Those who put their money into commercial real estate may reap exceptional benefits. However, business transactions are typically much more involved than their domestic equivalents. Typically, more parties are engaged in a commercial transaction than a residential one. When evaluating deals, real estate investors must consider the interests of several parties. To that end, the purpose of this article is to provide an overview of the various participants in a commercial real estate transaction.
Here are the details of what we’ll discuss:
- Key Figures in Commercial Real Estate Transactions
- Additional Participants in Value-Add Transactions
- Additional Participants in New Developments
- Concluding Thoughts
Key Figures in Commercial Real Estate Transactions
Overview
Every commercial real estate transaction is one of a kind. In addition, the right team of people is needed to close the contract. Nonetheless, essential actors are needed across the board in commercial real estate, regardless of the deal being done. We’ll introduce the key players in any transaction here so you know who to expect to work with.
- Commercial Real Estate Broker
Commercial real estate (CRE) brokers assist investors like residential real estate (RE) brokers do. The basic qualification for either kind of broker is the same license. However, commercial ones need to know much more about financial analysis, commercial tenant property management, and the commercial appraisal process, in addition to the standard property tax and local zoning rules.
Furthermore, there are numerous online services (Zillow, Redfin, etc.) available to assist you in your search for a home to purchase. There are business bargains to be found on the internet, but many of them are not publicized. If you want to identify opportunities that meet your investing goals, working with a local CRE broker can help. Additionally, there is a wide range of commercial property kinds (e.g., multifamily, office, industrial, etc.). With the support of a commercial real estate broker who focuses on the type of property you’re interested in, you may uncover and evaluate far more opportunities than you could on your own.
Lastly, commercial real estate brokers function as your advocates in a deal, just like their residential counterparts do. They can assist you in getting the best bargain possible because of their extensive familiarity with the local market.
- Structural Engineer
A home inspection is a part of the required “due diligence” in every property transaction. The stakes and size of a commercial structure are far higher than those associated with a residential home. It would be best if you had a structural engineer do a thorough inspection of the building before committing to a purchase, known as a commercial property assessment. When investing a sizable sum of money, verifying the building’s soundness is prudent before committing to the deal.
- Permanent Lender
They will discuss short-term funding options if they are required for your deal. However, you’ll need a permanent lender to secure a long-term mortgage on any business property you intend to hold onto for the long haul.
An all-equity transaction is possible in theory. However, this A) eliminates the amplifying benefits of utilizing debt to finance an acquisition and B) presents major financial issues. The best loan terms and a thorough comprehension of what is needed to close any given loan can be obtained through an established working relationship with a trustworthy permanent lender.
On the other hand, you might work with a commercial mortgage broker. They are not speaking for any one financial institution. They will instead shop your contract around to various lenders to secure the most favorable terms for you. It’s important to know that borrowers typically pay the broker’s fee.
- A Limited Partners / Investors
Commercial real estate is typically far more expensive than residential. Investors’ inability to develop the necessary funds is a big roadblock for many deals. In that instance, you might know how to underwrite and carry through a contract, but you lack the financial means to do it. For illustration, suppose you find a stabilized apartment complex for $10 million. A 20% down payment would be required if the loan-to-value ratio was 80%.
A common deal structure has a general partner (or sponsor) who originates and manages the transaction and investors (or limited partners) who give the capital in exchange for a return on investment. The sponsor might put up $200,000, and the investors would put up the remaining $1,800,000. As the transaction sponsor, you will own a commercial property worth $10 million while investing only $200,000. Funding from third-party investors is typically crucial for turning an idea into a working business.
- Real Estate Attorney
As was previously indicated, commercial real estate transactions are significantly more difficult than residential ones. In the latter, parties employ standard form contracts to conduct business, with the flexibility of customizing them as necessary. Every business transaction has a unique contract, and these deals can be challenging for first-time investors.
The first draft of a sales contract is typically drafted by the seller’s attorney and then sent to the buyer for review. While you can evaluate the contract independently, having a real estate attorney on your side can help you get the best deal possible. The contract between the seller and the buyer usually goes through multiple revisions before being signed by both sides.
- Settlement Agent for CRE
Commercial transactions are more complex overall, making closing on them more challenging. The transaction between the buyer and seller will be closed with the help of a third-party settlement agent, just like in residential real estate transactions. Also, these intermediaries prepare the settlement statement, which details the buyer’s and seller’s respective contributions and credits. Settlement agents operate as escrow agents, holding transaction funds in escrow until closure. These intermediaries oversee the signing of all closing documents, the transfer of monies, and filing of all necessary formal documents.
In the broadest sense, settlement agents are impartial third parties that oversee the processing of a transaction. Commercial real estate transactions are usually handled by legal firms that focus on commercial settlements to act as an agent.
- Manager of the Property
Commercial real estate is typically bought by investors who intend to earn passive income and have no desire or expertise in running the property themselves. You should engage a property manager if you don’t want to, can’t, or don’t have the time to manage a property on your own. Depending on the project’s scope, this could be an on-site manager or an off-site management firm.
No of the setup, property managers are essential to the smooth running of any commercial building (e.g., finding, screening, and placing tenants, overseeing maintenance requirements, turning units when a tenant leaves, etc.). In this case, the answer is yes; the expense will cut into the property’s NOI. It frees up the investors’ time to focus on other endeavors and guarantees that seasoned experts are managing the property.
Additional Participants in Value-Add Transactions
Overview: Value-Add
The participants, as mentioned earlier, are common to all commercial real estate transactions. However, the need for more people to close a deal grows in tandem with its increasing complexity. Value-added transactions are what we’ll talk about here. Typically, investors will buy a building, then upgrade and raise rents to boost the property’s worth. All the parties above, plus those mentioned below, are included in these agreements.
- The Interior Designer
Unit renovations are a common component in value-add transactions. In theory, you can ask for a higher rent payment if you upgrade the place. Take buying a multifamily dwelling where the amenities and construction are considered “standard.” With the help of an interior designer, you can create a “silver,” “gold,” and “platinum” package for upgraded dwellings, with progressively finer furnishings and fittings.
Again, someone who appreciates aesthetics could achieve this on their own. However, it makes sense to hire an expert to create these refurbishment packages in a commercial agreement worth several million dollars.
- The General Contractor
A value-added project begins with a designer who creates a blueprint, but the GC brings that blueprint to life. A certified GC is required whenever a commercial building is renovated (or new construction altogether). The renovation work will be supervised by this person (or business), who will typically assemble and oversee a crew of subcontractors.
- Short-Term Lender
As previously said, it must permanently finance long-term real estate investments. Short-term funding, typically in the form of an acquisition and rehabilitation loan, is also required for many value-add projects. Non-amortizing, interest-only loans are a common kind of short-term financing for such purposes (one to three years). However, because they are interest-only loans, investors can use them to A) fund a purchase and renovation and B) reduce their cash outlay.
The property’s worth, as the name implies, should rise once the refurbishment is complete. As a result of this appreciation in value, investors can obtain long-term funding, which, assuming the deal has been underwritten properly, will serve to repay the temporary loan (and potentially return some cash to investors).
- A CRE Leasing Agent
The demand for new business leases is high if a value-add project involves renovating any commercial spaces (as opposed to residential units in an apartment complex). As is often the case, a commercial lease is more involved than a standard residential lease. Tenant improvement allowances, utility pass-throughs, rent increases, and other provisions are common areas of negotiation for landlords. Moreover, the dangers of a badly negotiated contract are amplified by the extended duration of most of these leases.
A commercial real estate leasing agent will assist you in locating prospective tenants, negotiating favorable lease terms, and closing deals. While there is an associated cost for this service (usually a percentage of the lease), the benefits typically outweigh the expenditure.
Additional Participants in New Developments
Overview: New Development
The most difficult deals to close in commercial real estate are those involving new developments (i.e., turning a plot of land and an idea into a fully functional building). For this reason, you’ll still need the participants mentioned above, but you’ll additionally need the following two experts at the very least to seal the deal.
- The Architect
Architects are the people who take your plans for a building and make them workable. Let’s pretend you’re planning on constructing a 100-unit apartment building. Simply by using a computer (or a camera), one can demonstrate their desired design for the structure. However, only an architect has the necessary A) education and B) legal authority to develop and approve such construction plans.
You should hire an architect if your business agreement entails building something. However, working with an architect should be iterative, with you offering conceptual input and feedback on draft plans and the architect going through several iterations of the plans before arriving at the final, agreed-upon designs for a project.
- The Municipal Zoning Specialist
Municipal zoning restrictions are also a significant barrier to new growth. What developers can’t construct and where is whatever they want. Instead, zoning regulations are delineated by specific laws and maps at the municipal level. For example, zoning regulations can restrict construction on one block to single-family houses while permitting commercial enterprises on the adjacent block.
Developers can get assistance from a municipal zoning specialist. Usually, a lawyer is familiar with the local rules to meet these regulations. Moreover, these lawyers will submit a petition on your behalf to change the zoning of a certain piece of land.
Concluding Thoughts
Learning about the major stakeholders in commercial real estate can help investors evaluate transactions. And if you’re interested in discussing your circumstances in the context of real estate investment opportunities, High Peaks Capital will be happy to oblige. Send them a message to arrange a time when they can meet and go through the passive investing opportunities in real estate that are now accessible to you.
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