10 Tips for Buying Commercial Space
When making a commercial real estate purchase, you may feel like you've reached the big time. Business owners and property owners all long for the day their investment strategies pay off and their company or property turns a profit.
Now is when you need to pause and take a deep breath. Real estate investment is a major leap for anyone, and when the investment concerns the survival of your business, you must be even more cautious. Take the time to consider what you need in a commercial space and what type of property will fill your needs.
Types of Commercial Property
Commercial property falls into five general categories. You can save time by letting your commercial real estate broker know what you want before you begin your search.
- Multifamily buildings are residential properties with more than one unit. They range from duplexes to apartment complexes. Assisted living facilities and similar facilities are also multifamily properties.
- Office space usually has multiple tenants using the space for business purposes. Office buildings may be of various sizes and have multiple owners.
- Retail space is often sold in large blocks, such as shopping centers or malls, and then leased to other businesses.
- Hospitality space covers establishments that provide traveler services. Short-term rentals like hotels, restaurants, and entertainment facilities are hospitality properties.
- Industrial properties can be light or heavy manufacturing, assembly, and other industrial purposes. These properties are often restricted to specific city or county map zones.
Office properties have other classifications. Class A buildings are high-quality, often new, and in good locations. Class B are good but older, and may need work or be in less desirable locations. Distressed properties are Class C.
As you search for commercial property, remember that this is a purchase. Whether this is an investment property, a residential income property, or a building for your own business use, this is your property. You will be responsible for everything in and on it.
The tips below can help you choose the right business property for you.
#1: Prepare for Your Search
When purchasing a commercial property, it's important to do your due diligence. Make a list of all potential properties you want to look at before you set out. If you're working with a real estate agent or broker, give them a description of what you want in your property and what you'd like to have.
Know where you want your property to be. With any real estate purchase, location matters. With commercial real estate, location may dictate where you can set up shop. For instance, as much as you may want to buy property in the suburbs, zoning laws might not permit an auto body shop in that area.
When you set out to look at prospective locations, take your time. Space out your inspections so you're not overwhelmed with property visits. Take your smartphone or a video camera to get good shots of the interiors and exteriors. Take copious notes, and don't be afraid to ask questions.
#2: Do a Thorough Inspection
Plan to spend a full day inspecting and investigating your potential building. As the owner, you'll be responsible for everything good and bad about the place, from the foundation to the roof. A walkthrough of the interior is enough for a rental but not for a purchase. More is recommended.
In commercial and residential real estate transactions, the seller is legally required to disclose all known material defects in the property. That does not mean they will. If you buy the property from a corporation or a broker, the seller may be unaware of the defects. The on-site property manager may have concealed them or may be so accustomed to them that they no longer seem like defects.
Finally, consider your surroundings. Look at parking, street access, and your neighbors. You can improve the appearance of an unattractive building, but you're stuck with the neighbors. Clients and customers will hesitate to visit if you're located in a seedy part of town. If it's too difficult to find parking, people may not stop by.
#3: Ask About Defects
Any commercial real estate attorney can tell horror stories about property defects. Although sellers must legally disclose all known material defects, minor defects can blossom into major problems if you're unaware of them in time to fix them. If a shady owner or manager has concealed a defect and you win in court, it might not save your business.
Since you will own this property, you'll have to repair or replace any faults after you sign the purchase agreement. Asking about problems now is a good investment of time and money. Some places to look for potential issues include:
- Roof: Ask when the building was last re-roofed. Get the name of the roofing company if possible.
- Walls: Look for signs of mold or water intrusion. Ask about insects or rodents. If applicable, inquire when the building was last tented for termites.
- Foundation: Depending on your location, you may want to know about possible flood damage, sinkholes, or earthquake retrofitting.
- Electrical damage: Ask about any issues with the wiring in older buildings, particularly if there are multiple tenants.
If you plan to remodel the building, or if it's an older building that needs extensive renovation, consider having a professional building inspector examine the building before making any purchase commitment.
#4: Inspect the HVAC
Take an extra look at the heating and cooling system. You need a steady temperature to keep employees happy and healthy. It's also better for your bottom line if the HVAC is up to code. Nothing runs up your electric bill like an inefficient air conditioning unit.
If your building is an industrial facility for manufacturing or assembly work, make sure you check the ventilation ducts and fans. Find out what equipment and fittings are included with the sale and what you'll need to buy to bring the building up to code.
#5: Review the exterior
Since more business services are available online, you must make your physical location as enticing and convenient as possible. The building should look nice and stand out from the background. Ask about any restrictive covenants that limit changes to the appearance or signage.
Access from the street is important. Will customers have to turn left across traffic to get into the parking lot? Does the building have a parking lot? If not, what is street parking like? Access to the building is just as critical. Is the building ADA-compliant?
Bear in mind that if the building's previous owner received a waiver or variance for any ADA noncompliance, the waiver will not come along with the deed. You will need to bring the building up to current requirements.
Walk down the block and look for any signs of criminal activity. Keep an eye out for graffiti, homeless encampments, and shops with barred or boarded-up windows. These should not prevent you from purchasing property in a neighborhood, but you may need to take extra precautions for security. There are few areas without some signs of petty crime.
#6: Check on Permitting and Zoning
Zoning laws define the categories of buildings and businesses in a community. Zoning boards and community planners create zones so towns and cities are pleasant and convenient places to live and work.
Typical zoning ordinances divide communities into residential, commercial, and industrial zones. Residential zones may include a small percentage of commercial real estate property, such as shopping centers and office space. Commercial zones may contain light industrial space, like auto shops or small manufacturing shops.
During your property search, be sure you're looking at property in the correct zones. Think about the primary purpose of your business and any secondary offerings. For instance, if you're a surf shop that offers surfing lessons and makes custom boards, you may want a shop in a mixed-use industrial/commercial zone.
If you need a special license or permit beyond your business license, ensure you can get it before signing any sales agreement. These could include licenses for gun sales, liquor or tobacco, financial services, or health care. You may want to make the sale conditional on receipt of the permit. Ask your real estate attorney about this.
#7: Review Your Financing Options
The real estate market has its ups and downs. So, too, does the business market. Small business owners take a big risk when locking themselves into a commercial real estate deal and buying a building or parcel of property. Before you commit, be sure you have the cash flow and the bank account to support your purchase.
The Small Business Administration (SBA) Lender Match helps small businesses find financing options in their area. The SBA also provides startup loans and assistance in other areas. If you have questions about buying commercial property, the SBA is a good source for answers.
#8: Make Improvements Part of the Deal
A "build-out" means changes to a building before a lease or sale. If you've leased property in the past, you've probably dealt with build-outs. When buying commercial real estate, build-outs can become a good leveraging tool when negotiating prices.
If you're purchasing the property as-is, you'll have to repair or rebuild whatever needs fixing. If you need the property right away, that may be acceptable. If you can wait, you might get the current owner to fix it on their dime and save yourself the trouble.
#9: Ask an Expert
If you're not a real estate expert, find someone who is. Have your building evaluated by a building inspector before you sign on the dotted line. If you have concerns about the structure, the wiring, or possible mold infestation, get someone in to ease your worries. Get it right the first time. You won't have to spend more later.
If you plan a major renovation or remodel once you've bought the building, get an architect or engineer to review your plans and make suggestions. Assembling the right team for the job can save you time and headaches down the road.
#10: Get Legal Advice
Viewing commercial properties may raise legal issues as well as financial questions. A business and commercial law attorney can answer some of your questions, and a real estate attorney can help with others.
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