Commercial Real Estate Acquisitions
There are some important considerations when evaluating commercial real estate acquisitions. There are several factors that a purchaser needs to consider.
First of all, it’s important that what you’re buying is actually what it purports to be. I would have a survey conducted. I would have a good general contractor do a thorough property inspection. It can’t be the basic one. I’d get a premium-valued one – it’s worth its weight in gold. And I would also factor in market value and exit strategies. So if you were to sell the asset, you should figure when would you want to sell it and under what terms. So that should be part and parcel of the decision-making process. Of course, the financing component is a big component as well.
Financial Partnership is Critical
Having a good financial partner behind you, or bank behind you is critical. It ensures that you can consummate the deal without any delays or penalties. Portfolio managers and REITs have similar needs. First of all, it’s managing up to hundreds of assets and figuring out how to maximize value for those assets. It’s also managing risk, each asset is unique. You should hold each asset in a single-purpose entity.
Here’s an example. Each asset should have insurance to ensure the asset’s safeguarded. It could be something called a cash-flow asset, and most of the time it is. You need to make sure that the proper people are on the ground. good management is handling everything. So, those are the two things that portfolio managers and REITs have in common. The first is having proper segregation through the use of single-purpose entities. The second is having adequate and competent operations people on the ground. They are also things to focus on.
Commercial Real Estate Acquisitions Compared to Residential
Commercial real estate and residential real estate are unique from one another. This is because of a lot of various reasons. No-asset-based and no-down-payment-based transactions plagued residential acquisitions. We saw the consequences with that market correction that occurred in 2007-2011. It was significant and it affected property value. Commercial real estate is much more traditional, much more conservative.
There’s a significant down-payment required when you’re acquiring commercial real estate. That’s more typical with income-producing properties. So the metrics evaluation of that is different. It’s also a much slower transaction, more methodical. The typical commercial deal takes about 90 days to close. The typical residential deal takes about 30 days to close. Again, each has its own set of nuances and challenges.
Either way, you’re going to want good counsel. You’re going to want a good broker representing your interests. You’re going to want to ensure that you have a proper and adequate finance strategy. This will ensure that you can take on that liability.