowledge to help guide you through the above steps and to make sure your interests are protected throughout the transaction.
Thanks for reading. A separate article will be written in the future discussing building your first commercial building. Stay tuned for this or contact us directly if you need to discuss an upcoming project.
Disclaimer:
We do our best to ensure the information we provide is accurate, truthful and well-researched. However, the content of our blog posts are opinion-based and these opinions do not reflect the ideas, ideologies, or points of view of any organization or client we work with directly or indirectly. As it is opinion-based and written to the best of our knowledge, it is prone to errors and missing information. The information we provide is for informative purposes only and is not to be perceived as professional advice or a replacement for professional advice. Readers who rely on the information we provide do so at his/her own risk.