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Buying a commercial property, whether you are an end user or an investor, is a significantly different process than purchasing a residential property. Let’s delve into the differences and how to best proceed so that you are able to successfully, and with minimum stress, satisfy your commercial property requirements.
We continually update this material so keep watch for new or changing information.
STEP ONE: PREPARE A BUSINESS PLAN
If you are purchasing a property for your business, it is best to prepare a detailed business plan, not just for your business but for the lender, and most importantly, to determine if you should actually buy or if leasing would be better for you.
While buying real estate can produce good long-term returns, many businesses find they can earn a better return investing in their business. As well, buying reduces your ability to change locations should your business grow, shrink or change in some way.
Finally, you may find that the funds required for a down payment may reduce operating capital. Will you have enough liquid assets to handle any future cash crunches?
STEP TWO: DETERMINE YOUR NEEDS AND WANTS
Separating needs from wants is difficult but very important. Why? The chances of you finding exactly the property you need in exactly the right location at exactly the right price is near zero.
You will likely be called upon to give something up and having needs and wants clearly delineated, and preferably ranked, will come in very handy in making a good decision. To help you with that you can download our Needs and Wants Form here.
Location is a key consideration that is often somewhat overlooked. We have heard many buyers state something to the effect that anywhere in the city is fine, but when you sit down and really consider your business, you will find that this is likely not the case. Transportation is a major expense in both time and money and the closer you can locate to your suppliers, clientele, or where your staff live, the better. You may need to be near certain transportation routes.
Work Flow is another important concept to consider, especially in a manufacturing or process-oriented operation. Take the time to plan out how material will move from start to finish. If you are a retail or office operation, take the time to plan out a most efficient workspace; consider the assistance of a professional space planner.
Stop in at the municipal office to become aware of all zoning and health and safety requirements.
Speaking of zoning, be sure to review the zoning bylaw for your municipality and take note of which zonings allow your use (permitted use), which may allow it with conditions (discretionary use), and which do not allow it at all. It is very unlikely the municipality will change zoning to allow you to operate in a location that is not zoned for your use so this is extremely important.
STEP THREE: GET FINANCIALLY QUALIFIED
It doesn’t matter how well qualified you believe you are; commercial financing is very different than residential financing and it is highly recommended you visit your financial institution before commencing your search. There is a big benefit we will discuss next, but the main reason is because commercial financing takes many more things into consideration than residential.
You may qualify but the building may not; the income and expenses of the building will be reviewed and the lender will make arbitrary decisions about the quality of the income. The lower they feel the quality of the income is, the less financing (if any) you will receive. On top of that, different financial institutions often make internal policy decisions around which property types they will or will not currently finance; you could be in for a surprise.
The interest rate will also likely be higher than you thought, and the amount of the financing will likely be less.
Even if you are placing a substantial down payment, the lender may still require CMHC financing.
The biggest benefit of being pre-qualified is the bargaining power it gives you in the negotiation process. That alone is well worth the visit to your lender. Sellers that knows you are pre-qualified knows the odds you will be successful in purchasing their property are significantly greater than an unqualified buyer.
STEP FOUR: THE PROPERTY SEARCH
Once you have a good idea of your needs and wants, and you are confident in your ability to secure the needed financing, it is time to commence the search.
Unfortunately, commercial real estate property searches are unlike residential in that the majority of available properties will not be found in one resource, at least not without an expensive subscription. There are services that collect commercial listing information but to get the details you need often requires an expensive subscription fee. Even then, they are not likely to have all available properties in their database, there are many sellers who choose not to list publicly for various reasons. If you are going to pay that fee, why not consider a real estate agent to work with?
While we may be biased, we believe strongly that it is in your best interests to seek out and hire a qualified, reputable real estate agent. A good agent will take the time to understand your needs and can save you time and money. While the industry is changing, the vast majority of sellers still include a buyer’s agent commission in their sale price so the odds of you having to compensate your agent are still small.
The best thing about having your own agent is that he or she legally works for you. And, since this is now getting into legal advice so we must advise you to always speak with a lawyer regarding legal questions. The following is general information and can vary depending upon your circumstances.
So, knowing this, let’s suppose you call the listing agent for a property yourself. This is something many people do because they don’t want to commit to working with an agent yet or because they think that is the way to do it. Because this agent is already working for the seller, he is in a conflict of interest that he must also disclose to you. This conflict of interest is called Dual Agency. When you hire an agent to sell your property, do you expect her to do everything in her power to get you the highest price? Of course you do. When you hire an agent to help you buy a property, do you expect him to do everything in his power to get you the best price and conditions possible? Of course you do (The law calls this “Undivided Loyalty”). So how does one agent do both in the same transaction (The law calls this, appropriately, “Divided Loyalty”)? Pretty tough, isn’t it? In fact, it is so tough courts generally deem it impossible, citing the old adage, “You can’t serve two masters”.
So, agents who are in this situation are required by law to disclose this to you, and explain the consequences to you, including the fact that they cannot provide you with undivided loyalty. This does not mean he or she will not treat you fairly, but it does mean he or she cannot legally act so as to get you the best price, terms and conditions.
Now, what is going to happen when you become interested in the Selling agent’s property? How will an agent who is protecting the Seller also protect you when conflicts arise? This agent is lawfully bound to do everything in her power to get the most money out of you for her Seller client.
Okay, so hopefully this illustrates the potential concerns when calling the Seller’s agent. By choosing an agent who works for you and only for you, you can rest assured your interests are properly taken care of.
Not only will he promote your interests, but he will work to eliminate problems associated with dual agency that can complicate your transaction.
Now, if you choose to purchase a property listed with your agent’s brokerage, your agent may have some extra forms for you to sign. This can lead to a practice called Transaction Brokerage, which is basically a neutral option. You also have the right to have another agent represent you. If this situation arises, your agent should explain this to you in detail or you can check out www.reca.ca, or call your lawyer for more information. Feel free to ask him for more information at any time.
FINALLY - MAKING AN OFFER TO PURCHASE
This is probably the most important part of the process as it will likely lead to legal obligations to purchase a property and so, careful attention must be paid to balancing opportunities with obligations. For example, making an unconditional offer will likely lead to you achieving a better deal, but once the seller signs it you are legally bound to complete that transaction and that does carry consequences.
A good agent will help you determine the best answer for you to all the following questions;
How much should I offer is the number one question on everyone’s mind, and the answer is, you guessed it, it depends. It depends on a lot of things.
Will a low offer upset the seller? I’ve seen arguments for and against this question and both are right – you might or you might not. You can never know for sure so all we can do is make an educated guess and balance the benefit gained by a low price offer against the cost of insulting a seller who then digs in her heels on price.
I believe the most important question to ask yourself in any dilemma is, is the risk worth the potential benefit? This question should be asked in all situations when you are deciding on a course of action in an offer.
If the low offer backfires, how much of an impact will that have on your plans? Is this the only suitable property you have found in a long time? Is the property only somewhat suitable and of little consequence if I lose it, etc.?
Should I make a good offer? Again, same questions, is the risk worth the potential benefit? How well is the property price? Have your agent perform a comparative market analysis on the property to help you decide.
What conditions should I include in my offer? Conditions are clauses you add in the offer that basically say, “I will buy this property IF (and only if) it meets all these conditions. If not, my deposit is refunded and we walk away from each other no harm, no foul.”
This could be a very long discussion but let us give a brief summary of the most common (and recommended) purchase conditions.
- Subject to due diligence (various inspections)
- Subject to obtaining suitable financing
- Subject to successfully achieving all required municipal approvals (zoning/fire, etc.)
- Subject to satisfactory environmental report
There are numerous other potential conditions that generally occur only in specific circumstances. If you are a large corporation, you may need Board or Management approval as well.
Many larger, sophisticated sellers may have a disclosure package ready with numerous reports, but there is no legal requirement for them to do so. Who pays for what (i.e., survey (RPR), inspections, environmental reports, etc., is a matter of negotiation. Be prepared for the possibility of paying for more than one study or report.
The amount of time required to go about satisfying your conditions varies from location to location, market to market, and transaction to transaction, but most fall between 60 – 120 days. This, like everything, must be negotiated.
Once you have satisfied yourself that the property is suitable for your requirements, you will be granted your business permit, and you can get financing, it is time to notify the seller that you remove your conditions. When you do this, you are legally bound to purchase the property.
Your lawyer will help facilitate the closing procedure, and congratulations, you now own your commercial property!
Question: The agent wants me to sign a Buyer Representation Agreement, should I?
A Buyer Representation Agreement is usually a contract that binds you to that agent for the period of time specified in the agreement, and signing it, like any contract, has positives and negatives. If done properly, I would say it is overall a very good thing.
First, the main negative is that you are committed to that agent for the period of time specified in the agreement. If you find out afterwards that the two of you are not entirely compatible, or the agent was not the right agent for whatever reason, you may be bound to that agreement. So, let me first answer whether you should sign it.
The shortest answer I can give is, in my opinion, absolutely - if you are reasonably confident in that agent. Many of the best agents will not work with a buyer without a reasonable assurance of being paid for their work at the end of the day. These are good people and they generally provide great client service, but, like everyone, we need to get paid for our work. It is not an exaggeration to say that the risk of an agent not getting paid for his or her work is large and increasing.
Finally, most of the large, sophisticated buyers commit one way or another to one agent whom they trust. These are sophisticated businesspeople who are very experienced at purchasing real estate, and yet they commit to an agent. Clearly, they see the benefits of a trusted professional.
So, how do you protect yourself if you are not yet sure? One of the best ways, that many agents will agree to, is to sign a short-term agreement (say 1 – 4 weeks) to get to know each other. Another way is to negotiate a unilateral escape clause where you can give unilateral notice ending the contract, but be aware that, if the agent agrees, he/she will likely add a perfectly reasonable clause that if you should purchase a property you were introduced to in any way during your agreement, that they are compensated for that purchase.
Question: I found a property without the agent, why should I pay her? She didn’t do her job!
Well, it is quite possible the agent didn’t do her job, but it is also much more likely that you just found it before she did, or, just as common, it doesn’t have some feature that you told the agent you must have. I had a client some years back who found a property on his own with a grade loading door when he told me explicitly, he had to have a dock loading door.
Additionally, commercial property searching is far more complicated than residential property searching, and requires more resources. With today’s online world, it is not unusual for buyers to find properties before agents do.
Frankly, finding properties is probably one of the less valuable things an agent brings to the table; our expertise in negotiation, market rents, property operating costs, contract terms and conditions, and an overall knowledge of what is reasonable in all those areas.
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