How do I make an offer on a commercial property

Question

Hey All,

I honestly don't even know where to start with a good question - I'm at the point where I still don't know what I don't know!

I posted about a property a while back that I thought could be interesting with little response.  A year later, after starting a business elsewhere I'm suddenly back looking at that property.  I've done the county search and found that the owner owns 2 side-by-side properties one with a single tenant, the other with 3 tenants.  Without knowing anything about the actual businesses (which look to be WAY under market for the area), how do I go about making an offer to the owner?

Do I have to come to the table with an offer?  Without knowing the NOI, can I use the price per sqft for other commercial property in the area?

Supposed to meet with a commercial RE realtor next week, but want to know what questions I need to ask when I meet so I don't look like a total idiot.

-Ian

Ronald Rohde · Answer

Please do not use a REALTOR.

I'd say you can make an offer based on replacement cost or some other lowball metric. Ask for gross lease amounts and lease structure. You should input your own expense ratio anyway, his NOI can be high or low.

Just figure our debt terms, closing timelines, Phase I, PCR, ALTA survey. Typically for new buyers, 45-60 days DD, and 30 to close. Whats the purchase price (range)?

Ashlee Hutson · Answer

Hi @Ian Jaeger, I second what Nick said. A commercial agent is a great resource for this situation. I can send you the info of a great agent in the Dallas area if you’d like. She has over 20 years of experience and can definitely guide you in the right direction on what you need to do.

Nick Hiersche · Answer

Don't worry, that is what the REALTOR is for! If they make you feel inferior, find a new one! You can search the National Association of Realtors which has a database where you can filter for REALTORS with commercial expertise and even designations for commercial courses, etc. so that is a great resource for locating someone with expertise in any market.

Call a few and you should always work with someone that makes you feel good, and knows the business!

Paul Swales · Answer

Hi Ian,

First, you need to know the following, and a broker can help you compile the information.

1) Lease expiration dates

2) Base rent and NNN amount, if applicable. (These are represented in a dollar-per-foot amount and need to be at or below similar properties in the area in case you need to replace a tenant)

3) Ensure the lease is a true NNN lease, with the tenant paying all expenses (Taxes, Insurance, Maintenance, and even management fees)?  Some may only cover a portion of these expenses.

Have your broker ask for the lease and OM on the property. (You may have to sign a non-disclosure agreement). You are looking for anything that would stand out as Landlord responsibilities you would have to plan for. In addition, you will be looking for rent escalations in hopes that you could increase your NOI in the future. Of course, you are also looking for how the current tenants have paid and if any are in default.

Next, have your broker draft a Letter of Intent so you can start a conversation with the owner. When you finalize an agreement to purchase via the LOI, your broker will draft the Purchase Agreement.

Commercial property can be a great investment, especially when taking advantage of tax benefits. It is something you should have in your overall portfolio.

Good luck with your potential purchase.

Eliott Elias · Answer

Get a commercial agent that can navigate you through this, sounds like you need a good team member. Happy to connect you with someone I know out there

Ian Jaeger · Answer

Followup questions: I essentially want to run a different business out of one of the 'units.'  If I do get the business, can I eventually just raise the rent of that one tenant when their lease is up to the point that they leave, or is there some other better option?

How do I make an offer on a commercial property

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