July 8, 2010
Buying a commercial property 101
As of late I have been receiving quite a few calls from first time buyers wishing to purchase commercial real estate. My best advice to them and to you is to do your homework first. Just because a property seems to be a good buy does not necessarily mean that it is. You have to be prepared for a much longer process than that of buying a residential property. You also have to be aware that there are many reports that the banks will require, such as an appraisal of the property, perhaps a BCA (building condition assessment) and a Phase 1 Environmental report (to begin with). These documents unless the vendor can provide you with some recent ones, are your responsibility and an out of pocket expense that you should budget for. Once most of these documents have been presented to the bank (some will be required only later) you must wait for the bank to present you with an LOI. (Letter of Intent or Interest) To pursue this further, the bank will give you a deadline date for your response to their offer, which must be accompanied by a fee the banks charge to go further with your file. There is a catch however, that after paying this fee there is no guarantee that you will get a positive response from the bank, so you must be absolutely sure that this property is for you and that you have done all your due diligence (discovery of all necessary facts about the building)
Speaking of due diligence you must be careful when making a promise to purchase that you give yourself enough time to get all the documents from the vendor and that the amount of days marked in the promise to purchase for the procurement of a mortgage only begins once you have every single document requested from the vendor (for eg the rent roll, the leases, the financials, etc.)
The banks will be requesting your PNW’s which is a declaration of you personal net worth. They want to make sure that your finances are strong enough to cover the debt service should the property at any point become incapable of covering the mortgage.
Unless you have very deep pockets and do not need financing from a bank, do not attempt to purchase a building that has no tenants, because trust me, it will be a colossal waste of time. The best kind of tenant is one who has great financials and a long term lease. Here we are not talking about a multi residential property, but an industrial or commercial property. A lease of 2 years in many cases won’t cut it. The banks are much happier with 8 years and up with options for renewal. This way they know that you will not lose your source of revenue before your mortgage term is up.
I have just given you a small preview of what to expect when purchasing a commercial property for the first time. To ensure success make sure that you have a professional to guide you or at least someone who has been through this before so that they can warn you of all the pitfalls.
Having said that, rest assured that finding the right property for you can be a very good investment.