Things to Consider when Purchasing a Multi-Unit Commercial Property

Contributing Author: Michael McGovern

An enormous amount of concern goes into the decision to purchase and renovate multi-unit property and therefore becoming a landlord. Additionally, providing pro-active property management and the necessity of being on call can affect all aspects of life yet the rewards of creating quality housing while realizing a generous financial return can provide quite a benefit offsetting these demands.

Before agreeing to accept this business model and lifestyle it is critical to fully understand the process, therefore increasing the odds of having a financially and personally rewarding experience. It is also of great value to work with an experienced, licensed Real Estate Broker who can assist with the entire process from site selection to document review.

The first requirement is to determine the location you wish to operate.  For example, in NYC you are either an Uptown, Downtown, East Side or West Side buyer. Some other things to you may want to evaluate in terms of location might include:

  • Are you willing to deal with the parking challenges and city requirements?
  • Are you a developer of the size to purchase air rights?
  • Would you prefer a smaller city, such as Albany, NY or a suburban or rural location?
  • What is your risk tolerance? Are you willing to take on more risk by speculating in a tougher neighborhood or more comfortable in a secure area which might produce less of a return on investment and less appreciation?

Once you’ve determined the location, size and model in which you wish to operate, the next step would be to determine the value of the property. This is critical.

Many buyers purchase at a high price and suffer throughout the process. It is important to start out with a good buy, which takes the sting off of the project, as the expenses mount. A study of comparable properties can show what has sold, what is listed for sale and at what price. Broker Price Opinions and Appraisals can provide this. Some things to consider for determining property value:

  • What is the market rate price per square foot?
  • What do comparable units in the area sell /rent for?

Assessments can provide information, yet these can be unreliable as many times they have been grieved down or allowed to inappropriately escalate. The Capitalization Rate can indicate value by providing the potential rate of return. Looking at the Net Operating Income (NOI) divided by the Selling Price will provide this. Many people place the highest value on the Real Estate Broker’s opinion of price in that the Brokers are involved in the specific region on a daily basis and have an intimate knowledge of current deals.

Upon determining value, the time comes to make an offer. This can be done by constructing a non-binding Letter of Intent or a Confirmation of Terms Letter. This sets out the broad stroke conditions about the transaction such as purchase price, deposit, mortgage contingency, access to owner information, brokerage, carrying costs, time for due diligence and construction of a formal Purchase and Sale Agreement.

Once there has been a basic meeting of the minds and signatures on a Letter of Intent, the Attorneys for each party can construct a formal Purchase and Sale Agreement and specify the terms and time frame of the Due Diligence period.

The Due Diligence period should determine there is clean title and address all of the inspections with regard to the condition of the property. Some items to inspect would include:

  • Roofing
  • Structural
  • Façade
  • Electrical
  • Plumbing
  • Fire systems
  • HVAC
  • Zoning
  • Water and sewer
  • Mold
  • Asbestos
  • Easements
  • Architectural drawings

Environmental inspections such as a Phase I based on research or a Phase II, which would require drilling and sampling, could be necessary particularly in an industrial area.

There could also be financial contingencies regarding Government assistance from The Industrial Development Agencies, or other entities incentivize construction by providing tax relief through programs such as 485-A which ramps up the taxes over 12 years or through PILOT Programs / Payment in Lieu of Taxes, sales and mortgage tax recording exemptions or through low income housing credits. Historic tax credits can also play a very important part.

The next step would be to determine the level of construction. By looking at demographics and comparable properties we can determine the appropriate cost of renovation.

  • Does the builder take it to granite and stainless kitchens and capture higher rent or do the rents reflect Formica and oak?
  • What level of expense can by justified by the current rate of rental income in the area and possible increases in the near future?
  • Should you hire an architect?
  • What features might set you apart from the competition?
  • Outdoor space, decks, washer / dryer in units?
  • Forced hot air versus hot water baseboard?
  • Month to month leases versus one-year lease?
  • Can renovation costs be boiled down to price per door / unit?

These questions can be answered by the models of other developers in the area.

Upon completion of construction it is necessary to have the final city inspections and the permits closed out. It is also important to a have Residency Occupancy permits in place. Now one could lease the units.

It is invaluable to work with a Licensed Real Estate Broker who can represent you and your interests. We work in the specific region, know the market and know the properties. We work closely with the appropriate agencies, organizations and government entities and can suggest valid choices on Banks, Developers, Sub Contractors, Inspectors and Architects.

By formulating a plan of action and working with a seasoned, professional, licensed, real estate broker, the possibility of executing a financially and personally rewarding project can be dramatically increased.

A final piece of good news is when working with a buyers broker, most of the time the fee for Brokerage and representation is built into the agreements with Cooperating Brokers and therefore at no cost to you.

Best of luck.

Looking forward to working together.

Our team at NAI Platform possesses extensive knowledge and experience across the complex nuances of commercial real estate. We operate with the singular focus of working diligently to help our clients meet and surpass their goals.

For more information and expert guidance on your commercial real estate needs, please give us a call at NAI Platform or visit our website at www.naiplatform.com.

Michael McGovern, Associate Real Estate Broker

NAI Platform

14 Corporate Woods Blvd.

Albany, NY 12211

mmcgovern@naiplatform.com

Direct: 518-465-1400 Ext: 219

Mobile: 518 772 7276

Fax: 518 465 1441

http://www.naiplatform.com/

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