14 Basic Steps to help you when buying commercial property in the Inland Empire and Southern California Markets:
This Guide to Buying Commercial Real Estate in the Inland Empire can help you avoid many issues that arise in the buying process.
1. Research and know the basic real estate laws in your area
2. Define and understand specific needs
3. Know the market
4. Be ready with financing and initial documents
5. Understand the sellers and the listing brokers you are dealing with
6. Contact seller and or their agent
7. Gather and review data
8. Tour the property
9. Compile and present an offer
10. Negotiate terms
11. Attorney review
12. Open escrow
13. Conduct inspections and due diligence
14. Manage the escrow process
Guide to Buying Commercial Real Estate in the Inland Empire Step 1: Research and Know the Basic Commercial Real Estate Laws
Each country, state, county, or province has their own real estate laws, rules and regulations.
But be aware if you do not have representation that understands the ins and outs of real estate in the location you are buying in, you could be at a disadvantage and miss important steps or nuances.
Always consult with a qualified real estate attorney regarding any purchase or lease documents, only a licensed attorney can practice law and give legal advice in the state they are licensed.
Have a basic understanding of the real estate laws and procedures in the area you intend to purchase. It’s always vital to have an attorney review all purchase documents, and work with a commercial real estate professional that can assist and guide you.
Guide to Buying Commercial Real Estate in the Inland Empire Step 2: Define and Understand Specific Commercial Real Estate Needs
Commercial Real Estate Buyers can be separated into two categories:
Buyer category #1 “Owner Users”, they typically know what they want and understand their commercial real estate “sub-sector” very well.
Commercial real estate arguably has seven basic sectors which include:
• Special purpose
There are about 10 times more subsectors, for example take industrial, the sector is divided many ways.
A high-volume fulfilment center operator may need a high ceiling warehouse space with clearance of at least 40 feet in order to accommodate automated storage and retrieval systems.
A food distributor for frozen foods may need warehouse space for food grade cold storage. Both buildings are categorized as “industrial space” but both have different characteristics.
The Special Purpose sector could include property designed for users that operate a specific type of business or for their brand, examples could be a movie theater, fast food restaurant or bowling alley.
Buying Commercial Property for Personal use.
While not the norm, some hobbyist or individuals with cars, motorcycles or other collections often need a large space to store their collectables.
If you own a collection or just need to store a Boat, RV or Vehicles a “personal use warehouse” may be perfect for your needs and may be less expensive than leasing space.
Below is a video of the type of small warehouse that would be great for Vehicle and other types of storage. Always verify permitted uses and zoning prior to any purchase.
Buyer category #2 “Investors”, they are usually looking to buy commercial property as an investment only.
Most investors are looking for opportunities in a specific price range and sector, some will be a bit more flexible depending on the return potential a property can provide. Some may want to determine if commercial real estate is a good investment or better than other alternatives.
For example, an aggressive investor looking for the highest return may compare properties in different sectors or even different asset classes.
Many use calculations like internal rate of return (IRR) to dig deep to get an “apples to apples” return comparison to see which is the better projected investment over time, even if cashflow frequencies and sources are different between assets.
Investors are focused on the numbers.
Depending on the size and complexity of an organization’s capital deployment requirements, sophisticated analysis software like Argus may be utilized to do assumptive modeling, detailed lease analysis and assist in the overall underwriting process for acquisitions.
Conservative investors may just be looking for stable cash flow and return and may prefer a property with a single tenant with a triple net lease. Some will prefer a well-known and financially stable credit tenant in place that has a long-term lease.
A “triple net lease” is a lease structure where the tenant pays a base rent amount plus all taxes, plus maintenance, management, and insurance.
Be familiar with the type of commercial real estate sector and product you are dealing with and understand how to evaluate it.
Guide to Buying Commercial Real Estate in the Inland Empire Step 3: Know and Understand the Local Commercial Real Estate Market
Every market is different, a large Metro area may have many submarkets. Each submarket has its own nuances and advantages and or disadvantages.
Some of the things to analyze for a market will include but not limited to:
• New construction
• Absorption rates
• Market capitalization rates for the sector being analyzed
• Comparative valuations
• Growth trends
• Job growth
Your specific property need and the sector you are looking for will have an impact on how you analyze the market.
Is Commercial Real Estate in the Inland Empire a Good Investment?
Historically commercial real estate has done well as a long term investment if purchased in the right area, especially when you consider the fact that there includes many tax benefits and cashflow considerations. Businesses need places to operate and people need places to live.
Recently we have seen how resilient some sectors are, see recent report below for Commercial Real Estate:
Understand the Commercial Real Estate Market and the value of similar properties in the Inland Empire this will give you valuable information so you can make an informed decision.
Guide to Buying Commercial Real Estate in the Inland Empire Step 4: Be Ready with a Commercial Real Estate Loan Approval, Initial Documents and Proof of Funds.
The worst thing that can happen to a buyer is to find the perfect property for their needs but not be prepared to get their offer accepted. “
Larger institutional buyers like private equity firms, hedge funds, pension plans or corporations may have cash to purchase and their offers will be taken very seriously by a seller.
To be competitive in the lnland Empire and Southern California markets a buyer must be prepared and ready to buyer with three things:
1. Be fully prepared to submit a written purchase agreement and commitment to purchase the property with a “buy in” from all decision makers (contingent upon inspections and meeting zoning requirements, etc.).
The above 3 points are the key things a seller needs to know about a buyer.
There are more depending on the property, but no seller is going to accept an offer, open an escrow and tie their property up with a buyer that is not ready to purchase and has not shown sufficient financial capacity to purchase their property.
Most major commercial lenders will take you through a commercial real estate loan preapproval process. If purchasing an owner user type property in the U.S. you may be able to qualify for and SBA Loan with the United States Small Business Administration.
The SBA provide qualified borrowers with some excellent rates and terms some with as little as a 10% down payment.
Many clients ask me “how can I buy commercial property with little or no money down”.
In some cases and in some markets this may be possible, an owner may be willing to finance 100% of the purchase for a buyer.
For example in a depressed market with a seller that is having a hard time moving a property may just accept a buyer that can make payments.
Or a buyer may be able to use equity in other assets as collateral or even trade assets for the down payment.
If buying in the U.S., under Under IRC Section 1031 and if you own an investment property that you are selling you can roll the proceeds of that property, when you sell, into another with potentially no or very little money out pocket depending on the situation.
Always consult your tax advisor prior to embarking on this path, there are very specific rules and regulations that must be strictly adhered to when doing a “1031 Exchange”
Be fully prepared to make an offer and demonstrate financial capacity to complete the purchase transaction.
Guide to Buying Commercial Real Estate in the Inland Empire Step 5: Understand the sellers and the listing brokers you are dealing with
It is almost cliché but knowing what the seller’s motivation is can help put a hard deal together.
Commercial Real Estate Sellers:
Depending on the situation, a seller and or their broker may let you know upfront and that can be part of a win-win negotiation further on in the purchase process.
Some sellers are willing to give a little in terms of price to have a quicker closing because they may have other opportunities waiting for them
Commercial Real Estate Listing Brokers:
Understanding how brokers and owners think is important, every property owner I have worked with wants to get the highest amount of money for their property with the smoothest transaction possible.
Real estate brokers and agents representing commercial sellers are interested in getting offers from serious, motivated, and qualified buyers.
They also want to have a smooth transaction with no problems and get paid their Commission.
In my experience, commercial listing agents do not like to deal with inexperienced agents presenting offers who do not understand commercial real estate, the laws and processes involved.
It ends up being very problematic having to explain and potentially argue with someone who is not trained or qualified to be involved in a complex transaction.
Understand the other party and know what they want.
Guide to Buying Commercial Real Estate in the Inland Empire Step 6: Contact Seller or Their Commercial Agent
So now you are at the point where you have found several properties on one of the various commercial real estate listing platforms or even from a sign, you next need to contact the seller or their agent and verify if the property is still active for sale.
Many times an agent or seller will accept an offer but keep the advertisement running.
In the early stages of a purchase there are many variables, and a buyer may not open the escrow even after the signed offer has been accepted, mainly because the seller does not want to lose marketing momentum by taking the property off the market in case there is any issues with their current offer.
You also need to verify the price, many agents will list the property for sale but will not give out a price for various reasons on listing platforms.
Most professional real estate brokers, if they’re selling a property will have a marketing brochure or offering memorandum prepared which should have a lot of the basic information about the property as well as pictures in it.
If it is just a property a seller has put on the market themselves, ask them if they could please provide any basic information they have.
Contact with a seller or seller’s agent is to verify availability and gather initial important facts.
Guide to Buying Commercial Real Estate in the Inland Empire Step 7: Gather and Review Data on the Property You are Focused On
Once you get the basic information from the listing broker or seller, it is important to review as many facts as possible and do so quickly.
At this point you are just looking in general but if it looks like a good opportunity good you must set up the next step quickly without delay.
Buyers and their brokers need to know facts to decide quickly.
When selling a property I typically create an incredibly detailed marketing package to answer most of the questions a buyer will have, quickly and efficiently.
Gather data and do an summary analysis on all information received and move to next step quickly.
Guide to Buying Commercial Real Estate in the Inland Empire Step 8: Tour the Commercial Property you intend to purchase in the Inland Empire
The property tour is the chance to see if you are going to make an offer or not, sometimes just to drive by is enough to know the property is right, but a walkthrough is essential to make sure everything looks good on a superficial basis.
With some properties like a multifamily or fully rented tenant occupied property, it may not be possible to do a walkthrough without submitting an offer.
Tour the property for a visual evaluation of the property and its features and condition.
Guide to Buying Commercial Real Estate in the Inland Empire Step 9: Compile and Present an Offer on the Commercial Property
This is a very vital step to get right all the time, a buyer wants to present an offer that will be accepted, especially in a hot market where there is little inventory.
This is where having that preapproval from a bank comes into play (if applicable), you want to submit the preapproval along with proof of funds that you are able and have the capacity to purchase the property.
You also want to give yourself enough time to do a thorough investigation on all aspects of the property, every situation is different.
For example, if the acquisition is to purchase land to construct an industrial warehouse, it may take as much as a year or more to get everything approved for construction.
If you are a buyer, it is advisable to clearly explain to the seller your intentions and lay it out in a simplified format that ends up being a win-win for both parties.
Sometimes brokers representing large developers just throw a “complex attorney drafted purchase agreement ” at an unsophisticated agent or buyer. This is not a best practice and typically results in a lot of stress and uncertainty for the seller.
Present a realistic and clear offer that shows you have the capacity and motivation to purchase the property.
Guide to Buying Commercial Real Estate in the Inland Empire Step 10: Negotiating the Commercial Real Estate Purchase Terms
The two things that are commonly negotiated are price and time periods, if you’ve done your homework and market analysis you should understand what the fair market value of the property you’re considering is, and if you have the data it should be easier to negotiate with the seller.
There are many variables involved and market conditions will ultimately dictate the price and the willingness of both parties to negotiate.
Timing is also a key negotiating item, it all boils down to the fact that the buyer will need an adequate amount of time to do their investigations which may include environmental survey reports, structure and systems inspections, verification of zoning and permitted uses and or conditional use permits if applicable.
If the property is for investment purposes the buyer will want to review all leases, tenant estoppels and even financial statements from the tenants to ensure they follow the terms of their respective leases.
Negotiation is about doing your homework and understanding what all stakeholders want and timeframes you will need to do your due diligence, use that information to make sure the transaction ends up providing what you need.
Guide to Buying Commercial Real Estate in the Inland Empire Step 11: Attorney Review of the Transaction Documents
Prior to signing any final sales contract, I always recommend that a buyer have the documentation and title information reviewed by an attorney.
A trained and experienced real estate attorney will catch mistakes that can save the buyer a lot of time and money.
Attorney’s see and deal with commercial real estate purchase contracts everyday while a buyer may see one every few years.
An experienced commercial real estate attorney is a vital part of any property acquisition team, they should review all contracts.
Guide to Buying Commercial Real Estate in the Inland Empire Step 12: Open Escrow
The fully executed purchase agreement is given to the escrow company along with a good faith deposit to be held in escrow in accordance with the agreement. Receipts are given to the buyer along with a reference number and when funds are verified as received the escrow is officially deemed open.
The best practice is for the buyer to give deposit / good faith funds directly to the designated escrow company.
It is important that the escrow and title company used in a transaction is familiar with commercial real estate, it is advisable to use a major firm that has a division that specializes in commercial.
Typically, the seller wants to use an escrow and title company they have a relationship with, and it is a negotiation item to be discussed. Many issues can come up and if the escrow officer is not familiar with commercial real estate it could be a problem for all parties involved.
A strong Commercial Title Company matters.
A strong, well established title company will have a staff which includes attorneys, underwriters, title officers all of which can be an asset in the event a problem arises either during the escrow or down the road.
Having dealt with many issues with title over the years, I have found the larger companies with dedicated commercial divisions are much better equipped to solve problems when they occur.
Work only with experienced title and escrow companies that know commercial real estate. This will save you time and potential problems with the transaction.
Guide to Buying Commercial Real Estate in the Inland Empire Step 13: Conduct Due Diligence
Due diligence in real estate is the research and analysis of all aspects of a property in preparation for a purchase transaction.
Ensuring the title is free and clear of encumbrances and can be transferred is one of the first things to be verified.
Property inspections and obtaining material facts on every aspect of a property is part of the process.
Some of the areas when buying a commercial property to be evaluated in the Inland Empire are:
• Lot lines & Easements
• Square footage
• Environmental hazards
• Natural occurring hazards
In addition to buyer investigations, lenders, title companies and hazard insurance providers will have their own inspection requirements.
Research and inspect all aspects of the commercial property so you can avoid costly repairs and legal issues in the future.
Guide to Buying Commercial Real Estate in the Inland Empire Step 14: Manage the Escrow process and Close the Deal
Actively follow up on milestones and critical dead lines, this can not be overlooked.
The buyer and their team must be aware of what escrow is and what it is not.
A good escrow company ensures documents get signed, invoices get paid (if applicable), funds are gathered and released according to the purchase agreement and the law but buyer and or their representative must take an active role as well.
Escrow also coordinates with the title officer to ensure a property is transferred between parties and the proper documents are filed and recorded with the governing authority.
Their job is not to do inspections or favor one party over another, the escrow officer will work with all parties involved in a transaction including the:
• Title company
• Brokers / Agents
During the escrow process problems can come up and this is also where they can be solved with the cooperation of all stakeholders and service providers involved in the transaction.
It is important to have experienced team members at all touch points in a commercial real estate transaction. They will know how to handle issues that will arise.
Understanding the basic steps of a commercial property acquisition and being prepared will help you have better outcomes and a much smoother process.
Always make sure to have a legal professional review all documents and be aware of local laws and procedures.