I was talking to a small business owner the other day and he had mentioned that he was going to contract on a small industrial building (15,000 sf) in order to move his business into. He is currently leasing space and felt that it was a good time to buy. I couldn’t agree with him more, that is, if you can find a building. Regardless of what we read in the papers about the slow economy and the woes of the residential market, it is difficult to find good industrial, office or retail space to purchase. However, if you do find a building that suits your needs, and you can agree on a price with a Seller, be mindful of the following;
Purchase Price / SF: When evaluating a possible purchase of a property, use the purchase price / SF as a gauge against comparable sales in the market. The total cost is meaningless, the cost per SF will give you an accurate measure.
Purchase price/Renovation Costs - You may have found what you consider a steal as it relates to purchase price, however, you need to also factor in the cost associated with renovating the building . Purchase Price + Renovation Costs = Real Acquisition Price. The Real Acquisition Price is now the true cost of purchasing the building which should be compared to comparable sales prices in the marketplace. As an example, if you acquire the property for $35.00/SF, and your cost estimate for renovations are $30.00/SF, your total purchase price is$65.00/SF. Will the market support that price if you have to sell?
Capital Improvement Costs - While under contract, do your homework and get a true estimate of what your cost are going to be for capital improvements. Is the property going to need a new roof in the next five (5) years?; what condition are the mechanical systems in?; does the parking lot need to be replaced or repaired soon?; will you need to add more office space, or construct loading docks?
Environmental Factors - There is nothing that kills more deals than environmental issues especially in industrial real estate. However, don’t walk away because of ”perceived” or “rumored” environmental contamination. What I have found is that except for “Super Fund Sites” most environmental issues can be addressed if both Buyer and Seller work together on solutions. Like any business risk, environmental issues can be managed and minimized. (There are insurance companies that do offer environmental insurance coverage on pre-existing conditions) However, make sure that you have environmental studies completed and talk to a qualified environmental attorney if you are unsure. As an investor, several of my purchases have been properties with some level of contamination. We have worked to minimize the risks, and in some cases, still have the Seller retaining a significant portion of the risk.
Your Due Diligence - The “Due Diligence” period of your contract, is the time period which you have to investigate all aspects of the property to determine whether you really want to purchase. During the period, you will establish your capital improvement costs; have the environmental studies completed; apply for your financing; complete an A-2 survey; etc. In order to do a comprehensive investigation, make sure you require in the contract, that the Seller provide all documents in their possession including, but not limited to, previously completed environmental studies; invoices of significant building repair or replacements over the past 3 – 5 years; construction drawings; site plans; surveys, etc..
Finally… be sure to retain an attorney who has experience in commercial and industrial real estate transactions. It could be a costly short and long term mistake to hire the same person that represented you in the purchase of your home. Commercial transactions have many more complicated legal issues that need the expertise provided by an experienced commercial real estate attorney.
Happy hunting and feel free to drop me an email with any questions.
Fred Petrella (fredp@ctrealtygroup.com)
