If you are considering purchasing a commercial property, either for your business operations (as a retail storefront, manufacturing facility or warehouse) or as an investment, congratulations. Purchasing commercial real estate is a great way to diversify your investment portfolio and, in many cases, can provide you with substantial passive income.
What to know before you buy
Commercial real estate transactions are, as a rule, very complex, with significantly longer closing periods than, for example, those found in single-family residential transactions. In addition, the financial requirements to purchase commercial property are significantly more substantial, with some banks requiring a completed business plan as well as an initial down payment of up to 40%. Also, it’s important to note that, while real estate does have a strong history of appreciation, there’s never any guarantee.
The commercial real estate buying process
In the following paragraphs, we’ll take a look at a typical commercial real estate transaction step-by-step to help you get ready to become a first-time buyer of commercial real estate.
Here is typical commercial property purchase from initial planning to closing and beyond, broken down into 10 steps:
1. Get started with your initial planning
- Define your objectives. How will you use this property? Will you conduct business there? Or are you looking to generate income by renting its space to others?
- Evaluate your financial resources, establish your budget and secure financing if needed.
- Decide if you will be purchasing the property on your own, with a partner or as part of a real estate syndicate. Note: although this can apply to any commercial transaction, it is particularly relevant for properties being purchased as an investment.
2. Conduct a comprehensive property search
- Engage an experienced commercial real estate agent, preferably one specializing in commercial properties that meet your needs.
- Familiarize yourself with the market and identify suitable properties that fall within your established price range.
- Tour potential properties to assess their suitability for your purposes.
3. Make an offer and negotiate terms
- Submit a Letter of Intent (LOI) outlining your preferred terms and conditions of the proposed purchase.
- Negotiate the purchase price, contingencies, and other key terms with the seller.
4. Protect yourself by performing due diligence
- Know what you’re buying. Conduct a thorough property inspection to identify any potential issues.
- Examine the property's financial statements, including income, expenses, and leases.
- Perform an environmental site assessment to check for any environmental concerns.
- Verify zoning compliance and review any legal restrictions on the property.
5. Prepare your financing
- If financing is required, complete the loan application process with your lender.
- Arrange for a property appraisal. Potential lenders will typically require one in order to determine the property's value.
- Secure final loan approval and review the closing terms and conditions.
6. Draft the purchase agreement
- Work with your attorney to outline and draft the purchase and sale agreement (PSA).
- Review the PSA carefully, negotiate any final terms, and sign the agreement.
7. Prepare for closing
- Confirm that there are no outstanding liens or issues with the title by having your attorney conduct a thorough title search.
- Protect yourself against future claims on the property by purchasing a comprehensive title insurance policy.
- Complete all remaining financing requirements in final preparation for the closing.
8. Arrive at the finish line: closing
- Review and sign all closing documents, including the deed, loan documents, and settlement statement.
- Arrange to have funds transferred to the seller.
- Verify that the deed has been recorded with the local government and that ownership has been officially transferred to you.
9. Entering the next stage: post-closing
- Take possession of the property and ensure that all keys, codes, and necessary documents are received.
- If you have an existing management system, integrate the property into it. If necessary, hire a property manager.
- Address any urgent repairs or improvements that may be required. Note: any such repairs or needed improvements should have been discovered during the closing period.
10. Performing ongoing management - Perform any regularly required maintenance on the property and address any tenant or operational issues.
- If the property’s purpose is to generate income, monitor its financial performance and manage the cash flow.
- Ensure ongoing compliance with local regulations and lease agreements.
California Bank & Trust offers several ways to help you purchase commercial real estate. Visit our web site or come in to your local branch to learn more.