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.
Looking to invest in commercial property in the Charlotte, NC area?
The experts at SVN | Percival Partners have been immersed in the Charlotte, NC commercial real estate market for over 50 years. We’ve helped countless investors acquire commercial properties across the area, and are versed in local developments and ordinances. If you have questions about a property in Charlotte, or surrounding areas, contact us and to learn how we may be able to help.
SVN | Percival Partners is one of Charlotte’s most recognized and respected commercial real estate firms with more than 50 years experience in the region. Our professional and experienced real estate Advisors are in the business of listening, understanding, and adding value. No matter the commercial property type you own or seek, you can count on the SVN | Percival Partners team to maximize your return and peace of mind. To reach us, you can call us at 704.632.1000 or follow us at @SVNPercival, LinkedIn or Facebook.