Commercial Real Estate Buyer’s Checklist – Site Acquisition Research –
Commercial Real Estate Transactions can be difficult to navigate. This is the third article in a several week series regarding the Commercial Real Estate Buyer’s Checklist aimed at simplifying your next commercial real estate purchase.
Commercial Real Estate Buyer’s Checklist – Week Three – Site Acquisition Research
Have you ever read a book or seen a movie for the second time? If so, was it easier for you to understand the plot and how the pieces fit together once you knew the outcome of the story? My opinion is that a commercial real estate transaction can be more easily understood if you know the climax of the story prior to reading/watching the beginning. This is why this week’s article, covering site acquisition research, is being presented after we discussed “Making An Offer” (week one) and “The Due Diligence Team” (week two). If we relate the commercial real estate purchase to a basketball game, “Making An Offer” would be like “opening tip-off”. The offer gets the game started. Under the same analogy, the due diligence period would be like the first three quarters of the game. As any sports fan knows, you have to practice well in order to play well in the game. “Site Acquisition Research” is similar to the practice time prior to the game beginning. The better you practice, the better you will play in the game!
If you are a seasoned commercial real estate buyer or broker reading this article, feel free to skip the below links to the previous two articles in this series. If you are new to commercial real estate acquisitions or would like a refresher course, I highly recommend going back and reading week one and week two’s articles so that you can better understand what happens after you find your site.
See below links to the first two weeks of this series:
San Antonio Commercial Real Estate Buyer’s Checklist Item #12 – Site Acquisition Team – In week two’s article, we discussed how your commercial real estate broker should be the “quarterback” of the due diligence team. You also learned that there are countless vendors that you may or may not need to employ to help you research your final decision to close on the purchase of a commercial real estate property. If the commercial real estate broker is the “quarterback” of the due diligence team, then I would refer to him or her as the “head coach” of the acquisition team. Much like the owners of successful sports franchises must rely on the coach that they hire to win games, your commercial real estate broker is critical to winning (closing a successful transaction) in commercial real estate. Commercial Real Estate brokers are often the only vendor in your due diligence team (read last week’s article to better understand this team) that plays a significant role in site acquisition research. Why is this? “$$$$$” is the main reason. Commercial Real Estate brokers are typically paid “IF” a transaction closes…not based on an hourly rate like most vendors which must be paid whether a deal closes or not. The commercial real estate broker’s contingency based compensation allows a buyer the ability to acquire seasoned advisement without the risk of compensation. Since the commercial real estate broker is a taking a huge risk by selling their most valuable commodity (TIME) without guarantee of compensation, most are very picky about the buyers and projects that they will work with because they know that they only get paid for a “WIN” (closed transaction), versus the other vendors that are paid for their practice and game time. This is also why many of the best commercial real estate brokers will require representation agreements spelling out the terms of their compensation in the event that a transaction does occur. Once you find a commercial real estate broker experienced in the product type that you are acquiring, my opinion is that you should commit to them…if you want them to commit to you.
Commercial Real Estate Buyer’s Checklist Item #13 – Determine Site Acquisition Criteria – Once you have found a commercial real estate broker to aid in your site acquisition research, I highly recommend starting with a “planning” meeting where you focus on establishing goals for your site acquisition. Searching for sites through the web or windshield should NEVER be done until you have established clear goals for your acquisition. There are countless commercial real estate property types to consider. There are also countless variables specific to each property type (and to each specific property), so the key is to establish goals for the acquisition so that your commercial real estate broker can take a “rifle” approach (versus shotgun) to aid you in your search. Since there are so many variables associated with different commercial property types, I have decided to provide you with some real world examples to review to aid you in your understanding. The next section, Commercial Investment Acquisition Criteria, will provide some property examples and potential questions that you and your commercial real estate broker should research if you are acquiring a commercial investment property. Over the next few weeks we will uncover examples of other property types to increase your understanding of site acquisitions.
Commercial Real Estate Buyer’s Checklist Item #14 – Commercial Investment Property Research – After you and your commercial real estate broker have a comfortable understanding of your acquisition criteria (Planning Meeting is Step 1) for your commercial real estate investment property, the next step will be researching specific properties. For the purposes of this article, let’s use some of our commercial investment property listings to understand the potential questions that you will need to answer during the site acquisition stage. CLICK HERE TO GO TO OUR MEDICAL OFFICE BUILDING INVESTMENT PORTFOLIO Hopefully, after looking at some of our listings, you will better understand some of the information that a seller might provide in their marketing packages. Of the nine medical office building listings that you will see (we listed them in February when we started our new commercial real estate group) we have either sold are in agreement to sell 8. There are a variety of reasons why we have made deals on these properties, but one of the main reasons is that we are “prepared to sell”. (read week 2’s article to briefly understand what this means). A second reason is that we did our homework when we acquired the 8 properties for development. Please understand that there may come a day and time when you sell the commercial investment property that you are considering for acquisition (hopefully for a profit). Doing your homework when you buy can often ease your ability to sell in the future. Whether we represent the buyer as an intermediary to acquire one of our listings or whether we are representing a buyer to acquire a different commercial investment property, there are questions that need to be answered before an offer can be considered.
Below are a list of questions that I would recommend the buyer and their representatives uncovering when considering commercial investment properties:
Question 1 – Is the investment property located in an area that the buyer feels will sustain successful occupancy? This is a broad question, but studying demographics relating to the tenant’s potential success (research the tenant’s target patrons relating to the site’s demographics) is a great way to better understand the likelihood of your current tenants and similar future tenant’s occupying the site. At the end of the day, occupancy is one of the biggest components of a successful commercial real estate investment property. Commercial Real Estate Investments involve investing not only into the building, but also into the success of your tenant’s businesses.
Question 2 – What are the terms set forth in the lease with the tenants? This is a very broad question as well, but being able to quickly pull out information from the leases like…lease guarantees, lease duration, rent escalations, termination clauses, renewal terms, options, expense reimbursements (what is the tenant responsible for and what is the landlord responsible for?), and comparing the overall lease language to the financial terms provided in the seller’s marketing package….are all examples of some of the items that you will need to uncover before an offer can be considered.
Question 3 – What are your expected loan terms? If you are using debt to acquire the investment property, it will be critical for you to get a good “feel” from your lender regarding the terms of the loan based on the property location, lease terms, and tenant mix.
Question 4 – What is my estimated return on investment if I purchase this investment property? Once you have an understanding of the lease terms, property expenses, and estimated debt terms (assuming you are using debt) your commercial real estate broker can help you to analyze a wide variety of return estimates.
Question 5 – Are there any physical issues with the property? This is a question that is nearly impossible to fully answer without full due diligence research. That being said, a keen eye and spending extra time reviewing surveys and any other property related documents that a seller is willing to provide prior to an offer can help the buyer to find potential issues early on.
Question 6 – Are the existing rental rates, the cap rates (noi/purchase price), and price per square foot in line with market for this type of property? As mentioned in week 2’s article, the due diligence period is not the time to decide “IF” you want to purchase a property…it is the time “confirm” your purchase. On the contrary the site acquisition period is the time to decide “IF”….so make sure to learn as much as you can prior to making an offer!
Next Steps—-Please understand that every commercial real estate transaction is different so it is important that you hire a seasoned commercial real estate broker to help you navigate through the transaction. Although the site acquisition topics mentioned above are common to many commercial real estate transactions, I am regularly involved in deals that require completely different criteria. I look forward to following up with you next week to go over Commercial Land Acquistion Research.
Stay tuned for Next Week’s Article…..Commercial Real Estate Buyer’s Check List – Commercial Land Acquisition Research
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Contact a Commercial Real Estate Expert today:
Luke LeGrand, ePRO 210-843-5853