Deciding to purchase a commercial property is a huge investment and it is important to have all your affairs in order and ready before you start the process.  Here are some Dos and Don’ts to consider before you start the process.

• Do be prepared before you start the process of buying a commercial property.  Start with a thorough list of what exactly it is you are looking for and wanting in a commercial property.  For instance, do you want an office space or a store front; do you want a property with or without tenants; and what is your intent for the property?  These are just some of the questions you should have answers for before you begin your search.
  

• Do talk with a mortgage lender and get pre-approval before you start your commercial property search so that you have a clear idea of the price range for which you qualify. 
  

• Don’t just go to any mortgage lender.  Instead, make sure you work with a mortgage lender that is familiar with process of commercial property loans.
  

• Do have a lawyer you trust that can be ready to advise you throughout the process.  You will want your lawyer to go over all paperwork and contracts.
  

• Do register at www.commercialdex.com and login to research the Commercial Dex listing before you begin working with a real estate agent.  This will give you a heads up on what areas are in your price range and what properties are ideal for your search.
  

• Do work with a real estate agent who specializes in commercial properties.  Agents who specialize in commercial properties will be more knowledgeable about commercial areas and about the process of buying commercial property verses residential properties.
  

• Do become familiar with the surrounding business communities for which you are interested.  Learn about whether businesses have strived or failed before considering any commercial properties in that area.
  

• Do become familiar with the property before you consider purchasing.  This includes knowing the capitalization rate, or the Cap Rate as it is often called, of the property.  The Cap Rate is the percentage of annual return produced from the property in its current market value.  Knowing the Cap Rate will give you a good idea of how long it will take for your investment to pay off.  The Cap Rate is calculated with a simple formula: Cap Rate = annual net operating income / cost (or value).
  

• Don’t sign anything without having your lawyer’s review first; this includes the letter of intent (LOI) regarding the property and any and all contracts.  A LOI is a document that basically states your intent with the property.  A good lawyer will be able to make sure the LOI is not binding in the case that something goes wrong down the line with the contract.
  

If you follow these Dos and Don’ts, you should be ready to start thinking about your investment in a commercial property.  The most important thing to remember, though, is that you are making a sizeable purchase and it is imperative that you are very diligent throughout the process.

WebbyWorld

It’s on every real estate agent’s lips these days: this is a buyer’s market. And it’s true. The real estate bubble burst has made today one of the best times for qualified buyers and investors to put their money into real estate. But it’s not only residential real estate that’s seeing some of the lowest priced properties in years. The commercial sector of the real estate industry is experiencing its biggest downturn since the 1990’s.

Vacant Space

Right now there is a surplus of commercial real estate property. Empty office buildings and shopping centers throughout the country are begging for tenants. The economic recession has resulted in plunging profits for many businesses. With stores closing and unemployment rising, there are less and less enterprises to fill the thousands of vacant commercial properties that are currently out there on the market. And to top it off, there are even more commercial construction projects still unfinished, projects that were planned during the peak of the real estate boom and are now heading into completion with no guarantee of returns. Thus, developers are, with good reason, worried that they will very likely end up losing money.

In 2008, commercial real estate sales went down by 73%, according to Real Capital Analytics. Rising vacancy rates have resulted in hundreds of properties going into foreclosure. Joblessness in the construction industry is at 15.3%, over twice the average rate of 7.2%.

 All of this spells bad news for commercial real estate owners, contractors and developers. But for potential investors and qualified buyers, especially first time buyers, the current commercial real estate market poses one of the best economic opportunities in years. Both the banks and the Federal government are working to implement new incentives. Lower mortgage rates and special foreclosure deals almost guarantee sizeable returns.

Investing In Commercial Real Estate

If you’re looking to invest in the commercial real estate market, keep in mind the many factors that are working in your favor. Overbuilding, for one, means more properties to choose from. With multiple businesses closing within the same block, property prices will be more competitive.

 Also, purchasing cheap, under-kept properties and fixing them up is a viable option now more than ever. Builders and contractors are charging less because of the competitive environment created by the commercial real estate market crunch. Also, because contractors have experienced a reduction in available projects, many have an overstocked inventory of building materials and supplies, something that also translates into bigger savings for you if you’re planning on purchasing a fixer-upper.

The important thing is to take your time when looking for a commercial real estate investment property. Shop around and make sure to check out all of the properties in the neighborhood. Compare prices and location. Remember that, in a buyer’s market, you can afford to be more picky with your decision. No need to rush. By shopping around you will start to get a feel for what properties are overpriced and what properties are actually worth the tag. With this knowledge you’ll have an additional upper hand when it comes time to make an offer.

Also, when you hire a commercial real estate agent, make sure that he’s a buyer’s agent, preferably one who has specialized in representing buyers for several years. As in residential real estate, a commercial real estate agent who represents both buyer and seller in a deal will usually have conflicting interests. You should also make sure that you pick your own lender. Getting an outside commercial real estate lender ensures that the conditions of the loan will be more objective.

Lastly, it’s good to be wary of free incentives. Many commercial real estate sellers will advertise free incentives as a means of attracting potential buyers. But often these incentives end up costing you, the buyer money, as they get tacked on to your closing costs during the negotiation period.

First, in order to compare commercial loans to home loans, we must look at what they both are.  A commercial loan is a loan that is given to a business and is used for business costs, such as for inventory, operating costs, and commercial real estate.  On the other hand, a home loan is given to an individual and is used for the purchase of a home.  The main difference, then, between a commercial loan and a home loan is the intention of the loan.  If the loan is not intended for any personal use, it may be considered a commercial loan.

It’s all as easy as that, so now we can all go home.  But wait, not so fast.  What if someone purchases a commercial building and plans to use it as their home as well as their business?  A traditional commercial real estate lender will see someone who lives in a commercial property as high risk and will not approve them; however, private lenders may see their property as an opportunity instead.  A private lender will evaluate and appraise the property and give a loan based on their estimation of the property itself.  Therefore, a person who plans to live on site of their commercial property will want to seek a private commercial real estate investor for their commercial mortgage loan. 

Now, what if someone conducts business from their home but is looking for money for their business?  Here is another tricky one since we are dealing with both the home and the business, right?  Actually, this one is fairly simple.  In the case that a person with a home business is looking for money to help with business expenses, he will want to apply for a small business loan in the form of either a line of credit or a term loan.

First, a line of credit is one that has a lot of flexibility for the borrower because it allows for changing business conditions.  Once a line of credit is established, the borrower can use the available funds as they feel fit.  They will then repay toward the principle balance periodically.  This type of loan is ideal for a home business because whenever the business owner draws from the funds he does not need to wait for approval from the lender each time.

A term loan is also another option for a home business owner.  A term loan is one that is given as a lump sum with a set period of time in which to pay the money back.  Term loans can be given to an individual but are often used for small businesses, including home businesses.  What makes these loans different than personal loans is the purpose for which they are given. 

Overall, there are many reasons why commercial loans and home loans are different entities.  Basically, it has to do with how the banks account for the loans.  With a home loan there are several secondary markets and most of the loans are sold to investors like “Freddie Mac” and, in the long run, will not remain on the banks books.  But with a commercial loan, the banks keep these loans on their books in order to show an asset for their company.

Commercial real estate industries usually thrive in cities where trade and shipping industries are successfully active. These are cities that are seen as hubs for national and international investment. They usually have bustling downtown areas and good public transportation systems, so people can find alternatives to driving. Commercial real estate hotspots also entail strong residential housing markets. As the commercial sector grows and jobs become more available, people tend to crowd around cities and the value of single-family homes in the area tends to go up. Keep these factors in mind when looking for an ideal place in which to make a commercial real estate investment.

Seattle, WA

In the U.S., Seattle, Washington, is at the top of most lists as the number one city for commercial real estate investment. It has a diversified market and is a base for many leading businesses. Boeing has a strong presence in the city, employing over 4,517 Seattle workers and contributing a substantial amount to the local economy. The University of Washington in Seattle is a center for the biotech industry, and the Seattle port is one of the most active and profitable centers of international shipping and trade.

So despite suffering the loss of Washington Mutual and the severe downsizing of Starbucks, Seattle has stayed at the top, being host to companies, like Microsoft, that are still going strong. There is a low apartment and retail property vacancy rate, so there’s no danger of oversupply yet.

San Francisco, CA

San Francisco is another hot spot for commercial real estate. Since the days of the California Gold Rush, it has been an important center of business. Today, the Bay Area’s land-locked harbors account for almost 30 percent of the West Coast trade. Shipments from all over the world flow through the city’s ports every day.

The San Francisco International Airport is the ninth largest in the country. The city has also recently become one of the biggest centers for technological innovation, and it hosts some of the country’s largest banks, like the Pacific Exchange. Post-World-War-II San Francisco saw a boom in the defense industries, which are still active in the city today. NASA also has several research facilities in the Bay Area. San Francisco has a huge tourist industry, which generates $6 billion a year. The city is also home to Levi Strauss, the biggest apparel maker in the world. Its dynamic economy and pedestrian-friendly city plan, with its excellent public transit system, make San Francisco one the best places to invest in California commercial real estate today.

Washington, D.C.

In early 2009, Washington, D.C. was named by various commercial real estate groups as the best place for commercial real estate investment in the country. D.C. is set to benefit greatly from the economic recovery plan. The federal government is the largest consumer of technological products. Thus, Washington’s economy is stimulated by steady research and development funding for tech industries by the U.S. government.  The growth of telecommunications, information and computer industries have made the city a strong hot spot for commercial real estate.

Other cities that stand amongst the top ten for commercial real estate investment in the U.S. include Portland, Ore., with its growing population and dynamic culture; Los Angeles, Austin, Texas, and Boston, Mass.

At the end of 2007, commercial real estate sales in the Unites States had hit a record high of $514 billion, according to a study done by Real Capital Analytics, a New York market research company. But in 2008, as the onset of the current economic recession began, an estimated $14.5 billion worth of commercial real estate deals fell through, according to data gathered by the commercial real estate firm of Cassidy & Pinkard Colliers. $1 billion out of the approximate $14.5 billion loss came from deals in the Washington region.

But all over the country today, the commercial real estate sector is facing the possibility of communal crisis. With fewer lenders giving out loans this year, sales of commercial property, including office malls and warehouses, are expected by some analysts to be half of what they were in ’07. 
 

Private Housing Sector Affecting Commercial Real Estate

So far, the sub-prime mortgage loan fiasco has only hit hard the private housing sector of the real estate industry. A surplus of nation-wide housing and bad loan practices have led to foreclosures and a lower demand for homes. California was one of the states hardest hit by the real estate bubble burst. For over a decade, California mortgage brokers and investors engaged in a variety of lending malpractices, as people bought up property at sub-prime rates with the hopes that real estate value would continue to go up indefinitely. Call it wishful thinking. As we all know now, that unfortunately didn’t happen.

But while the residential real estate industry was collapsing in 2007, the commercial real estate industry was experiencing one of its highest points in the past two decades. But many industry insiders and analysts believe that the private housing sector is bound to have an affect on the commercial real estate market sooner or later. Some see the $14.5 billion loss in commercial real estate deals in 2008 as the beginning of the commercial real estate crisis.

This is because establishments like factories, warehouses, office spaces, malls and other tenement buildings depend on the health of the private sector. With people losing their homes and in many cases their jobs, demand for commercial office and tenant spaces has gone down. All over the U.S. 19 million square feet of commercial real estate space was vacated last year. Renovation projects for unused commercial real estate buildings are only seeing some success throughout the country. Rents nationwide are stagnant and will most likely continue to go down as 2009 progresses.
 

Unemployment and Commercial Real Estate

If unemployment continues to grow, as it is likely to do before the economy bottoms out and stats rising again, consumers will continue to cut back on spending. This means that many commercial industries will see a decrease in demand for their products, which in turn will lead, inevitably to layoffs and cutbacks on spending on the part of commercial real estate owners. Less space will be leased, and acquiring a commercial loan will become increasingly difficult.

And there is also the decline in foreign investment to consider. Historically, foreign investors have played a big role in financing commercial real estate loans in the U.S. But as the American economy continues to spiral and consumer trends point to a general fear and a lack of confidence in the financial sector, investing in American property is looking more and more risky. The pulling out of foreign investors, of course, only helps to worsen the situation even more. This creates a cycle or decline that, thus far, is showing no signs of improvement.

But there are some deals that are still getting financed. They are usually smaller and involve multiple lenders and investors. But nonetheless, even the most pessimistic financial forecasts are forced to admit that the looming commercial real estate crisis will most likely not be as harsh as its residential counterpart.

In fact, some experts argue that there will be no such thing as a large commercial mortgage crisis. They point to the fact that, while the sub-prime mortgage crisis created a huge surplus in residential property, there is virtually no surplus in commercial property today. Unemployment has risen by 2 percent during the recession, and sales of commercial real estate have fallen accordingly. 

Because the commercial mortgage industry is tied to the nation’s economic trends, it isn’t likely that there will be a surplus of commercial property. Unlike in the residential sector, there aren’t many people, relatively, buying up multiple commercial properties and flipping them for profit. As the recession continues, commercial mortgage deals will probably decrease. But whether a massive crisis on par with the collapse of the residential property industry will occur in the commercial real estate sector is still up for debate.

Purchasing a piece of commercial real estate can be a profitable investment. You can increase your cash flow by diversifying your portfolio and taking advantage of federal and state tax benefits that apply to commercial property owners. By doing your research and getting the right advice from a qualified California commercial lender, buying commercial real estate can be an excellent financial move.

But before you jump in, make sure to have a good understanding of the risks involved. Many people who want to buy a piece of commercial real estate, either to rent or to use for their own business, often go into the deal without a proper understanding of what is involved in a commercial transaction.

Today, California is a buyer’s market when it comes to real estate. The recent bubble burst has resulted in lower prices which has resulted in opportunities for investors. However, proper loan structure and financing terms remain a critical component of the acquisition process.

Consult with an Industry Expert

As you go into the beginning stages of buying a commercial property, it is always a good idea to consult with a reliable industry expert. Seek advice from our proven California commercial mortgage brokers to assess property cash flow and learn about the loan process. Our mortgage brokers will not try to sell you on any given lending program, but rather give you up-front and honest advice.

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