If you are seeking to invest in commercial property in your market, you already know how important due diligence is in the acquisition process. A commercial property is a substantial financial obligation, and as such an investor will want to ensure they are making the best decision possible. To see the highest returns, an investor must do their research on every commercial asset, no matter its location, price or property type.
While thorough due diligence requires extensive background and market research completed over the course of days, weeks or months (given the investment size), there is certain information that every investor should know from the start. Below we outline the 5 questions investors should be asking when purchasing a potential commercial property.
1. Why is the commercial property being sold?
If a commercial property is being sold there could be a number of reasons why, and some of them are not so appealing. From costly repairs to liens, there are many financial and legal liabilities that could be transferred to the next owner. After all, if a commercial property has major issues and isn’t performing well, wouldn’t you want to get rid of it too? Asking why the seller is selling is a critical piece of information you will want to gather.
Word to the wise: In our experience we have found that this is a question you will want to ask a few times from a few different people, as the answer seems to change.
2. Who are the current tenants?
Depending on the type of commercial property, there will most likely be one or multiple tenants currently occupying the building. An investor will absolutely want to know some background information on the tenants, and their current lease terms, in order to determine the associated risks.
Buyers should ask to see a rent roll, tenant credit files and payment histories. A rent roll will provide information on the tenant, how much they pay in rent, if they pay common area expenses, what the lease terms are and when the lease expires. The credit files and payment histories will let you know which tenants may need to go.
3. Can I get a pro forma?
Every investor involved in the purchase of commercial property should ask to see a pro forma. A pro forma is a document that contains expenses, such as common area maintenance and utilities, and income information for a building.
This document is so critical because it contains the commercial property’s NOI (net operating income), which is needed to calculate income projections or ROI (return on investment).
4. What’s in the area’s development pipeline?
Investors purchase commercial property for one reason, to see profits. So it’s important to ensure you know of any current and future development projects that could affect a building’s profitability.
What if you purchase a property and intend to run it as a spa, then 3 months later you learn a new airport is being built just a couple of miles away. Not going to see too much relaxation now, which means not too much profits.
Moral of the story? Ask around and be sure to check what commercial building permits have been filed in the property’s vicinity.
5. What are the zoning ordinances?
After choosing the right location, zoning is probably the most important aspect of commercial real estate investment. Zoning ordinances are set by a city or county and define how a commercial property is intended to be used. Investors will want to make sure that these align with their plans for the property.
No one wants to be the person who purchases a building to run a retail business only to find out that the property is zoned for office. While investors can apply for a variance, or re-zoning, it’s not always guaranteed.
To see the whole article by Donna Whinnery click HERE
Looking for commercial real estate properties in Northern Kentucky and Greater Cincinnati to expand your business? Or maybe you’re trying to sell the property you currently own because your business isn’t effective in that location. When you need experienced commercial real estate agents on your side, you can count on KW Commercial to provide you with the assistance you’re looking for. With our team of real estate agents, we’re sure to find you the right property for the right price.