Specialist · St. Petersburg, FL · Member since 2013 · 114 posts · 49 votes
I'm a NPN investor and up to this point have only worked with residential notes. I understand that niche of the industry to a pretty high degree but feel completely lost when it comes to commercial. I've been getting a lot of interested investors approaching me wanting to do commercial deals, and have gotten in contact with some direct commercial sellers but am not quiet sure what to look for in regards to the process of pricing, due diligence, etc. Any advice?
Typically your interested buyer would have criteria which they are looking for. This will include property type. Different commercial property requires different types of due diligence, somewhat related to the utility of the property.
Pricing out the bid and purchase is similar to residential but the expense categories get larger. The cost of FCL attorney is more in commercial or BK defense. The cost of deferred maintenance can also be much more than residential.
The timing of commercial foreclosure also varies. Commercial enterprise is not overly protected like the common public, as such a foreclosure uncontested can move pretty fast. OTH, commercial BK can be a bit more of a pain than a residential BK. Usually commercial operators have a couple of dollars to extend the times of decisions compared to most residential borrowers.
Many commercial sellers, including banks and lenders, seek fairly high execution levels on commercial assets. Typically commercial has big balances and they don't want to take the large loss and will push the bid up. Because of that, investment committees are more willing to allow a NPN to sit around waiting for the right bidder with the right number.
Commercial security instruments and notes also have a varying degree of features that are different than residential. Things like personal guarantees and UCC filings can be included with the loan. The impact of which can be both good and bad in some cases.
Due to the utility of some of the property types, whoever is doing due diligence should have knowledge of industry use of the property. For instance a hotel. Due diligence would include review of the property historical performance via P&L and Balance Sheets. If you don't know what REVPAR or ADR or how to review and determine what is good and will make it difficult.
There are more levels of complexity to commercial. Every member of company with 10% or more interest might have had to sign for the loan. So you will have all of those folks to look at in due diligence. If the property is owned by a company, you then need to do diligence on the company as your borrower. Then you need to do diligence on the property.
Liz Brumer I agree with Dion here.There are so many different categories within the commercial note space, so a lot of what could be said varies a lot depending on the type of deal you're looking at. What are you looking to buy? For example, buying a commercial piece of ground and buying a business on a commercial piece of ground would require two completely different answers.
The one general thing I will say is that your due diligence can run A LOT more money and you may never buy the note. Your degree of accuracy has to be a lot higher for value and type of land you're buying, so environment as well as location plays a huge factor. With residential notes you rarely run into buying a piece of property that was previously a toxic dumping site or something like that. I know that example sounds extreme, but that sort of thing can happen.
I also have to ask who is on your team? Do you have a commercial broker? Or a commercial real estate attorney? (the lease contracts can be a lot different for commercial properties vs. residential)
Don't get me wrong, I don't want to discourage you because it's not impossible. It just requires education and capital (which could mean more risk). Find other commercial note buyers and team up with them to learn. If you don't have much experience buying commercial property, I would look up Scott Scheel or someone like him to get an idea of what to look for when purchasing a commercial property in general - this is critical to know before buying commercial notes.
Thank you Dion DePaoli and Dave Van Horn. Great input here. I'm not looking at anything specifically yet although I do know what types of commercial real estate my investors are trying to purchase. I don't currently have anyone on my team for commercial such as an attorney, but I do have direct sellers. We're not ready to bite in this area yet, but will definitely being learning all we can on our specific areas of investment. Thanks again!
Agree as well! Get with some commercial brokers and learn. Residential notes are pretty easy, compared to CRE and business.
You really need to identify what aspect of commercial you're interested in.
When you have just CRE, that can be much easier than when business assets are also pledged, equipment, furniture and fixtures, inventory, accounts receivables, existing leases, it can get deep and hopefully plant/RE is enough, but often it's not.
Don't know your background, but mortgages really won't be enough. It's also not something you'll learn without a formal accounting/finance education. Secured RE is only part of liquidations. You also need contacts to dump about anything you can think of. And as Dave mentioned, you can put time and money into your due diligence and never take the note.
Probably best to start out as a commercial lender, everything related to handing the money out will be the basics in aspects of cleaning up a bad loan, modifications or securing and disposing of collateral.
Just saying commercial is really broad in scope. Liquidation firms specialize as well, oil & gas, motels, apt/condos, retail strips, industrial/manufacturing, etc. Might find these types and broker between them and your investors. Let them do the work. :)