by Prince Licaylicay | Jul 30, 2021 | All Articles, Buying, Investing, Selling
When planning to buy a commercial property, whether as an investment or for your business, conducting due diligence is crucial. It is not just a formal part of your negotiations but a key element in ensuring the success of the transaction.
Due diligence involves researching and analyzing the property to minimize risks and uncertainties. This process is your “homework”—a way to confirm important details about the property you’re planning to purchase.
What is the Due Diligence Period?
The due diligence period is the timeframe in which a buyer can inspect, examine, and test all areas of the property. This period allows the buyer to gather information and determine whether the property meets their expectations.
When Does the Due Diligence Period Start?
The due diligence period can start before or after signing the purchase and sale contract. However, if you start it before signing, the seller may limit the information provided and often requires a confidentiality agreement. Typically, the due diligence period for commercial real estate lasts around 30 days. In some cases, it can extend up to 60 days, provided both parties agree to the extension.
Key Areas of Focus During Due Diligence
Due diligence in commercial real estate can be broken down into three main areas: physical, financial, and legal. Each of these areas is important and should be carefully analyzed.
1. Physical
The physical condition of the property is one of the most critical aspects to assess. It directly impacts the property’s long-term value and can be costly to correct if overlooked.
By conducting a thorough inspection, you can determine if the property has been well-maintained. This insight can help you negotiate a better price or, if necessary, decide to back out of the transaction.
Hiring a professional inspection company that specializes in commercial property assessments is highly recommended. They should cover the following areas:
- Building and property condition assessments
- Risk assessments
- Capital expenditure forecasts
- Facilities management reviews
- Property management KPIs
- Replacement cost estimates
2. Financial
Financial due diligence focuses on investigating the property’s cash flow, ensuring that income and expenses match the seller’s representations. This step is essential in determining if the property’s rent roll is sustainable and if the investment is financially sound.
To mitigate risks, conduct a comprehensive review of the property’s financials before closing the deal. Do not rely solely on the seller’s books and records. It is your responsibility to verify every dollar coming in and going out.
This process includes audits such as lease audits, rent roll analysis, and market comparisons. Hiring a qualified accountant with commercial real estate experience is advisable. They will play a critical role in ensuring your financial security during the transaction and in future deals.
3. Legal
Legal due diligence covers the various regulations and legalities that govern the property. This includes:
- Title examination
- Survey reports
- Existing permits
- Liens and tax issues
Without proper legal due diligence, you may encounter deal-breaking problems. For instance, title defects, improper land use, or environmental issues can significantly impact your investment. Therefore, hiring a real estate attorney, along with a title insurance company and a CRE broker, is essential. They will work together to identify and mitigate any legal risks before you sign the purchase and sale agreement.
Conclusion: Due Diligence is Non-Negotiable
Due diligence is a necessary step when purchasing any commercial property. A thorough investigation of physical, financial, and legal aspects helps avoid costly mistakes down the road.
If you fail to conduct due diligence and let the period expire, there is no turning back if discrepancies arise later. Your deposit money becomes non-refundable, and you may be forced to either proceed with the transaction or lose your deposit if you withdraw from the deal. This is why due diligence is non-negotiable in any real estate investment involving millions of dollars.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Phill Tomlinson | Jul 23, 2021 | All Articles
Not all investments turn out as you expect, and commercial real estate (CRE) is no exception. Like any investment, CRE requires research, knowledge, and effort to succeed—especially if you’re a first-time buyer. It’s crucial to weigh the pros and cons before making your first purchase. While CRE can offer significant returns, it also comes with risks. As the saying goes, “The bigger the risk, the bigger the reward.” Purchasing commercial property is a great investment for your business, but it can be a lengthy process. In this article, we will walk you through the important steps to ensure you cover all your bases.
1. Ask and Assess
The first step is to determine your “why.” Ask yourself why you want to buy a commercial property and why this type of investment appeals to you. What is your end goal? There’s no point in investing in commercial real estate if you don’t know what you hope to achieve. Next, assess the “what.” What type of commercial property aligns with your goals? Commercial real estate includes a wide range of property types, from office buildings and industrial complexes to retail spaces, restaurants, and apartment buildings. Consider what type of property will best serve your business or investment plan.
2. Secure Financing
Buying commercial property can be financially challenging. Before you start looking for a property, assess your financial situation. Most individuals need financing to purchase commercial property, and lenders like banks or credit unions will require a personal financial statement. This statement outlines your assets, debts, and financial obligations, helping lenders determine your creditworthiness. It’s also important to know if the type of property you’re eyeing fits your budget. Here are some common types of commercial property loans: Bank Loans, Life Insurance Companies, Agency Loans, Debt Funds, and Commercial Mortgage-backed Security (CMBS) Loans. Make sure to line up your financing options in advance to avoid potential issues during the purchasing process.
3. Build the Right Team
Purchasing commercial property is complex and involves many components. Surrounding yourself with the right team is crucial to avoid costly mistakes and ensure a smooth process. While it may seem expensive to hire professionals, their expertise will save you time and money in the long run. Your team should include an accountant to analyze your financial position, determine what properties you can afford, and advise on tax benefits; a commercial real estate broker who specializes in finding the right property that meets your criteria and alerts you to new opportunities; a commercial real estate attorney to prepare and review the contract and oversee the legalities of the transaction; and a commercial property mortgage broker who can help secure the financing needed for your purchase and manage the financial aspects of the transaction. If your chosen property is complex, additional professionals may be needed. But at the very least, consider hiring these key experts to guide you through the process.
Even if you have a property in mind, it’s essential to do your homework before closing the deal. This is where due diligence comes in. A thorough analysis of the property helps you understand its value, risks, and potential. Location is a critical factor. Ensure the property is accessible and aligns with your business operations. It’s also important to assess whether the property supports your business goals. If it doesn’t, you might need to look for another option. Finally, keep in mind that every investment comes with risks. Always ensure that the potential rewards outweigh the risks involved in the long term.
5. Make an Offer and Close the Deal
Once you’ve considered all the factors and found a property worth pursuing, it’s time to make an offer. Your commercial real estate agent will assist in drafting the purchase offer. Before signing, have your attorney review the contract to ensure everything is in order. Sellers may ask for earnest money, a sign of good faith that you’re serious about the purchase. It’s also important to include a contingency clause in your offer. This gives you an escape route if the property doesn’t pass inspection or other issues arise during the due diligence period. If everything checks out, move forward with closing the deal. At this stage, your team of experts will review all documents and ensure the transaction goes smoothly.
Conclusion
Buying your first commercial property is a significant investment that requires careful planning, research, and teamwork. By following these five steps—assessing your goals, securing financing, building the right team, conducting due diligence, and closing the deal—you can set yourself up for success in the commercial real estate market.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Jul 15, 2021 | All Articles
Absorption, or the absorption rate, is a key metric in Commercial Real Estate (CRE). It measures the difference between the amount of space vacated by tenants and the space that gets leased or sold within the same time frame and locality.
Simply put, absorption is the rate at which commercial space is “absorbed” (leased or sold) over a given period in a specific market. This rate can be either positive or negative, depending on market conditions.
Absorption and Vacancy: A Close Relationship
Two important metrics often go hand-in-hand in CRE: absorption and vacancy. Vacancy refers to the percentage or number of units or square feet that are available in a commercial property. A lower vacancy rate usually means higher rental income for the property. Both vacancy and absorption rates play a crucial role for investors when deciding whether to buy, hold, or sell commercial properties.
Gross Absorption vs. Net Absorption
When discussing absorption rates, it’s essential to differentiate between gross absorption and net absorption.
- Gross Absorption refers to the total amount of space tenants move into within a specific period, without considering the amount of space vacated.
- Net Absorption measures the total amount of space leased, subtracting any space vacated in the same period. This metric is particularly important because it helps investors understand market supply and demand trends.
Focusing on Net Absorption
Since net absorption is the metric most frequently used by commercial real estate investors, it’s vital to understand its implications. Positive absorption means more space is being occupied than vacated, often leading to increased rental rates. Negative absorption, on the other hand, indicates that more space is being vacated than occupied, which can result in lower rent rates as landlords compete to fill vacancies.
Knowing the net absorption rate in a specific area allows investors to forecast cash flow and make informed decisions about their properties.
How to Calculate Net Absorption and Vacancy Rates
Absorption and vacancy rates are often calculated together. For example, let’s assume a commercial property has 24,500 square feet of leasable space, and 2,250 square feet are available across five units.
Vacancy rate is calculated as:
2,250 SF (vacant space) ÷ 24,500 SF (total leasable space) = 9.2% (vacancy rate)
If a new tenant leases 1,200 square feet, the vacancy rate changes:
2,250 SF (vacant space) - 1,200 SF (leased space) ÷ 24,500 SF = 4.3% (new vacancy rate)
This leaves 1,050 square feet vacant, creating an annual net absorption rate of 53.3%:
1,200 SF (leased) ÷ 2,250 SF (available space) = 53.3% (net absorption rate)
Thus, this scenario shows a positive net absorption rate over the year.
Factors That Influence Net Absorption
Several factors can impact net absorption, and understanding these can help investors make informed decisions.
1. Availability
Availability of commercial space in the area plays a significant role. In regions with limited availability, new businesses quickly fill the vacant spaces, resulting in a high net absorption rate. Conversely, in areas with abundant available space, the net absorption rate tends to be lower due to competition among properties.
2. Pricing
Rent rates also influence net absorption. Tenants look for spaces that meet their needs at affordable rates. By pricing your property competitively, you can attract tenants and reduce vacancy rates, leading to a higher net absorption rate.
The broader economic environment significantly impacts absorption rates. For example, during the COVID-19 pandemic, many businesses either shut down or moved to remote work, resulting in vacated commercial spaces. This shift led to lower absorption rates as companies sought smaller spaces to reduce costs. Economic shifts like these can dramatically affect market absorption trends.
The Bottom Line
Commercial real estate is a competitive market, and understanding metrics like net absorption can be a game-changer for investors. By gathering data, analyzing trends, and factoring in market conditions, you can make more informed decisions that drive the success of your investments.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
by Prince Licaylicay | Jul 8, 2021 | All Articles, Buying, Exchanges (1031 & DST), Investing, Selling
Most people know that when you sell a long-term investment, such as real estate, you’ll have to pay taxes. Unfortunately, these taxes can be significant. However, many savvy investors use a strategy called the 1031 Deferred Tax Exchange, or simply the 1031 Exchange, to defer these taxes.
While we’ve previously discussed the basics of the 1031 Exchange, today we’ll dive deeper into Advanced 1031 Exchange Strategies and what you need to know to maximize its benefits.
Below are four advanced strategies that investors frequently use:
1. Delayed Exchange
The Delayed Exchange is the most commonly used 1031 strategy. In this approach, the investor sells their current property (the relinquished property) first. Then, they purchase a new property (the replacement property) using the proceeds from the sale.
To facilitate the process, investors hire a Qualified Intermediary (QI). After selling the relinquished property, the QI holds the proceeds in escrow. According to the 1031 Exchange rules, investors must identify a replacement property within 45 days. Additionally, they must complete the purchase within 180 days.
2. Reverse Exchange
Although most investors prefer the Delayed Exchange, some situations make it difficult to find a suitable replacement property after selling the relinquished one. In such cases, investors can opt for the Reverse Exchange.
In this strategy, the investor purchases the replacement property before selling the relinquished property. Once the new property is acquired, the investor has 45 days to identify which property to sell. After that, they have 180 days to complete the entire transaction.
3. Improvement or Construction Exchange
Sometimes, investors may want to modify the replacement property to better suit their needs. The Improvement or Construction Exchange is perfect for those who wish to build or renovate a property.
After selling the relinquished property, the investor identifies the replacement property and begins construction or renovation. They are given 180 days to complete the project and finalize the exchange.
4. Simultaneous Exchange
In a Simultaneous Exchange, the sale of the relinquished property and the purchase of the replacement property occur on the same day. This process can take place in one of three ways:
- Two-party exchange: The owners of the two properties directly swap deeds.
- Three-party exchange: An accommodating party helps facilitate the exchange.
- Qualified Intermediary: A professional intermediary manages the entire process and ensures the transaction complies with IRS guidelines.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
