So, at this point in the story, my quest for real information begins. What could I pay; what’s involved in a commercial property contract for sale; how do I finance it; and what’s the process to occupy the building?
The first thing I did was a little income and expense calculation. For income, I took the square footage of the building and multiplied it by the average rent per square foot for similar types of office properties in the area. How did I find that, you ask? Three ways. I called my real estate agent and asked her how much office rents were going for in the area. I call my commercial mortgage guy at the bank and asked him. I also looked online real estate like http://www.loopnet.com/ and searched for commercial rentals in the area to see what they were charging per square foot.
The range in my area turned out to be between $12 and $18 per square foot. A very wide range and it depended on the age of the building, what it included (utilities, CAM charges, etc.) I settled on low balling it a little and figured on $14 per square foot.
For expenses I looked at vacancy, taxes, insurance, owner paid utilities, common area maintenance inside and outside (cleaning service and professional landscaping), licenses, potential repairs, reserves for capital improvements.
Subtracting the expected gross income from the estimated expenses gave me the cash flow that would be left over to pay the mortgage. I called my mortgage guy at the bank to find out what the commercial rates and terms were and then arrived at the final price I felt that I could comfortably pay for the property. Some of the big differences that you may find with a commercial loan is that they usually require a personal income statement and balance sheet. Even if you didn’t have to do one, the process itself provides you personally with a wealth of information and I highly recommend it (even if you only do it for yourself).
Commercial loan terms are usually 20 or 25 years instead of the 30 years you find in residential property purchases. The interest rate is also different. Not necessarily higher, but often it is fixed for say on to five years, and then is reevaluated/renegotiated at that point in time. Also, the amount financed by the bank is usually only 70-75% of the purchase price.
Of course, I’m not covering the financing in great detail because it varies. But, if you are considering buying a commercial property, I would suggest you call a few local banks and talk with them about the terms. You need to know the specifics before you begin to negotiate the building!
In the next posts we’ll move forward and discuss the negotiation, contracts, and what needed to be done with the governmental powers that be in order to purchase and occupy the property.
Steven A. Boorstein
Author & Landlord