Leasing space affords business owners the opportunity to quickly establish a professional presence and focus their capital on growing the enterprise, while also providing flexibility. However, there comes a time when the business or practice is established and space needs are known; the owner has accumulated cash reserves and has come to the realization that he or she has nothing tangible to show for years of increasing rent payments. When this “aha” moment occurs, it’s time to consider buying an office building or business condo.
This article will explore some of the key concepts business owners, healthcare professionals and corporate executives should consider as they transition from leasing to ownership status and provide insights into the process of buying commercial real estate.
The Basics
Several characteristics make real estate a unique investment. First, real property is a tangible asset that can be acquired for a fraction of its market value. To clarify: a 5% to 20% down payment is all that is required to obtain a loan for the balance of the purchase price. Second, loan payments serve to increase the borrower’s equity position in the property. Third, there is a strong likelihood that real property will, over time, increase in value. Additionally, the property can become an income- producing asset.
Understanding these key concepts is essential to making fully informed, fact-based buying decisions: 1) caveat emptor, 2) due diligence, 3) arm’s length transaction,
4) advisors, 5) the difference between clients and customers, and 6) dual agency.
Key Concept 1: “Caveat emptor” is a Latin phrase for “let the buyer beware” and essentially proclaims that buyers need to be vigilant in performing due diligence.
Key Concept 2: “Due diligence” is the process a reasonable and prudent person uses to acquire knowledge of facts that, if known, would materially influence the purchasing decision.
Key Concept 3: The modern real estate industry is founded on the concept of the “arm’s length transaction” in which parties deal from equal bargaining positions. Parties are said to deal “at arm’s length” when each conducts business in a formal manner without trusting the other’s fairness or integrity and without being subject to the other’s control or influence. It also assumes that each party is willing, but not compelled, to buy or sell.
The definition above comes from The Language of Real Estate by John Reilly and demonstrates how real estate negotiations should theoretically be conducted. In reality,
owners of commercial property surround themselves with experienced advisors that have specialized legal, financial and industry knowledge, while buyers typically do not … and that results in very unequal bargaining positions.
TIP: Take a page from the property owner’s playbook and select a team of seasoned professionals to advise you.
Key Concept 4: Your acquisition team should be dedicated to protecting your interests, have no conflicts of interest, be independent of each other and include an experienced real estate advisor, a real estate attorney, a commercial lender and an accountant.
The real estate advisor should be charged with overseeing the time-intensive due diligence process, including reviewing your existing lease (to confirm the termination date, whether there is an automatic extension and the holdover provisions), conducting the research for suitable properties, compiling information on comparable sales, negotiating the purchase terms and conditions, verifying the representations of listing agents and property owners, and interfacing with your other advisors through the close of escrow.
Desirable qualities in a real estate advisor/agent include: credentials (look for a CCIM); verifiable experience in solving your real estate problems; accountability (insist on an exclusive fiduciary relationship); and ownership (seek an advisor that owns commercial real estate).
Key Concept 5: Legally speaking, clients are owed a fiduciary duty by their agent or advisor. That is to say the agent/advisor must protect the client’s interests at all times. Customers are owed a much lower legal duty.
Regardless of their titles, listing agents are salespeople who work for the property owner (their client). To listing agents, buyers are viewed as customers or prospects. TIP: Refrain from dealing directly with an agent/advisor that lists properties. Instead, establish a client relationship with an advisor/agent who does not list properties.
Key Concept 6: When one agent, or multiple agents within the same company, represents both buyer and seller in the same transaction a “dual agency” exists, which always favors the seller and the self-serving agent, who stands to collect the entire commission. TIP: Be skeptical of agents/brokers/advisors that try to persuade you that they can fairly represent both your interests and those of the seller, and who soft-peddle or blur the distinction between client and customer.
Summary
Once you can clearly anticipate your space requirements for the next 3 to 5 years, it’s time to consider owning the building that houses your business or medical practice. Doing so will help create wealth for your family instead of for your landlords.
Stephen A. Cross, CCIM, owns Cross Commercial realty advisors and represents business owners, healthcare professionals and corporate decision- makers in matters involving the lease and purchase of commercial real estate. Contact him at 480-998-7998 or steve@crossrealty.com.
