Archive for Commercial Dealings
Commercial Real Estate: Hard, Hard, Hard Money Loans
When purchasing commercial real estate, financing is the most significant factor in determining whether the project is worth pursuing. Although there are a variety of commercial real estate loans on the market, we are going to look at hard money loans in this article.
Hard money loans for commercial real estate are often a matter of last resort. They aren’t good deals, but they can save a financing situation that has gone critical. Most hard money loans come with significant upfront costs and astronomical interest rates. When you are facing the prospect of losing a commercial property, however, they can be a godsend because they also are granted very quickly.
Hard money loans are considered very risky and are issued by private financing groups, not banks or lenders. The loans tend to be only available as the primary loan on the property, which isn’t that rare a situation in commercial property.
Unlike home loans, hard money loans are all about the potential sales price of a piece of commercial real estate. The party considering lending you money is not going to look at the appraised value of the property. They are going to look at the probably sales price if the commercial real estate has to be sold a few months after making the loan. Depending on the condition of the property, this figure will typically be between 50 and 75 percent of the appraised valued of the commercial property.
Put another way, a hard money loan is a short-term loan designed to get you past an immediate problem. It is undeniably a loan of last resort and is not an ultimate solution to a financing problem with a commercial property. It does nothing other than buy you time, and at a fairly hefty cost. If you are in a tight spot and can resolve the problem with a few extra months time, a hard money loan may be the answer.
Create a Commercial Real Estate Empire by Specializing
There are many types of commercial properties available to those who work in the commercial real estate industry. Many people like to work in a specific area by working with only one or two types of commercial properties. They do this because they have expertise with that specific type of property.
Commercial properties differ more than in just their appearance and use. How you purchase, sell, operate, manage, evaluate, and price each property can be very different. Although there are some similarities, being an expert in one or two properties can greatly increase your ability to analyze good deals and maximize your profit potential. When you know the inside and out of the processes that take place with a certain type of property, know what hidden things to look for, and what mistakes to avoid, you are less likely to run into problems, and will generate positive, long lasting results.
Let’s look at the main commercial properties that you may already be involved with, or are thinking about moving into.
The first are office buildings, or office parks.
The term office can be used to refer to floors, parts of floors, an entire building, or an entire office park with multiple buildings positioned in a community type setting. Office space is used for a variety of reasons. It can be used for actual offices for companies, or it can be used for places of business operations, or to meet a tenant’s specific functional and technical needs. An example of this would be an office building for medical purposes.
Office buildings can be segmented into three basic levels. The first is low rise, which has fewer than 7 stories above ground. A mid-rise has between 7 and 25 stories above ground. A high-rise has more than 25 stories above ground. These buildings are often rented by the square foot according to the total useable square feet available to the tenant.
The next type of commercial property is retail property.
These are places of business where products and services are provided. There are many types of retail properties which include big boxes, outlet centers, strip centers, regional centers and power centers. Each of these has distinct characteristics that differentiate one from another. Business owners can better choose where they want to lease by identifying their product position, where the best location is, and the type of retail center that will best sell their products and services.
A big box is a large, free-standing building that is often much like a huge warehouse. They can often be found near major shopping centers and along major corridors. Companies such as Wal-Mart, Home Depot and Target are all example of big boxes.
Outlet centers are usually located in tourist or rural locations, and the businesses there offer their products and services at a discount. Strip centers are consecutive narrow parcels that have a variety of stores. They are often found along main roads and commercial corridors.
Regional centers are characterized by an enclosed, inward orientation of the stores. A walkway or common area connects the stores that offer a variety of products and services. There is usually a large, common parking lot found along the perimeter of the regional center.
Power centers are areas of business where large retailers, including large discount centers lease out the buildings. Category killers can also be found here. These are companies that offer a large selection at low prices. Ross, Mervyns, and Kohl’s can all be found in power centers. Think of the one stop place to shop retail center, and you have a power center.
Any of these types of retail centers can be chosen areas of specialization for an investor, developer or builder. This gives them a competitive advantage in the commercial real estate industry because it is the only thing in which they concentrate their efforts. You can bet there is not one thing that can pass by these people when it comes to retail centers, and they know exactly how to maximize their resources.
Industrial and warehouse properties are the next category of commercial property.
Here you will find freestanding properties, research and development, large manufacturing, as well as industrial park properties.
Freestanding industrial properties can vary greatly in construction type, design, and overall function. They stand alone, and are usually occupied by an end user, so the building is specific to a special purpose.
A research and development property is characterized by having office space and manufacturing on the premises. You can find them most often near universities, and close to other locations of professionals.
Industrial parks are large, planned developments that can be used for special scientific and technological use, or sophisticated communications uses. They have many buildings for mixed-purpose or a single purpose that are scattered in an often functional way.
Industrial buildings and warehouses are crucial to a city’s economic development, and cities often provide tax incentives when jobs are provided and new companies are brought to a city, especially to one experiencing rapid growth.
Multi-family property is another type of commercial property.
They offer huge opportunities to create value. A multi-family property is not considered a commercial property unless it is greater than 5 units. Duplexes and fourplexes are not considered commercial properties, though they can be a great investment. The larger the apartment complex, for example more than 100 units, the more money you will be able to return on investment. These multi-family units have living space, appliances and amenities. Multi-family units can range from low-end to luxury type units.
The last type of commercial property is raw land.
Raw land is characterized by untouched land with no improvements such as utilities and roads. It can be the most difficult property to involve yourself with; however, it can return the greatest results.
Whichever property you decide to specialize in, only begin a new project in a new area with a person who has lots of experience. You can learn a lot from someone by using this strategy. It will give you a solid foundation to do the next project on your own. This partner or associate will help you to gain the experience and insight that may otherwise take you years to learn.
Commercial Real Estate Savings
For small companies, an office is an overhead that many feel they can do without, at least when starting up, but as a business grows and takes on staff, an office becomes an essential.
Even before that, there are many arguments in favour of a physical presence; an office can add credibility, and suggests permanence, that the company is going to be around in the future, perhaps particularly important for new companies.
But how much space should you rent or buy? Obviously this will depend on the employees that you expect to be working there, but you will need to factor in growth plans, whether you require an open plan working environment (allow 75-100 sq ft for each person) or individual offices (about 175 sq.ft) and meeting areas (215 sq.ft will accommodate a table and chairs for about six to eight people).
An alternative, particularly if your growth is uncertain is a serviced office, where you rent space by the number of workstations you require and by the month. This may not only help with cash flow, but also allows a company to grow or contract in a fairly flexible manner. There are no capital outlay costs for furniture or telephone equipment, all of which are provided and if you need meeting space, you pay for it by the hour.
Additional services, such as secretarial assistance are also available as required and the telephone is answered by a dedicated receptionist and in your company’s name.
On a price per sq. ft basis, serviced offices are more expensive, but this additional cost is often outweighed by the fact you are paying for just the space your business needs.
Commercial Real Estate Misconceptions: You Mean Location, Location, Location Was a Lie?
Commercial real estate is a wonderful, exciting business that can offer a wealth of opportunity for those who look for it! Many people are often hesitant to enter such a market as commercial real estate for many different reasons. In fact, there are some major misconceptions about commercial real estate which I am going to address here.
Many people who hear about commercial real estate, but aren’t necessarily in the business, often use the expression “Location, location, location!” Many people associate this expression as the truth, that the three most important attributes about a property are “Location, location, location!”
I am here to tell you- this is absolutely not the case! Now, I am not going to say location is not important, but what if you have a beautiful location for a mountain resort, complete with snowy hills, a perfect location for a lodge, and beautiful mountain views? What you want to do to the property is improve it for a weekend getaway for romantic couples with a beautiful lodge, resort, luxury type housing, and perhaps some individual cottages overlooking the green forest. Sounds great, right?
The perfect location- you can’t beat it! But, you learn that the zoning for this property is residential, R1, to be exact. The use is only one single family residence per acre, and no commercial property allowed. What happened to your “Location, location, location?” It flew out the window!
The most important aspect of a property is the use. What is it intended for by designation of the city or county? It does not matter where the property is, if you cannot get the zoning that is in the realm of your intended use.
It is possible to get properties rezoned, especially as cities change and grow. Be sure to consult with the city or county to determine if these changes are even possible, because you do not want to buy a property that you cannot rezone, and be left with an unprofitable property on your hands.
Most people believe that commercial real estate is complicated and you need a special education or know how to succeed in the business. Many think that commercial real estate is filled with international finance, heavy and complicated math, complicated tax rules, and forms and applications that are just too complicated to understand correctly.
I am happy to tell you this misconception is the worst, because it puts a road block in front of many people’s aspirations to become a commercial real estate insider. Let me put this misconception to rest. There is math involved, and most of it is not at all complicated: simple ratios, adding, subtracting and multiplying. What is even better is you don’t have to do the math. There are others who can do that for you. The same is true with property management, inspecting the property, and doing the year-end tax report. In fact, commercial real estate is less complicated than residential real estate because you can focus your energies on a single deal that will be worth perhaps 10, 20, even 50 residential deals and more!
Let me put it into perspective for you. If you owned a business (many of you may), would you create strategies, keep the books, manage the many locations, sell on the front floor, and take out the trash after the day was over? I think not! Commercial real estate is made up of many people whom are there to help you with whatever you need. You must position yourself as a real estate insider, which is a leader in the business.
Another misconception is commercial real estate is management intensive, that you must manage every property you own. Let me tell you when you end up owning 10 or more properties, this is almost impossible to do! You do not have to actually manage your properties yourself, so you can concentrate on creating more deals. Hire a company or set a team in place to take care of this “day-to-day” business.
As you can see, what is passed around in dialogue about commercial real estate is not always true. Before you take everything to heart, be sure to get your facts straight. In fact, many people in this profession speak about commercial real estate as a business in which only the savvy and sophisticated can succeed. They often act this way because they want to keep people out of the market by differentiating themselves. If you were in this position, you would too!
Commercial Real Estate Terminology – From O to Z
Operating Expenses: Just as it sounds, operating expenses are those costs associated with operating a commercial property. Contract and state law typically govern the exact nature of the operating expenses.
Partition Wall: A wall built in the internal area of a suite to divide the general space. For instance, offices built during a tenant improvement project with have partition walls separating them.
Punch List: A punch list runs part and parcel with a walk through of completed construction work. The construction company and client will walk through the area and complete a punch list of items that need to be fixed or modified. .
Shell Space: The interior of a commercial building that has been completed, but does not yet have any tenant build outs. The shell space generally refers to this gross square footage regardless of whether tenant improvements have occurred or not.
Substantial Completion: Notice given by a contractor to the client indicating the property has been completed to the point where a walk through and punch list review are appropriate.
Usable Square Feet: The square feet in a building, suite, warehouse and so on that can actually be used by tenants. Due to building regulations and design issues, certain amounts of a space in a tenant suite may not be usable and such footage is excluded from this calculation.
Unlike residential real estate, commercial real estate is primarily considered a business transaction. Learn the terms and you’re well on your way to moving smoothly through the process.
Commercial Real Estate – A Primer
So how exactly are commercial properties being bought, sold, being rented? What’s the best way to acquire commercial real estate, and who you need to help you in doing an acquisition?
Here are five key points to consider:
1. By far the most popular business entity for owning commercial real estate is now the limited liability company (LLC).
2. Commercial real estate is a much less popular subject, in part, because it isn’t as personal and doesn’t tug at our own financial purse strings.
3. Commercial real estate is a term to describe a property with 5 or more units. Commercial Real Estate is a critical component of any well-run business.
4. Investing in commercial real estate is riskier and more costly than investing in residential property – but ultimately it can be far more profitable.
5. Commercial real estate is a business investment driven by economic factors, not so much the property itself.
Investing in commercial real estate can be a good way to invest but you should make sure you are well represented by an attorney and accountant before moving forward since buying commercial real estate can have significant tax consequences and if you’re buying or developing commercial real estate, it’s important to protect your financial interests with legal support. It may sound redundant, but the axiom location, location, location, is an important factor in buying commercial real estate too. Here is the key to buying commercial real estate: the one with the most information wins.
The winners are the people that recognize that the world of commercial real estate is constantly changing and understanding the nature of commercial real estate is a precondition to the timing question. They also understand the data and realize that information is the most critical aspect of any transaction. In other words, the most valuable commodity you can have in the commercial real estate market is information.
Commercial Real Estate Terminology – From A to N
According to Value: The value of the property when computing property taxes.
Build to Suit: A customized design and build approach for a single tenant space usually resulting in a single occupant building which is then leased or sold to the tenant.
Certificate of Occupancy: Issued by a city building department and is a necessary requirement prior to moving into the space.
Common Area Maintenance: Typically an annual charge assessed to tenants based on their percentage of occupancy to pay for maintenance of parking lots, bathrooms and open areas.
Demising Wall: A wall between two separate suites in a building with multiple tenants. In many states, the demising wall must meet specific fire safety standards.
Flex Space: A building providing mixed-use space such as an area combining an office and warehouse.
Gross Square Feet: Usually refers to gross footage of a building. GSF is typically arrived at by calculating the footage from the outside of exterior walls multiplied by the vertical footage.
HVAC: Refers to the climate control systems for a building including heating and air conditioning.
Mechanic’s Lien: A legal claim typically filed by a subcontractor to obtain payment for services rendered. The claim arises under state law and is dependent on each states particular law.
Unlike residential real estate, commercial real estate is primarily considered a business transaction. Learn the terms and you’re well on your way to moving smoothly through the process.