Discover the Top 15 Secrets of Successful Commercial Property Ownership!

1.) What's Your Type?Communication
There are many different types of commercialIf you are looking at an older building, there may be
properties that you can purchase including:o Officeoquite an investment up front to either meet city
Retail Spaceo Warehouse Facilityo Restaurantostandards or meet your own standards. Don't overlook
Commercial Condoo Strip Mallthe importance of a high-tech phone and Internet
The first step is clearly defining what type of propertysystem, especially if you have a lot of employees. If
you want to purchase and how you want to use it.there is not already a T1 or fiber optic network in place,
The following information will help you maximize yourbuild this cost into your purchase, as it will save you
investment dollars to get the best possible deal whenmoney and headaches in the long term over more
purchasing your property.traditional (and older) phone and Internet systems.
2. Build Equity With Your InvestmentMake sure to hire an expert to tell you if the changes
Equity is Moneyyou need are possible and within your budget. With
Building equity is the primary if not the ultimate reasonmost commercial real estate loans, you can include
to buy instead of rent a commercial property. Let'sthese remodeling costs in your financing. Again, make
face it. It's money in the bank. In fact, it's better thansure to ask.
money in the bank because you can't get the same11. Map Out Your Plan
kind of return on your money when it's sitting in theAs a business owner, you understand the importance
bank as opposed to when you're building equity.of carefully planning every move. Buying a property
Moreover, if you choose the right financing for yourrequires no less preparation. Before you begin looking
commercial real estate purchase, you can not onlyfor a building, sit down with your finances and figure
build equity through ownership, but you can alsoout how much of a mortgage you can afford to take
leverage your capital saving in order to grow youron.
business, hire additional employees, or even purchaseCreate a Budget
an additional location when the time comes.When calculating your budget for buying property, don't
Owning beats renting because you can sell yourleave out taxes, insurance premiums, and repair and
investment once you outgrow the space or sell themaintenance, as well as costs involved in customizing
business. Even if commercial property in your area hasthe space to meet your needs. Failing to create a
not appreciated (which is unlikely), you can recoup yourbudget for these often overlooked expenses will
investment by renting out the space once you movequickly put you in the hole with your new property. If
out and by selling when the time is right.you need help creating this budget, ask your realtor or
If you plan on growing into your building, buy somethingyour commercial lender for advice.
larger than your current needs, and rent out the extraRoom to Grow
space until you need it for expansion. This will provideTo determine the amount of mortgage you can afford,
you with steady income that you can use to help payassess your income and expenses. Your mortgage
your mortgage or invest in your business.and property expenses should leave you enough room
to operate your business without cutting into your
3. Calculate Your Savings And Your Potential Profitnormal expenses.
Lower Monthly PaymentsSometimes it is necessary to take a cut in profit in
Consider buying commercial real estate as a savingsorder to purchase the kind of space you need to
for your business. Real estate costs are the thirdgrow. Think of it this way: buying a larger space will
largest business expense, behind payroll and taxes.allow your company to stretch its wings, which will
Long loan amortizations mean that your monthlyresult in more profits down the road. It's a risk you
payments could wind up being less than what yousometimes need to be willing to take if you want to
would pay for rent, since landlords usually charge moregrow. Remember, if you buy more space than your
than their monthly loan payment. In other words,company needs immediately, you can acquire tenants
owning your own commercial property may actuallywho will provide rental income that can significantly
be more affordable, depending on current marketoffset your monthly mortgage obligation.
conditions.Planning Ahead
Ask your lender to provide you with an analysis of theIt's almost always a good idea to buy slightly more
current market in your area so that you can see whichroom than you currently need. You can lease out the
scenario is best for you (renting or buying). The lenderadditional space until you need it. If this is your plan,
should be able to explain your options in detail withmap out how this will bring in income to help subsidize
examples of monthly rental costs vs. monthly loanyour mortgage. Remember, however, that you may
payments and the benefits of each.have periods when some of the space is unoccupied,
Analyze the Rent Valueso don't rely on the rent coming in to cover your
Upon finding a property that peaks your interest, findmortgage every time. Make sure you can cover the
out the status of the current tenants (if it is amortgage on your own.
multi-tenant property) in terms of how much rent theyHave an Exit Strategy
are paying. Check the current market to see if theSo, how does it all end? Hopefully with big dollar signs.
rents are undervalued, meaning below what you canAfter all, that's why you're investing, isn't it? To
get in the current market. Your realtor or lender shouldeventually cash in on your investment. Therefore, you
be able to help you figure out how much you couldneed to have an exit strategy.
charge for rent and determine how much of a profitYou might choose to hold onto your commercial
you can make each month.property through retirement, as real estate is a great
Tax Advantagesasset that can provide you with a steady passive
There are many tax advantages to becoming anincome stream: a lucrative retirement strategy.
owner of a commercial property. In most cases, you
can deduct part of the value of the building at tax time,12. Before You Sign on the Dotted Line
as well as improvements you've made as depreciation,Having a carefully drafted contract is key in your
which can save you more money on your taxes.commercial real estate deal. You are required by law
Buying the property under your business orto have a written sales contract, and it is to your
corporation's name is also a better tax strategy thanadvantage to have one with each detail of the
under your personal name.transaction documented.
4. Do Your ResearchAlso, make sure to leave ample time for due diligence
The more you can learn about property types andand closing, especially if any construction is involved!
options, mortgages, financing, zoning and remodeling;Details
the better position you'll be in to make wise decisionsDespite the stories of real estate contracts being
concerning the acquisition of a commercial property.thicker than phone books, all you really need is a
However, you don't have to know everything. That'scontract that lays out the important elements of your
where putting together a powerful team ofagreements. First, it needs to describe the property
professionals proficient in their areas of expertise mayand the purchase price, as well as whether the price is
be your most important step. Building a team ofdue at closing or in installments.
advisors - people you can trust to steer you in the rightEquipment, etc.
direction is critical to your success.The contract should include any equipment, machinery,
Understand Current Market Conditionsor personal property that is included in the purchase
Keep your eyes open for news articles pertaining toprice. It should list any contingencies that must be met
the commercial real estate market. Is it "hot" rightprior to completing the purchase. A common example
now? Is it a buyers' or sellers' market? What kinds ofof a contingency is whether you are able to obtain a
interest rates are available?loan to finance the purchase.
The Internet is a great place to start. Conducting aDon't Forget...
Google search for "commercial real estate market,"The contract should cover how the property taxes
for instance, will give you results that include news andand utility bills will be pro-rated between you and the
resources for national trends, analytics and marketseller, as well as what type of title insurance you must
research.provide. The date for closing and delivery of
In addition, many realtors, lenders and lawyers acrosspossession should be in the document, as well as what
the country offer free and timely articles on theirlegal recourse either the buyer or seller has in the
websites that shed light on current commercial realevent that the other party defaults on the agreement.
estate trends nationwide. Again, make sure you listenAnd Always...
to both sides of the story.Once the contract has been drafted, have a lawyer
Tap Expert Resourcesreview it prior to signing it. A lawyer may be able to
National market research companies can give youhelp you negotiate a better deal than what is originally
specific information about the area where you'represented.
preparing to locate your business. You can also findUnfortunately, not all property sellers are honest, and
information on demographics including the median age,some will try to hide their true purpose in technical
household income, breakdown of ethnicities, and morelegalese within a contract. Having a trusted lawyer and
from censuses available from the U.S. Census Bureau.commercial realtor review your contract will keep you
Also contact commercial lenders or realtors forsafe in your transaction.
additional resources. In looking for help, it's usually better13. Choose a Lender with Care
to talk to a lender or realtor with nationwideThere are many types of lenders available to assist
experience and up-to-date information than ayou with your commercial real estate financing. But
small-time operation that might not have recent datakeep in mind: not all are created equal. Do your
for you. If the lender/realtor hasn't gotten updatedhomework in finding a lender that meets your specific
demographics since 1996, you've essentially wastedneeds.
your time. Also, a lender or realtor that specializes inIt's important to find a firm that can give you broad
the type of property you're looking for will be moreaccess to capital, understand your priorities, offer you
likely to have the specific information you need, whichthe best deal on your loan and complete the process
will save you time in research.in a timely manner.
Study the Current Vacancy RateTypes of Lenders
Research what the vacancy rate has been over theThere are three basic categories of lenders: direct
past few years for the area you're taking intolenders, indirect lenders and hybrid lenders. Direct
consideration. If there seem to be high levels oflenders lend their own funds. Some examples of direct
vacancies, try to find why. Is it a bad neighborhood?lenders include commercial real estate lending
Talk to store owners in the immediate area and findinstitutions, banks, and private lenders. Indirect lenders
out how long they've been doing business there. Ask ifplace funds on behalf of others, and include mortgage
they have any concerns that you as a potentialbrokers and mortgage bankers, as well as financial
property owner should know about the area.intermediaries. Hybrid lenders both lend their own funds
Research Commercial Realtorsand lend on behalf of others, and include certain
It's important to research commercial realtors thatinvestment banks, investment advisors and credit
specialize in the type of space you're looking for. Grillcompanies.
the realtor you are considering selecting on the entireBanks usually generalize in services, and offer a wide
purchase process so you know what to expect. Askarray of products. While this may sound good, think
how long the process usually takes so that there areabout it for a moment. Would you rather have a lender
no surprises. Check their references and their trackthat knows a little about many financing options, or a
record (more on finding a Commercial Realtor in #5).lot about three or four products designed specifically
Examine Experienced Commercial Lendersfor you?
Choosing a lender and financing program is just asLending institutions are more specific in nature, and are
important as choosing the property. Again, find out theexperts in the products they offer. Banks are more
entire process of financing, as well as your differenttraditional in their financing products, while lending
options. Don't assume that just because you've had ainstitutions are more entrepreneurial and creative.
relationship with your bank for years that using theirBanks often require that you move all of your financial
financing is the best choice.relationships under their umbrella, including deposits,
Banks don't always offer the lowest rate forLOCs, etc., while non-bank lenders only work with your
commercial loans, and sometimes have a far longerreal estate loan.
turnaround than non-bank lenders. Some banks requireThe U.S. Small Business Administration (SBA) is a
that you transfer your accounts to them in order togreat resource for small companies looking to expand
qualify for a loan. Be aware of any stipulations whentheir business or purchase real estate for commercial
seeking a bank for a commercial loan.use. The SBA offers tools that can help you plan your
5. Choose the Right Commercial Realtornext move, as well as loan programs for a variety of
As mentioned before, you need qualified partners tobusiness purposes. The SBA itself does not offer
help you with the process of buying commercialloans, but works through banks and non-bank lenders
property. Start with a terrific commercial realtor.to provide small businesses with loan programs that
Some commercial realtors work exclusively withmeet their needs.
individuals interested in investment properties. OthersGet Started Early
work with owners/users of commercial real estate,It is important to choose your lender early in the
and among those some specialize in propertyprocess so that you can maximize leverage and get a
management, which can be an added value to you.lower cost of funds. Your lender will ask for certain
Who Do You Know?forms in order to determine your eligibility for financing,
Referrals from trusted sources are usually the bestas well as to figure out what kind of deal you can
way to find a good commercial realtor.negotiate.
Ask QuestionsYou will need to provide your income and expense
Set up a meeting with more than one potentialstatement, balance sheet and personal financial
commercial realtor. Find out as much as you can aboutstatements from all prospective owners of the
their professional background, education, andproperty. If you don't have them written already, you
experience with your type of property. You can askwill need to create profiles of the management team,
for a list of recent transactions to give you an idea ofincluding information on education and employment
what they deal with on a regular basis, and how manybackground, as well as experience relevant to your
properties they've actually sold in the last year or two.business. Other documents needed include a property
And most importantly, ask for client referencesappraisal, contract of sale, and plans for the use of the
(testimonials)! Real client feedback is the mostproperty. Providing these documents early can help
effective measure for potential success.streamline the process. Again, your realtor and lender
The Right Matchwill help you through the process.
Make sure you choose a realtor that understands your14. Know Your Financing Options
specific needs. If you are a small business, you don'tWhile you are in the "shopping" phase of looking for a
want to work with a realtor that normally handlescommercial property to purchase, you should begin to
multi-million dollar deals. Your project may become lessresearch your financing options. There are many kinds
of a priority when that particular realtor gets a biggerof commercial financing options available, so it is
commission to worry about.important that you find the one that best suits your
6. Consider Your Time Frameneeds. It's also very important to know how much
If the reason you are looking for commercial propertyyou're qualified to borrow. This will help you and your
is because your lease is ending, think twice beforereal estate broker find the right type of property for
jumping into a decision you might regret. Finding just theyou faster.
right space, securing financing and going through theNo matter what type of loan you wind up getting,
process of obtaining a commercial property can takenegotiating the loan will be based on the same basic
months. If you don't have that kind of time, you mayfactors: anticipated use of the property, expected
need to rent month-to-month for now.returns from the property or business conducted there,
Take Your Timegeography, type and size of real estate, perceived risk
While you may be in a hurry to move into a space,to lender and market conditions. There is no one rate
take your time. Buying any kind of property is a majorapplicable to all commercial financing. The rate you
decision, and buying commercial property is even morereceive will be based on your specific situation.
important for the development and growth of yourIf interest rates are low, securing a low fixed rate will
business. Selecting a property in the wrong area, or amean you pay less interest over the entire mortgage.
space that doesn't allow you to grow can hinder yourA variable rate, which is considered by some to be
company and even cause it to fail, so plan carefully.more risky, can give you a lower payment for a period
If the realtor or lender gives you an estimate of three(before it increases), which will let you use the money
months from start to close, plan for longer - just insaved for other investments.
case. Keep in mind there are many people involved inIn weighing your financing choices, remember that
the process of buying property, from the seller, realtor,some debt is good. Don't assume you should take the
lender, appraiser, surveyor, paperwork approvers,loan with the highest down payment requirement so
secretaries, and more and this process can often takeyou can "pay off your debt faster". Putting down more
slightly longer.money means you have less to invest in your
7. Location, Location, Locationbusiness.
One of the most important factors in consideringTerm Loans
commercial property is location. If a property is locatedBased on how much money you need to borrow,
on a busy corner that is difficult to get to, yourthere are different financing options available. One
business may not do well (in fact, that's probably whyoption is a term loan. Term loans can be used for a
the property is for sale). If you want to operate a dogvariety of purposes, including financing permanent
kennel and the property you're considering is in aworking capital, new equipment, refinancing, expansion,
residential area, not only will your business disturb theacquisitions and, of course, buildings.
residents, the zoning laws may prevent you fromThere are loans specifically designed for commercial
operating there.real estate or equipment. Banks typically lend up to
Foot Traffic80% of the value of the real estate to be financed,
For a retail business, look for areas with high footand the loans must be repaid in 15 to 20 years. If you
traffic that will give you the exposure and increasedare able to come up with the remaining 20% on the
walk-ins you need to be successful.cost of the property (and don't have anywhere better
If you are looking for an industrial or manufacturingto invest the money), this is an option to consider.
facility, then you can stay out of the retail limelight andUp Up and Away
buy something in a warehouse district. These areasBeware of balloon payments. While paying a very low
are usually cheaper than retail space.monthly amount at the start sounds great, you often
Easy Accessend up spending additional money to refinance your
Make sure your location has easy access from thecommercial mortgage as lenders reset interest rates
road. Look to see if the site is at a difficult intersection.or reexamine you and your business over the life of
Is there construction going on that seems like it won'tthe loan.
be ending any time soon? On the other hand, what'sCredit Line
the potential once the construction is completed?If you want a more flexible loan, you may have the
Check out the Competitionoption of a credit line that can provide you with cash
If you want to open a bistro in a neighborhood that hason an as-needed basis, up to a cap amount. Credit
several bistros, you might want to try somewhere elselines almost always have a variable rate, and have
with less competition. However, a healthy population ofinterest-only payments for the first one to three years.
restaurants usually means a healthy population ofEquity Financing/Joint Ventures
customers.Equity financing involves joint ventures with investors
Know Your Customerthat have the capital you need. Usually, the investor will
Find out the demographics of the area you'rereceive a percentage of your business' profit in
interested in. If you want to move your sports apparelexchange for the capital you need to purchase the
shop to a new location, you'll probably want an areabuilding or stock in the company if it is public.
with a high percentage of youth and active adults. AnSome investors will take a back seat to your
urban area with a lot of pedestrian traffic might beexecutive decisions, while others will want a say in the
better for this kind of retail shop than a suburban areaoperation of your company. Joint ventures are not for
in a retirement community.everyone, so keep in mind all of these factors when
8. Free Parkingconsidering one.
We've all spent time driving around and around lookingThe SBA 7(a) Loan Program
for a parking spot. It can be very frustrating, especiallyThe SBA has a variety of financing products that are
when you're running late. Whenever possible, you wantideal for small businesses. The most commonly used
a location that has ample parking for your visitors.SBA loan is the 7(a) Loan Program. The loan is
If you have a retail store, restaurant, or otherprovided through banks or non-bank lending institutions.
high-traffic business, estimate how many customers orIn order to be eligible for a 7(a) loan, your business
visitors you're likely to have at any given time andmust be for profit, and you cannot purchase real
consider rejecting any properties that have fewerestate for investment purposes. There are many other
available parking spaces than your estimates. Again,guidelines to qualify for a 7(a) loan. The maximum
use your best judgment and consult your realtor.amount a business can borrow from a 7(a) loan is $2
Avoid Headachesmillion. Furthermore, all SBA 7(a) loans have
Also pay attention to how your parking is situated. If it'sprime-based floating interest rates. This type of
located just off a major road, it may provide ainterest rate structure can leave you vulnerable to
headache for people trying to back out of the parkingmonthly/quarterly interest rate swings that can have a
space, and may even cause accidents. When visitingsignificant impact on your monthly mortgage payment.
the property, see how well you can maneuver theNow you can see why it is so important to find a
parking. If it's a hassle for you, it will be doubly so for acommercial lender who can help you digest all of this
potential customer or visitor.information and take the time to explain your options.
9. Get in the Zone15. The Best Kept Financing Secret
Before you begin the negotiation process for aOne of the main reasons small businesses choose to
commercial property, make sure to investigate therent instead of purchase their own commercial real
zoning laws, as well as what types of businesses youestate property is the perception that they can't afford
are able operate there. There are zoning laws aboutthe down payment. Many of them are not aware that
the type of business that can be conducted in certainSBA-guaranteed loans are available to qualifying
spaces.applicants and can provide up to 90 percent loan to
For instance, some spaces do not permit food andcost financing.
beverage to be served, or may have restrictions onIn fact, the 504 loan program was designed to assist
how late a business can operate. The typical zoningsmall businesses in building or purchasing properties
districts in most cities include: residential, commercial,while spurring business growth in the local economy.
industrial and mixed-use.Only 10% Down
Don't AssumeWhile in some parts of the country, use of the 504
Zoning can be tricky, so do your due diligence on thisloan program is widespread, there are other areas,
topic. Don't assume that just because the previoussuch as those east of the Rocky Mountains, where
tenant of the space had a restaurant that the propertythis program isn't getting the attention it deserves. If
you're looking at is necessarily zoned for food andyou are unable to put down much of the loan cost, the
beverage. Many businesses slide under the radar for504 is worth looking at: it only requires 10% - and there
months or years while violating zoning laws. Makingare no closing costs in addition to the 10% down!
assumptions can cost you big time and big money(Please note that there are certain basic criteria you
when it comes to zoning.will need to have to qualify for the 10% down program.
RegulationsA good lender work with you to do his or her best to
Zoning laws can regulate not only the type of businesshelp you qualify for this benefit.)
that can operate, but also parking, signs, water and airThe other 90% of the financing comes from two
quality, waste management, noise, appearance ofplaces: up to 50% of the total cost (land, building,
building and more. Find out any and all regulationsrenovations, and soft costs) is paid for by a senior lien
regarding the property in advance.from a private-sector lender, and up to 40% comes
Visit your local library or zoning office to getfrom a junior lien from a Certified Development
information on all the zoning laws, rules and regulationsCompany (this portion is backed by a 100 percent
that apply to the property you're considering forSBA-guaranteed debenture).
purchase. Talk to people at the zoning office if youSmaller Payments
have concerns or questions prior to making theSince most banks and loan programs require a
investment. Ask your realtor to double-check yourminimum of 20-30% of the property cost, and do not
efforts to ensure you've covered all your bases.fold in soft costs and closing fees, 504 loans are a
10. Inspectiongreat way to get the best of everything: by paying
Normally, if you are considering buying a home, youonly 10% down, you retain more capital and are able to
have an inspector look at the structure, pipes, electricalmake smaller payments over the life of your
system, etc. A commercial property requires evenmortgage.
more of a stringent inspection, not only to meet yourBecause you have two separate loans with the 504,
needs, but also the requirements of the localyou end up getting a blended rate that is below
government.market. The first loan is either fixed or variable, and is
Before purchasing commercial property, hireat or slightly higher than conventional financing rates.
professionals to thoroughly examine the electricalThe second mortgage (the 40% loan) is considerably
system, including the sprinkler and security system, aslower than market interest rates, and is fixed for the
well as the plumbing, phone, and Internet systems.life of the loan. Having a lower interest rate lets your
Since you will have already done your homework oncompany retain more capital.
zoning and regulations, you will be aware of the building504 loans can close in 30 days or less, saving you
codes. With the results from your various inspectionstime, and helping you get into your new property
you can get an estimate of how much work, if any, willsooner. Another advantage is that there are usually
need to be invested in order to get the building "up tofewer "hoops" to jump through to get approved, as
code."long as you are dealing with a lender who specializes
A Good Foundationin this type of loan as opposed to one who might
Hire an architect or engineer to examine the foundationprocess one or two a year. The specialist knows this
and structure, especially if you have frequent naturalloan inside and out and can streamline the process, as
disasters such as earthquakes or hurricanes in yourwell as make sure you are receiving all the benefits.
area of the country.