First things first: Buying, developing, managing or designing a piece of commercial real estate is a completely different process than a residential property. Take the process of residential real estate and ratchet it up to ten. Commercial real estate is more complex, involving many more steps and requiring more planning the further you go.
As a design and development firm, we are often asked what’s involved in getting a commercial property from Point A (purchasing) to Point Z (managing that asset). Whether you are looking to invest in commercial real estate from strictly an ownership perspective or already have a piece of property that just needs some TLC before leasing, we will take you through the steps to help you better understand the commercial real estate process.
FINDING COMMERCIAL REAL ESTATE: THE FIRST STEP
Deciding just what type of property you are looking to invest in is step one. We have already talked about the different types of commercial properties, so from the long list of available types, finding what suits you best is the first step on your journey.
Luckily, searching for commercial real estate is as easy as it is with residential properties. A quick internet search will reveal commercial properties within your desired area, or you can use dedicated websites such as CoStar and Loopnet to refine your search. From there, learn as much as you can about potential properties and tour as many as possible. Keep in mind, the best fit will involve a balance in terms of price, location, investment and use.
SECURING FINANCING AND SETTING UP YOUR TEAM
Once you have found the ideal piece of property, the next step will be to secure financing. You can opt to shoulder the risk yourself in the form of a business loan, or you can seek out private investment companies or private investors. Talk with lenders and agents to determine what works best, and get a good understanding of any fees, interest rates or other costs that will determine your budget.
Because buying commercial real estate can be a complex process, having the right team in place will help things go much smoother. Depending on the type of property being purchased, at minimum you’ll need to enlist the help of an accountant, commercial realtor, and commercial real estate lawyer. You may also need to bring in other specialists such as engineers, appraisers, or an environmental expert.
THE OFFER, THE ESCROW & THE DILIGENCE
Once you have found just the right property to invest in and you have financing secured, things are starting to come together.
After having your lawyer review the offer, it’s time to sign a letter of intent (L.O.I.), which outlines the basic terms of the transaction to take on the property.
Next, in partnership with the seller, you will need to find an escrow agent that will act as the neutral party to oversee the negotiations and transactions. They will make certain both sides of the deal are protected, and will handle things like warranties, supplier guarantees, title affidavits and quitclaim deeds.
Finally, you will need to perform due diligence on the property, which again is much different for commercial property than for residential. Beyond confirming the physical characteristics of the property via inspection, this stage also verifies zoning, puts the title under review, involves a preliminary environmental study, a formal appraisal and more. If it all seems a little much, helpful checklists exist to help ensure all the i’s are dotted and t’s are crossed.
Once these steps are completed, the final step is closing, which here is similar for both commercial and residential. Final funds will be shuffled to the appropriate place, final documents will be signed, and the purchase will be complete with you in possession of a new investment property.
DESIGN AND DEVELOPMENT
Now that the property is in hand, you are able to start implementing your vision in earnest. Though there are still many hoops to jump through (permitting, surveys, assessments, etc.), working with a firm to design and develop the property to your exact specifications will be the most enjoyable part of the process.
Often there are instances where many elements of design and development happen before the actual closing, and for good reason. While it may seem odd to begin laying the groundwork for something that’s not yet owned, this initial ideation often serves as a “proof of concept” to gauge feasibility in a project’s scope, or as a budgeting exercise. An offer on a property is shaped by how much additional money will need to go into a project to see it through to completion, and this early stage development acts as a great test of how things will pencil in relative to an overall business plan.
Regardless of whether you look to tackle the design pre- or post-closing, at no other stage are you able to exercise your vision for your property more than here, You will be able to implement everything from façade updates, interior alterations, space organization, signage, and landscaping to help make the property your own and maximize the return on your investment.
Once you have settled on design plans, the development phase begins in earnest. This has the potential to be the longest, most taxing stage of the entire process. Depending on the scope of work, you will need to solicit bids from multiple general contractors to handle the various elements of construction. While doing your own bid solicitation is a conventional way of attacking this step, the alternative is to partner with a firm like ML Group Design and Development that will handle the process for you.
Partnering with a design/build firm has become a much more efficient method to help minimize cost, maintain a reasonable schedule for completion, and save invaluable time. A design/build firm will work with you on a strategy, develop the architectural and overall design plans, then facilitate all aspects of the bid and construction process on your behalf. With bids notoriously coming in at both the high- and low-end of the spectrum, they can utilize their in-house expertise to formulate a solution that will best fit your needs.
Whichever way you go about it, before any construction can take place, you will need to endure the requisite review process by local government, utility companies, and other various agencies to address any foreseeable issues that might impact things like public safety, traffic, water supply and sewage disposal. Again, a design/build team will do all of this on your behalf.
Now that the dust has settled and you are ready for tenants, it’s also time to start looking for someone to help manage your asset. An asset manager will take one of two forms, either focusing on infrastructure or on the property’s finances. While you might be inclined to handle some of the operations yourself, it’s imperative to have an expert handle each of these specific aspects of your property.
While a more traditional form of asset management will focus on the finances of your property (reducing expenditures, identifying sources of revenue, basic marketing, etc.), an infrastructure asset management firm will concern themselves with the protection and ministration of physical assets. This will include managing the operation, maintenance, repair work, modifications or any replacement of physical infrastructure assets integral to your ability to operate.
Working in tandem, the combination of the two will help to attract tenants, reduce vacancies and limit liability, ensuring your long-term viability.
THE BOTTOM LINE
Investing in commercial real estate goes above and beyond the purchase of a residential property, involving several extra steps that might make it seem daunting. Yet as a scarce resource prone to appreciating in value over time, if you are willing to invest the time and money, follow the appropriate steps, and partner with the right firm, owning a commercial property can be a lucrative and rewarding option to expand your investment portfolio.