How to Buy Commercial Real Estate

The process of buying commercial real estate with a bank loan.

Finding Property

Before you start, it's good to know how large of a property you can afford. A banker or agent can help with this. Next, finding a property. Agents and word of mouth are common methods. Commercial agents know what's listed for sale and also what might be for sale. Lots of investors will sell for the right price.

People Involved

There are a few people that you need for buying commercial real estate with a bank loan.

Real Estate AgentCommercial agents are different than residential. They interact between the seller and other parties and lead the process for the various forms, documents, and inspections that are needed.
LawyerReviews contracts and advises. Make sure he reviews the purchase contract and other documents.
Insurance AgentThe insurance agent makes sure that you have the correct amount of insurance.
BankerProvides money. But also requires an endless supply of documents and forms.
Here are a few more parties that you might deal with, although they play a lesser role.
AppraiserUsually required by the bank to make sure that the price you offer is not higher than what the property is worth.
Environmental InspectorA Phase 1 assures that the property has no contamination.
Title InsuranceThis is provided by the seller. The closing often happens at the title agent's office

Purchase Agreement

Once you have a property in mind, you sign a LOI (letter of intent). This is non-binding and demonstrates your intentions for the properties, usually including price and general terms. Once this is agreed to, a purchase agreement is signed. This is binding and a lawyer should review the contract. The purchase agreement often includes an earnest money deposit that becomes "hard" aka non-refundable after the contingencies are met. Contingencies often include a certain amount of time for inspections, financing, environmental reports, and other due diligence.

Due Diligence and More

At this point, you might want to work with a lawyer to form an entity, often an LLC. You also want to start the bank approvals. This can be painful. Banks require an endless supply of forms and documentations. This includes years of tax history and reports of your assets. It's interesting that the more assets that you have, the more documentation you need to provide.

A bank might require an environmental report but you should probably get one anyway to protect yourself in case there is any contamination on the property. A clean Phase 1 should protect you.

A bank will likely require an appraisal. These can be expensive and are used to verify that the property is worth about what you want to pay. If you're experienced at valuation, you might see this as a waste of money. The problem is that this doesn't matter; the bank usually requires it.

A bank might also require an Estoppel and also an SDNA from the tenants. The Estoppel is a certification from the tenants saying that they actually pay the rent that's in the lease. An SDNA is a form that says that the bank will become the landlord in case of foreclosure. Some tenants have problems with an SDNA so it is best to work this out early in the due diligence process.

Expect a bank to demand even more documents after this

The Closing

Ideally, you can close at the date listed in the purchase agreement. Closing is often done at the offices of the title insurance company. Once you close, you are now the owner of the commercial property.

Advice

When you buy commercial real estate, some people are truly on your side and others want to get the deal done so that they can get commission or sell their product. During this process, only a mentor or a lawyer is really on your side. They are not incentivized to close the deal. The commercial agent, banker, insurance agent, and pretty much everyone else benefits when they close a successful deal.

Remember, that you are ultimately responsible for the deal and the property. All of your advisors will not suffer the consequences of a bad decision. During the process I believe in the trust but verify mentality.

Dealing with banks is a major hassle. They require incredible amount of paperwork. I recommend asking for a list of all forms and documentations that they will require ahead of time. Otherwise you will be involved in an endless back and forth of documentation requests.

Side note: In the future, Silicon Valley will create better lending experiences and chip into the business of banks. I'm fortunate to have alternative sources of capital and will probably avoid banks in the future.

Feel free to contact me with comments or questions.