Buying commercial real estate in Texas is not like purchasing a new family home. The costs are more, the funding is harder to get, and to top it off if you need tenants, you will have to cover the expenses of marketing, identifying, and securing new leases. Purchasing commercial property for a new investment endeavor or a new business is rewarding and can be quite profitable if the process is undertaken strategically and in compliance with state, city, and local laws.
Types of Commercial Real Estate in Texas
Commercial real estate (CRE) is property used for purposes related to business rather than residential. A CRE can be a mom-and-pop store or a huge shopping mall and includes restaurants, hotels, office spaces, hospitals, and doctors' offices. CRE is generally broken down into five distinct categories: industrial use, multi-family rentals, office space, hospitality, and retail.
- Industrial Use. Industrial use properties consist of businesses that make and store goods, like manufacturing facilities and storage warehouses.
- Multi-Family Rentals. A multi-family rental is generally a large property with multiple smaller units that families rent to live in as their primary residence. They can be small, housing only a couple of families, or large, housing hundreds of families.
- Office Space. Office space is another type of CRE often considered to be the most high-risk. These properties are generally broken down into three different classes based on their condition and location: Class A for the highest quality buildings, Class B for older but still high-quality buildings, and Class C for older buildings in deep need of maintenance and care.
- Hospitality. Hospitality properties are meant for travelers and include hotels, entertainment sites, or restaurants.
- Retail. Retail properties include small stores, strip malls, and restaurants.
Commercial Real Estate Purchasing Process in Texas
Buying commercial real estate can prove a valuable investment if it is handled correctly. There are various steps to purchasing a CRE, though the exact process may vary depending on the jurisdiction.
Identification of a Property
The first order of business is to locate the property to be purchased. While this may seem an easy task, there are many things that must be considered, including:
- The history of the property and whether it has the potential to provide a steady stream of income
- The location of the property, and whether this type of CRE is needed in that location
- Any work that must be done to the property to make it ready for its intended purpose
A real estate lawyer who specializes in CRE properties can help you find exactly what you are looking for in a CRE.
Decide on the Initial Offer Price
The property will definitely have an asking price, but the purchaser must do their homework to ensure they do not offer too much initially. There are different approaches used in the industry, but two of the most popular are:
- Income Capitalization Approach: This approach requires dividing the net operating income (NOI) of the rent collected on a property by the capitalization rate.
- Cost Approach: This approach requires looking at what it would cost to build the CRE from the ground up. The cost of the land combined with the cost of construction, less depreciation, will yield the cost approach value.
There may be other ways to calculate the offer price depending on the CRE being purchased. As your commercial real estate attorney in Texas, we will look at all options to identify the best offer price.
Purchase and Sale Agreement
The purchase and sale agreement contains all the terms of the sale and should include everything agreed upon between the seller and purchaser. At f, we will negotiate, draft, review, and analyze these agreements to ensure they favor your needs and that there is no hidden language that may negatively impact you or your property.
Financing and Inspection
Securing financing for the property can be a complicated task, but due diligence must be performed to ensure the best terms are found. You should compare several lenders before settling on one. You want to know what the interest rate is, what the fees are, and whether there are penalties. Commercial property financing options that can be employed for various purposes include:
- Permanent loans
- Small Business Administration (SBA) loans
- Bridge loans
- Hard money loans (which are a last resort but could be useful in certain situations)
In most cases, the purchaser of the CRE will put a down payment of 20-40% of the purchase price and finance the rest of the purchase price amount.
Close on the Property
Once all the terms of the agreement have been agreed upon and the financing obtained, the purchaser can move forward with buying the property. Other important matters, such as a title search and execution of the documents, must take place before the keys are actually exchanged. Once the purchase has been completed, the buyer can move forward with their plans for the CRE.
Factors to Consider before Purchasing Commercial Property
Before purchasing a CRE, there are various questions to consider, including:
- Will this property suit the needs of the investors long term?
- How hands-on are the investors willing to be in the CRE?
- How will local demographics impact this type of CRE's success?
- What are the zoning laws of the area where the CRE is located?
Other factors exist, which is why it is a good idea to hire someone who specializes in this area to provide legal and professional guidance during the purchase process.
Commercial Property for Investment Purposes
If you are purchasing commercial property for investment purposes, several different strategies exist that could prove beneficial in this type of investment. Some of the most common real estate investment strategies include:
- Land banking, which requires you to purchase and hold land and is often used to protect and grow investors' money.
- Development, which is probably the most common and is where an investor purchases raw land upon which to build.
- Fix and flip, which is a tactic popularized by reality TV and occurs when a property is purchased, renovated, and resold for a profit.
- Buy, Rehab, Rent, Refinance, Repeat (BRRRR), which is a way to enjoy passive income through flipping properties that are rented out to tenants.
- Wholesaling, which involves purchasing a contract from a property seller below market value and reselling or assigning it to an interested buyer.
- Passive investment, where you do not want to be involved in the property so you simply put capital into a real estate endeavor through a partnership with an active investor, crowdfunding, or stock market.
If you have not yet decided on how you wish to invest in commercial property, at f, we can help you determine a strategy most suitable for your goals. Each strategy involves different roles, responsibilities, and requirements, and so each should be carefully considered.
Seller Disclosure Requirements in Texas
Seller disclosure requirements vary from state to state. In fact, many states do not require the same (if any) disclosures for commercial properties as they do for residential properties. Some states specifically outline what information must be disclosed, while others leave it up to the seller to choose whether or not they want to disclose any information. Typically, most states still require disclosing any property defects or environmental concerns even if the property is a commercial one.
As a commercial property purchaser, it is imperative that you are aware of your jurisdiction's disclosure requirements and that you receive accurate information from the seller. You should also inspect the premises. All of this is critical if you live in a state that does not strictly regulate commercial property like they do residential properties.