Commercial Real Estate Book - Buying Book Preview

THE OFFICE AROUND THE CORNER

YOUR NAME

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Table Of Contents

Introduction

Why You Need Representation

A Residential Agent Is Not Geared For Commercial Purchases

The Different Types Of Commercial Properties 15

How To Finance Your Purchase

Signs You Need New Office Space

Don’t Be Afraid Of Owning Instead Of Leasing 39

Renting Out Your Space Will Offset Costs

What To Consider While Searching For The Right Space

10. Conducting A Financial Analysis

11. The Best Way To Evaluate Your Options

12. Things To Consider In Commercial Property Buying

13. Top Habits Of Successful Commercial Investors And Property Owners 71

14. Finding Out Your NOI And Why It Is Important

15. Purchasers’ Most Common Mistakes

16. Expenses To Consider

17. When Buying, Location Matters More Than Leasing

18. Terms To Get Familiar With

103

19. Developing Your Offer

111

20. Surprising Questions To Consider

115

21. Tips To Negotiate

121

22. Warning Signs In Your Building Or Area

127

23. Escrow

135

24. Due Diligence And Inspections

139

25. Designing Your Space

145

26. Insurance For Your New Building

151

27. Moving Guide

157

28. Finding Tenants For Your Open Space

165

29. Pros And Cons Of Different Landlord/Tenant Arrangements

171

30. Top Landlord Responsibilities

177

CHAPTER 1 Introduction

This book will lay out each step of the commercial real estate searching, negotiating, and buying process in precise detail. Chances are you don’t have a staff member with experience in navigating the commercial real estate landscape since most businesses only need to address this need once every five to ten years. The person in charge of a new office space search is taking on a full-time task that has even more importance when looking to buy space instead of lease. When companies run out of space, need to downsize, or just need to move, they often face the decision whether to lease or buy (assuming they are financially sound enough). The owner or person in charge will usually not know all the ins and outs of commercial real estate and everything that it entails. This book is designed to inform you about the ins and out of the buying process to help you be more familiar and comfortable when that time comes. It is massively important to be familiar with each step and each aspect of the process, to maximize your business’s employees and assets. That is almost impossible to do without the help of a commercial real estate agent to help you through the buying process. The paperwork, details, and negotiations are more complicated than residential home sales, which can be done at times without an agent. The right move to the right office can re-energize your company, improve employee engagement, and pay for itself over and over

again. You may be looking for a new office to expand your staff. You may want to get out of the reach of a poor landlord and be your own landlord. It is a long process. You need to start the search around 12 to 15 months before moving out of your old space. And you should negotiate and sign the purchase agreement four to six months out from your potential move. If you start this early, finding multiple realistic options will ensure that you will have some negotiation leverage. If you are short on time and in a rush, you’ve boxed yourself into a corner. I see companies and business owners lose out in negotiations because they are often out of options and time. This is something you can avoid if your process is properly planned out. This book contains four parts. Each represents steps in the commercial real estate buying processes: The Basics, Your Property Search, Negotiating Your Deal, and The Building is Yours. One of the biggest factors in your search is which broker you choose. They should bring a network of partners you can use in different areas that need a professional. That will also help free up time for the person in charge, whether it’s an employee or the owner. It is extremely tough to keep up the day-to-day aspects of your job and conduct a full-time property search and purchase. Part 1 discusses different things you should know about the industry before you start your search. There are plenty of reasons you need a broker, some that you may not realize. You can’t use a residential realtor either, because they aren’t trained in the language of commercial contracts. The chapter, “How to Finance Your Purchase,” is one of the most important parts of this book. There are several different types of

loans to consider, usually based on your business’s credit standing and financial history. Another chapter will detail warning signs that your company needs new office space. You don’t want to be behind in noticing any of these. That can cause you to work out of a negative environment. Another chapter compares owning versus leasing. If you have the finances to do so, investing in your own property makes a lot of sense and can eventually bring in more capital for you and your company. The rest of part one details some of the ways you can offset the costs of the purchase — there are a few — and some factors to consider while searching for your property. Your Property Search Needs to Be Planned Out and Done As Early As Possible Part 2 will go over the aspects of your property search, what to consider, and other factors you might not be aware of. Having more than one realistic option you could see your company investing in is the biggest part of your search. Without this, you will find yourself in a tough spot during negotiations. If you are buying more space than you need, or just considering it as a long-term investment, you will need to find out your NOI (net operating income) to know how successful your investment is doing. You will also have to conduct a financial analysis with your assembled team. This will weigh the loans you get approved for against the price of the building and also take in external factors such as how much money you need to put down and how much repair and renovation you need to do.

Part 3 is about the negotiation process and how to work around

the landlord and their representative to make sure you get terms you are comfortable with. Chances are, if the landlord is selling, they are using a broker. You do not want to negotiate against someone whose full-time job entails getting the best deals for his client. This is another area in which your agent will be indispensable. Part 4 focuses on the steps you go through once the building is yours. There are several details to get through here, such as inspections and escrow. Once those are finalized, you can finally move forward with designing your space. This step is way earlier when leasing space, since the landlord will most likely pay for the buildout. When buying, you start the construction bidding, planning, and working process after you own the building. You may get some early bids to determine how much space you will take up and get early buildout cost estimates before the deal happens, but it will be preliminary. Chapter 25 goes over the types of insurance you need and what options there are. That is followed by a moving guide. The last three chapters focus on aspects of being the landlord of your building and renting out space to tenants. This is relevant for younger companies that plan on growing and have the capital to invest in an office, but will have empty space for short amounts of time. It is a great chance to rent out that extra space and offset some of your company’s costs. Finding tenants may be easier than you think, and if you are working in the same building and on the same floor it will be much easier than a normal landlord-tenant relationship. There are a few different types of leases you can choose for them, each with different benefits and drawbacks.

Here is a Situation Where a Broker Saved a Deal

A seller had sold a $950,000 building to a buyer and the contract was signed. The final closing was in a month and the buyer had already paid $60,000 upfront. He then ran into a snag in his financing. He was depending on selling another building to get approval for it, something that did not go through. Because he was working with an experienced broker who had dealt with these situations and also had many partners to refer him to, the broker was able to extend his contract holding period up to 120 days. However, fees start coming in at 90 days, when closing would take place. The buyer’s own agent negotiated a raised sales price of another $10, 000 to buy their client some more time. The buyer then sought other financing options from a partner that his broker referred him to. The lender worked out a deal on the loan because of the relationship they had previously had with the broker. The loan was given to the buyer, but after (and if) the buyer sold his other property, the structure of the loan would dramatically change. This ended up costing the buyer $10,000 more but he did eventually sell his property, improving the loan’s structure. The deal was about to fall through the first time the buyer was denied the loan. The $60,000 guaranteed $15,000 of that, so if the deal did die, the buyer would have lost that money straight up. Due to the broker’s negotiations and close relationship with the lender, the deal was able to be saved for both parties. This is just one story that showcases the need for a commercial broker. With experience and partners, they have what it takes to save a deal that otherwise seems dead. I hope you become familiar with the world of commercial real estate purchases and all of its aspects after reading this book. It will put you on the right path to planning and navigating the process.

CHAPTER 2 Why You Need Representation

Very few commercial agents are purely buyer brokers. They are usually tenant representatives but they will always take on a client looking to buy a property. It has the exact same benefit to them, they just don’t always market themselves for that because there are many more tenants than buyers. Now that that’s out of the way, you should know that you need to hire a broker to help you in your property search and purchase. There’s no way around it. The commercial real estate landscape is complex and filled with details that need trained eyes.

YOU DON'T PAY A THING FOR THEIR SERVICES

This is a huge misconception. You simply don’t pay them. The building owner pays them their commission. That commission is usually between 4 and 6 percent of the deal, but it is no worry to you. This is the biggest reason to work with a broker. It’s free expertise that you will desperately need. The homeowner and their agent are almost always ready to pay your broker’s commission. Most of the time, they’d rather work with an expert anyway. If you have a broker, you are thought of as a more serious candidate. Since there is no cost to you, there are no excuses for not wanting to use a broker. It is mandatory for most deals. You get free help from someone who knows the detailed industry in and out.

THEY ONLY WORK FOR YOU

A lot of buyers will try and use the owner’s commercial agent. That’s a conflict of interest for you since their allegiance will be to the property owner. You need to match that with representation that only has allegiance to you. You need someone who is much more than a middleman. Listing agents have to protect their landlord’s interests. If you go through them, you may also be shown fewer properties. Tenant brokers (or buyer brokers) are prepared to guide you through the search like no one else is. They will be an efficient project manager with your search and your timeline. This is extremely valuable to you, and something a listing agent would never do. A listing agent may show you properties they have listed, and that’s it. You need your own representative for your side of the deal. Without it, you will be starting at a massive disadvantage.

YOUR BROKER WILL KNOW YOUR WANTS AND GEAR YOUR SEARCH TOWARD THEM

They will start off by asking the right questions to help you determine your exact wants in location, size, and price. They will help find you the best space for your needs, present, and future. If you want to invest in a space that is bigger than your current needs, they can plan it for you, whether you want an investment or future space to grow into. You probably don’t have the technology to run estimates on the amount of space the building offers and the amount of space your employees need. You need to get space that makes financial sense. A broker will make sure this happens. Most likely their company has programs that can run test fits. The broker will also help you with your financial analysis and they’ll know where to get your best loan. This is a huge aspect of

buying property. They’ll make sure your search stays in your price range. You don’t want to fall in love with a building that you later find out is beyond your budget.

THEY WILL SAVE YOU TIME, AND THEREFORE, MONEY

As I said before, this entire ordeal can feel like a full-time job for whoever is in charge of it. The effort and time a broker can save you is crucial and it only increases as your search and deal come closer to an end. Organizing inspections, negotiations, paperwork, and due diligence all take time. The broker has experience and can search for properties and get through each stage much more efficiently than someone with no experience. The person in charge can focus on their day-to-day responsibilities for the most part, while the broker works on their behalf.

YOU NEED THEIR HELP IN NEGOTIATIONS

Chances are, you will be negotiating against a listing agent. That’s going to put you at a disadvantage unless you have experience in property negotiations. A broker on your side is obligated to negotiate in your best interest. You want someone who does this for a living to help here. Your broker will also provide a buffer between you and the other side. Negotiations can get testy and stressful, and they can help ease that. Negotiations can also be very complex. Too complex at times for the untested to succeed. A good agent will go through and interpret any legal documents to look for clauses you may not know or may have missed. Sometimes, those clauses can be harmful to the buyer.

They also bring full knowledge of the market and will work for you to get a fair deal. This is one of the ways to get leverage in negotiations. Even if you study and stay aware of the market, their knowledge covers a longer amount of time. That knowledge can be used to lower the price of the space if it is too high. A broker will know which buildings are available in your area and at your price before you start the search. This type of knowledge will shape early communications and negotiations with the owner or their listing agent. Their company may also spend money on proprietary reports monthly on market data. That’s how well informed they are. You don’t want to negotiate against another professional without them as a resource. Time and time again, I’ve seen brokers bridge gaps between parties in negotiations and strike a deal that is not only at market value, but that each side is excited about.

A BROKER WILL MAKE SURE YOU HAVE FALLBACK OPTIONS

This is because they are professional negotiators. They know you have to have a fallback option to create real leverage to go with the going market rate. Plus, you never know when and how a deal can fall through. Without a fallback option, you may be stuck in your old space and holding back your company. You may have to take tempoary space, killing any leverage you had. A broker will make sure you have a realistic second or even third choice you can see yourself purchasing. They can then use this to negotiate.

LENDING, FINAL PAPERWORK, ESCROW, DUE DILIGENCE, AND OTHER CLOSING

FACTORS NEED A BROKER AND A TEAM

Just as the example of how the agent I knew got the buyer approved with special help from a lending partner, these are connections that you need and will greatly benefit from if they are referrals from your broker. They will treat you better, and help you out in ways for their partner that they wouldn’t if you came to them alone. First, you need a lender to get approved for a loan. This can be a private lender or a bank. Then you are going to need early estimates on construction done by a company. You’ll need a real estate attorney to look over the papers and the final documents. Next you’ll need a certified inspector to pass the building inspection. Then, you’ll need your space built out or renovated, which requires construction and a team. Of course, you can get all of these professionals on your own. But you will save so much time using whoever your broker recommends, not to mention the special preference you may receive.

THEY CAN PUT TOGETHER A CREATIVE DEAL IF NEED BE

The story from chapter 1 illustrates this perfectly. The deal would have fallen through if the broker hadn’t agreed to raise the sale price by $10, 000 to buy 90 days for the buyer to get a loan. A broker has the ability to work out a plan that fits your company’s financial status by thinking outside the box if need be. There are ways they can structure it to limit your down payment if that is what your company needs. The broker can also work directly with a lender to create a loan specialized for your company. In the chapter 1 example, the loan

changed once one of the buyer’s asset was sold.

THIS WILL ALL SAVE YOU AND YOUR COMPANY MONEY

Every point I’ve made in this chapter will save you money. You will get a better deal in your negotiations, therefore saving money. You may get a better loan and get better rates on the other professionals you need, saving you more money. The more time you save, the more money for you. You or whoever is in charge will be able to continue your normal duties. You could dramatically shorten your property search by using their market knowledge. Maybe it cuts out a few weeks of wasting time on properties that won’t work out for you. A broker will make a real difference.

CHAPTER 3 A Residential Agent is Not Geared for Commercial Purchases As a business owner or someone in charge of the real estate search, you may know someone who is actually a realtor. But not a commercial realtor. A residential one. I’ve seen companies try and enlist the help of a residential agent for their commercial deal. It makes sense why someone would try that. Each is licensed and each sells property and brokers deals. Negotiations are part of every deal, so you may think this applies here, but these aspects aren’t as similar to each other as you may think. The greatest difference is the terms of the deal and the language in the contracts. Yes, each sale has an escrow period, along with other similar parts, but the language that defines the deals is completely different. There are more moving parts and bigger variables in commercial real estate that a residential realtor isn’t experienced or trained in. Residential agents don’t always and aren’t required to have a college degree, as more commercial agents are. This isn’t a knock on residential agents. Most commercial brokers have to get a degree in business or finance for specific job-related reasons. A broker needs to fully understand the finance terms. Navigating that field can be confusing for someone who wasn’t taught it. There are quite a few terms that are used often in commercial deals and not residential ones. The capitalization rate, internal rate of return, knowing the property tax rate ins and outs, and doing the detailed financial analysis are all aspects that a residential agent isn’t prepared for. 13

I’m also not saying that a commercial broker could jump right in and sell a house that easily. It works both ways. The biggest difference is in the contracts. Each state has different laws, and in the business sector they are much different and more exact. Chapter 1 states many of the reasons why residential agents can’t make it in the commercial industry. Expertise is needed in many, many areas of commercial real estate. You can’t step right in and broker a sale. There are agents who practice both and that is different. They were trained in both and have vital experience in both. But your relative who’s sold a couple of houses isn’t trained in the commercial side. If you meet a broker and are unsure, ask about the past sales they brokered. You want to get a tenant representative that will represent you on a purchase. Don’t use the owner’s broker, as they are not impartial. Get your own broker, who is also not impartial, to make it even. Ask them how many deals they’ve been a part of, which partners they canrefer you to (layers, lenders, inspectors), and how much experience in your specific industry’s property they’ve had. It probably won’t make a difference if you need office space and they’ve been specializing in warehouses, but make them prove it to you.

CHAPTER 4 The Different Types of Commercial Properties

When you start your commercial real estate search, the first part is identifying what type of property is best for your business. Depending on your growth plans, or if you are strictly investing in a building, you may look at different types of industries for your property. There are six different types of commercial properties. They can be broken down to a few levels. You may want to work with your broker and consider what is best for you. If you are looking at it as strictly an investment, some types are better suited than others.

OFFICES

Office buildings are separated into a few classifications of their own. They can be multi-tenanted or single-tenanted and are usually built out to fit the tenants’ wants and needs. They come in all shapes and sizes and are distinguished by height, location, and use. Chances are if you are thinking about buying an office, it’s free-standing or smaller than a high-rise. You can still buy space in those buildings however, and some of these classes could be free-standing as well.

CLASS A OFFICES

These are the most luxurious offices in each area. Their cost for rent is above-average and they usually have high-quality finishes, are in the busiest areas, have the best security and IT systems, and are easily accessible (despite their surroundings.) 15

These are built to impress and often have their own amenities inside lobbies and on different floors. They don’t always have to be new; older and distinguished building can fall under this category as well. While Class B buildings can have their own amenities, there won’t be as many and they won’t be as high-quality.

CLASS B OFFICES

This is your average everyday working office. There are a wide range of tenants in a variety of industries in these buildings. The building does not compete with Class A buildings but can often stand out in the area. The area around it is adequate and so are the amenities. There may not be the number of amenities in the building like Class A, but the lobby and common areas are pretty upscale. Some finishes may be outdated but these offices can have a few high-quality tenant improvements done to them. Maintenance and janitorial services are pretty good. The HVAC systems are usually functional but not top of the line. There usually is on-site parking, though not as convenient as Class A.

CLASS C OFFICES

These are mainly for companies in a pinch, either time-wise or financially. If leasing, they can get a shorter lease, for less than the market average, in a lower-end area. These buildings are often more than 20 years old and are pretty run-down. The technology in the building is often outdated. There’s usually no tenant parking and each office has its own older HVAC unit, inside of one central unit for each floor. Upkeep and maintenance for Class C offices is lower quality. Also, if someone wants to maximize on the low price but add in fancier improvements inside, that’s often not possible and the building

can’t handle it.

These buildings are candidates for a new company to come in and buy, with long-term intentions to flip.

URBAN BUILDINGS OR CENTRAL BUSINESS DISTRICT

These buildings are located in the heart of a city’s downtown area. They often include high-rises in some of the most heavily congested areas. Companies attracted to these offices are often more client-based or tech firms. The rents are higher than in the suburbs. Some of these buildings may total over 1,000,000 square feet.

SUBURBAN OFFICE BUILDINGS

These buildings are usually mid-rise structures that range anywhere from 80,000 to 400,000 square feet and are located outside the city’s downtown and high-rise areas. They could be part of an office-park-like area. The rent is lower than in the central business district. Companies here can include many different industries. This grouping can be single-tenant properties or multi-tenant, depending on the location. Choosing between areas and classes needs to be done after analyzing your staff ’s needs, commutes, and preferences. An experienced commercial agent will help you determine the best fit. This area would be very popular for the company if it wants to own the space it is working in.

INDUSTRIAL

These buildings can house operations for a wide range of companies. They tend to be located outside urban areas, especially

along major transportation routes. Companies that use this space usually need some office space to go along with their storage, manufacturing, and distribution areas. There are four different types of buildings in this category. Any of them can have loading docks for 18-wheelers to load and unload goods.

HEAVY MANUFACTURING

The largest manufactures fall under this type. They are almost always heavily customized to the company’s need. They usually need to be heavily renovated for a new tenant and usually have less than 20% office space.

LIGHT ASSEMBLY

These are much simpler buildings than the heavy classification ones that can be reconfigured in a much easier and quicker way for new tenants. They aren’t as customized and can be used for light assembly or storage. They can have less than 15% office space and include higher ceiling heights than other buildings to stack and store products. Most of these can include production, storage, and office space.

BULK WAREHOUSE

This kind of property is most likely used as a distribution center. They are the largest of the industrial properties and can range from 50,000 to 1,000,000 square feet. They require the easiest access for loading trucks and the easiest path for those trucks to get to the highway.

FLEX INDUSTRIAL

These types of industrial buildings give tenants flexibility in how they use the space. They can also be referred to as flex/tech space. They are office and industrial hybrids that can have anywhere

from 30% to 100% office space.

They aren’t usually found in downtown and office areas because of their size, low-density parking, and the potential need for loading and unloading goods. These can easily be converted and prepared for new tenants and their needs.

RETAIL

These range from single-tenant buildings (restaurants), to strip malls that have multiple tenants. They don’t usually include any high-rises. Investors tend to target these.

STRIP CENTERS

These are usually smaller than 30,000 square feet and may or may not have co-tenants next to a large retail chain, such as Walmart, Target, Home Depot, and others. Many will contain a mix of small retail stores around them, such as dry cleaning, barbershops, and delis.

COMMUNITY RETAIL CENTER

These can range anywhere from inside of 150,000 to 350,000 square feet. They have multiple anchors, such as grocery stores and restaurants. An example is a shopping plaza with a Walmart and a large grocery store chain separated by a few smaller retail tenants. Usually, you will see one or more restaurants in these centers.

POWER CENTER

These usually include a few smaller retail stores but stand out due to the presence of a couple of major box retailers, such as Lowes, Best Buy, or Walmart. These major retailers are usually in supersized stores and can take up anywhere from 20,000 to

200,000 square feet. The entire area is smaller than a community retail center and is more focused on the big chain. These usually include an outparcel, which is a separate building in the area reserved for a drive-thru or a bank.

REGIONAL MALLS

These range anywhere from 400,000 to 2,000,000 square feet. They have a few anchor tenants that are big chains or department stores, and a high number of smaller tenants. Some of these can be “lifestyle centers,” which are basically open-air malls with more dining choices. Every one of these retail spaces is completely dependent on parking and traffic. All retail tenants need a minimum number of available parking spaces related to their square-foot ratio.

OUTPARCEL

As mentioned under power centers, these are set aside for fast food or banks. They are attached to most power centers but could be attached to any type of retail area. All of these retail options can provide the most visibility to future clients or customers.

MULTIFAMILY

This group includes any residential real estate that is not a single- family home. It includes townhouses, condos, and apartments and can come in almost any shape and size and location. They usually include swimming pools, outdoor patios, and fitness centers.

You can separate them into five groups:

• High-Rise Apartments – Buildings with 9 or more floors

and at least two elevators. They are usually found in large markets and are professionally managed, with 100 or more units. • Mid-Rise Apartments – These contain 30 to 110 units and are 5 to 9 stories. They are often in urban locations and sometimes have an elevator. • Garden Apartments – These are almost always located in suburban areas and are usually 3 to 4 stories, with 50 to 400 units, surface parking, and no elevators. • Walk-Up Apartments – These can be anywhere from a 2- to 6-story complex without an elevator. • Special-Purpose Housing – This is anything that targets a specific part of the population, and includes complexes such as senior housing, student housing, and low-income housing.

HOTELS

There are five main types of hotels:

• Full-Service – These are stacked with guest services and top amenities. Those can include top restaurants, conference rooms, convention space, spas, shops, and gyms. These are usually located in the central business district or downtown areas that see the most tourists, for example the St. Regis, Westin, and Hyatt. Their success usually depends on the quality of their on-site amenities. • Limited-Service – This is a step down in amenities and service but they still include meeting rooms, high-end pools, and gyms. These may not have on-site dining or convention areas like full-services hotels do. Buildout operations are more predictable than full-service hotels on

the real estate side. Examples are the Holiday Inn and Hampton Inn. • Budget – These could have one or two amenities for guests but mainly just get by with providing the basic necessities for a low rate. Examples are the Super 8 and Red Roof Inn. • Extended-Stay Hotels – These have larger rooms and better kitchens because they are designed for people staying a week or more. • Resorts – This is the biggest piece of land hotels are on. Resorts are usually in a travel destination (Hawaii or Orlando). They often come with their own golf course.

LAND

These are in undeveloped, rural, or raw areas.You can see many of them for sale when you drive past on highways and travel routes. There are three types: • Greenfield Land – These areas are undeveloped and haven’t been touched yet. They are often surrounded by farms and pastures. • Infill Land – This is located in city areas and has already been developed, but is currently vacant. This type of land is sometimes an option for tenants if a buyer is in the process of purchasing the land. • Brownfield Land – These are pieces of land that were used for commercial industrial purposes, but are now available for reuse. They can also be contaminated lands that have been restored and are ready for commercial use again.

SPECIAL PURPOSE

This is land that may be owned by commercial real estate investors 22

but can’t be classified in one of the categories mentioned in this chapter. Examples of this type of land are self-storage, churches, community centers, marinas, bowling alleys, theaters, funeral homes, car washes, and theme parks.

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