If you need a building to run your business, there are two main options: buying or leasing. Both have pros and cons; deciding which one will depend on your individual needs and circumstances. If you have funds saved up for a down payment, I recommend investigating if buying a building to operate your business is right for you.
Here’s a brief overview of the process.
Related: 5 Major Deal Points to Know Before Signing a Lease
Speak to a commercial real estate broker
I recommend speaking to a commercial real estate broker specializing in the type of property you are considering purchasing. Reveal to your broker your site criteria specific to building size, location and any additional specifications you will need. For example, if you open a school or childcare center, you may need a yard. Or, if you are in the distribution business, you will need loading docks. It is also essential to ensure your real estate broker knows precisely what you will use the building for. This way, they can educate you if zoning is challenging for your use.
After your commercial real estate broker understands what you are looking for, ask them to run a specific search for sale and lease. This search will give you an idea of current building costs, lease rates and availability.
Related: Is It Time to Join a New Real-Estate Brokerage or Start Your Own?
Speak to a commercial lender
With your sale and lease survey, you are prepared to move on to the next step of speaking to a commercial lender. When buying a property you intend to utilize for your business, you could be eligible for a Small Business Administration (SBA) loan. There are other options for commercial lending besides SBA. However, SBA will typically give the owner-user the most favorable terms, such as a lower down payment and interest rate.
Most banks will offer SBA loans, and it is best to go through a bank where you keep your assets. When you speak to the SBA advisor, find out the specifics of what your down payment will need to be. Then ask the SBA advisor to determine your estimated loan payment on the purchase price balance. It is helpful to show the lender the property search your real estate broker has provided.
Once your loan advisor provides you with your estimated payments for the loan, compare that number to the estimated lease amounts your real estate broker provided you with. After you compare these numbers, you will be in a better position to decide if you want to continue the process of potentially purchasing an owner-user property.
If you have decided to continue this process, ask your lender about the timing of the loan. Loans require a gamut of approvals. Not only do you need to be approved, but the property does too. You will need to fill out an extensive application for an SBA loan. Ask your SBA advisor how long it will take to get SBA approval. As for the property, you will need to get inspections, appraisals, surveys, permits, architectural drawings, and more. It would be best if you had a solid idea of how long this process will take.
You will also want to ask your SBA lender for a pre-approval letter. Although this letter does not guarantee approval, it will assist in putting together your offer. To be taken seriously as a buyer, I recommend submitting your pre-approval letter and a proof of funds statement when you submit your letter of intent to a seller.
Decide on a property
I recommend driving by the property more than once — at different times and days of the week. Your decision to put in an offer should come after you have toured the property inside. Make sure to speak to the city planning department directly and confirm that your business use is correctly zoned and permitted. Ask if it is allowed by right or permit. If authorized by permits, get information in regards to costs and timing to receive permits.
In addition to getting this information over the phone or in person, ask the city planning employee to email you the information they have verbally provided you. Having this information in writing could be critical if you move forward with a purchase.
Submit your letter of intent
Your real estate broker will draft the letter of intent for you. At this time, you must utilize the information that you received prior. The survey of available properties will assist in analyzing market comps. Also, ask your broker to provide you with comps of sold properties. Study the comps and look at the sold dates to understand the market. Now that you have comps, you will better understand what offer price you should consider offering.
The other major component of a letter of intent offer to purchase is the length of escrow. Sellers often want a quick close, while buyers will need time, especially if you are taking out an SBA loan. Make sure you understand when your deposit becomes non-refundable.
Once you are comfortable with your letter of intent, the submission process starts. Typically there will be several counters before both parties have an agreed-upon letter of intent. You need to consider that since letters of intent are non-binding, there is a good chance that the Seller is negotiating several offers at the same time as yours. There is also a good chance that you might be doing the same for other buildings.
Review the purchase and sales agreement
Once both parties have a mutually executed letter of intent, the purchase and sales agreement is the next step. You should hire an experienced commercial real estate attorney to review the purchase and sales agreement. These agreements are written in legal language and can be complicated to understand. Once you open escrow, it is also very critical that your commercial real estate attorney reviews all of your due diligence items. All of this will need to happen before your deposit is non-refundable.
If you decide to take the plunge and buy an owner-user building, you’ll own the property and won’t have to worry about rent increases or the landlord choosing not to renew your lease. You may also be able to benefit from appreciation and tax benefits.
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