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As you’ve read here many times, buying commercial real estate is a great way to build generational wealth. It’s like a jelly club of the month. By that I mean the gift that keeps on giving!
Many of those reading this column have started a business located in a piece of commercial real estate that they also own. Thus, the occupying company derives income from its commercial operations and pays rent for the use of the building. The value of the company increases over time and the skill appreciates. A double whammy!
Southern California has countless entrepreneurial stories where a generation took a risk, formed a business, bought a location, and family members who succeeded benefited. I have the privilege of advising these family-owned manufacturing and logistics companies.
Recently, a conversation struck me as particularly worthy of a chronicle. Concretely, how much should be allocated for a deposit when considering a purchase? The easy answer is 10% of the purchase price if used by the Small Business Administration and 20-30% when funded conventionally. Boom. Ended. See you next week.
But, wait, there is more… much more to the history of loan granting. So please stay tuned for one more minute.
In addition to the 10-30%, it would be suggested to budget for the following:
Evaluation: Regardless of your choice of lender – SBA, bank, insurance company, or cash – an appraisal will be done. The bank’s subscription contains confirmation that the price paid is in line with the market. Allow $ 2,500 to $ 5,000 for this exam.
Environmental: Hiding under the surface of your purchase could be a problem. These invisible problems are caused by something toxic deposited in the ground. A review of the building’s previous occupants, messy neighbors, and the fireplace down the street, combined with a glimpse of old aerial photos, makes up what is known as a Phase I environmental report.
Usually this does the trick and provides a good checkup. If environmental concerns increase – such as stained concrete or waste containers – a phase two will be used. The soil boreholes are sampled and tested. Recommendations range from no further action to remediation.
Have you ever seen a bunch of dirt inside the yellow tape next to a gas pump at your local station? No, this is not an episode of CSI. Aeration is one way to remove bad things from the floor. Allow $ 2,500 for subsequent phases if corrective action is required.
Legal: You’re going to want a lawyer to review the purchase agreement, the title commitment, and prepare your LLC incorporation documents. Budget about $ 10,000.
Escrow and title: Sure, the seller pays for a standard policy, but any lender policy or extended coverage is up to you. Plus, you’ll pay half the escrow fee. Another $ 10,000, but it depends on the size of the deal.
Investigation: This is not always necessary, unless you are looking for an extended title insurance policy. Unregistered easements, abandoned driveways and registered leases are generally not covered by a standard policy. The locations of utilities, property lines and underground pipelines are also clearly mapped. $ 5,000 is reasonable.
Loan points: In addition to the interest payments owed over the life of your debt, you will pay a percentage of your loan amount to the bank. 1-2% is pretty typical.
Cost segregation: One of the really cool things about owning a commercial property is the depreciation that lowers your tax burden. The improved part of your plot – the buildings – is depreciable over 39 years on a straight-line basis – 1 / 39th each year. But other components of the upgrades such as walls, doors, glass, and air conditioning have a shorter useful life and, if properly separated, can pay for itself sooner. Usually your CPA can help. She will want to be paid, however. $ 15,000 seems fair.
Once you become an owner, collect and total your recipes. Add everything you spent to the 10-30% down payment. What results is the “real” investment in your purchase.
Allen C. Buchanan, SIOR, is Principal at Lee & Associates Commercial Real Estate Services in Orange. He can be contacted at [email protected] or 714.564.7104.
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