Buying Industrial Real Estate
Buying Industrial real estate has an established process. The process can be varied, and there are no rules saying that it must be done this way.
However, knowing how the process normally works does make it much easier.
Buyers will usually come from one of 2 groups – owner / occupiers or investors. Which group the buyer comes from will drive much of the process.
OWNER / OCCUPIERS
Generally the owner/ occupiers impetus to purchase is driven by a need for space to house a business. But then there are a myriad of other factors which the potential owner/ occupier should decide on before they even go looking at property – and determine which factors are non-negotiable, and which are flexible. Amongst these are:
- Geographic location
- Proximity to street
- Cubic content
- Office/ warehouse ratio
- Stud height
- Street appeal
- Yard space
- Stand alone or unit tile
Obviously there are trade-offs. It’s hard to find the perfect building in all respects. The quantity of industrial building stock is not only substantially less than residential availability, but varies much more - mainly in terms of size. Whereas a family looking for a new home may be able to utilise a 5 bedroom home when they really want 3 bedrooms, it is much harder for a business to justify paying for 1000 square metres when they really only need 100.
Most commercial / industrial real estate is normally sold or leased through real estate agents who specialise in commercial / industrial properties. They will usually have access to a wide range of properties and are therefore in a good position to meet buyers/tenants needs. Most agents do work a particular geographical area – so be aware that if you are considering more than one area , you may have to talk to more than one agent.
As in any field, there are good and bad agents, and active and lazy agents. So, ask around first to get advice on who are the better agents. Be aware also, that although theoretically agents within a particular company have access to all the listings within that company, the reality is that many agents only work their own listings – as they get more commission by listing and selling – not just selling.
Investors are generally looking for a return on their investment that is better than they can get in the bank. Obviously the risks in property are greater than money in the bank - the property may be untenanted for a period, or the property may need major maintenance. Generally the rate of return (yield ) will reflect these factors. Investment properties will very often be promoted as offerring a "yield' , that being the rental figure divided by the cost.
There are two major factors that experienced investors will be aware of with regard to yields, that are often overlooked.
- No income = zero yield Often a vacant property is advertised as having a particular yield, which is of course nonsense. It has a potential yield, which it will cost fees, effort and time to realise.
- A yield is not a return on investment. From the yield (or the rental the tenant is paying) needs to be deducted management costs, plus maintenance and other extraordinary costs the tenant does not pay.
The price of a property will be determined differently by investors and owner-occupiers. The owner-occupier will view the price dependent on it's utility, or usefullness, and the cost of the funds required to purchase.Whereas the investor will be driven by the yield.
As with lending for any other purposes, the banks want to be assurred of a borrower's ability to repay, plus, if it all goes wrong, that they can sell the building up and get their money back.
As there is not as ready a market for commercial/industrial property as there is for residential, lenders tend to be more conservative in their approach. Generally most banks will only lend up to a maximum of 50% - and then be reliant on valuations, cashflow etc
Obviously this makes leveraged purchasing more difficult than in the residential market.
Whilst similar to the process involved in purchasing residential property, there are some differences.There are no hard and fast rules, but very often the process will involve:
- A sale and purchase contract will be drawn up by a real estate agent, with an offer price.
The contract will include clauses which determine whether either or both parties are GST registered , and the purpose the property is to be used for, which will determine whether the transaction is liable for GST.
- The contract will often contain a "due diligence" clause. This is essentially a period of time during which the potential purchaser can investigate the property, knowing that she has secured it, but also knowing that the contract can be cancelled if something untoward is found. The big advantage of due diligence is that these investigations cost money, but it is money spent knowing that the property has been secured. Spending the money on investigations before the property is secured can be money wasted if another buyer appears – which can often happen in a buoyant market.
- Once the contract is agreed by both parties,often the clock starts ticking on, generally, three processes : LIM, Finance and Due Diligence. The contract will often outline that time is required for the purchaser to obtain a LIM, obtain finance and conduct their due diligence. Obviously vendors will be reluctant to accept long due diligence periods as effectively this takes the property off the market for that time. To combat this removal from the market often vendors will include a "cash out" clause. This provides that if during the due diligence period another buyer comes along with an offer that is unconditional, then the original buyer has a period of time, usually 48 hours, to either declare the contract unconditional, or step out of the way.
- Once the buyer declares the conditions (LIM, Finance, Due Diligence and any other conditions) unconditional, then the deposit is payable.
From there it is normally up to the lawyers to conduct the settlement , or transfer, of the property.
The sale and purchase of commercial /industrial real estate contains a huge number of variables – possibly the greatest one being that buyers will see different values dependent on their viewpoint. With of course the irony being that often a vacant property , producing zero income, can actually be worth more than an income producing property.
The availability of bank finance for commercial property purchase varies with the gneral economic landscape. However, there are certain basic concepts to keep in mind:
1) The LVR (Loan to Value ratio) is significantly different when purchasing commercial real estate than when purchasing residential real estate. With residential you may be able to purchase with a 10% (or 5% or 20%) deposit. With commercial property a rule of thumb would be 50%.
2) The purchasing experience will be made much easier if you have a bank "pre-approval". This is not a bank offer of finance, but a process whereby the bank gives an indication they they, provided the property stacks up, with be prepared to favourably consider providing finance. Before considering an offer for a specific property, having the knowledge that you have pre-approval for a certain funding level will remove a part of one of the hurdles.
3) The general economic landscape will have a significant impact on the length of time a bank takes to make a decision on your application for funding. If the banks are not particulary anxious to lend, then they slow the process down. One of the ways in which they slow the process is by asking for information on a "drip feed" basis. They will ask for certain information at the start of the process, then days or weeks later want more, then later will want even more. The more information you can provide right at the start, the quicker and easier the process will be.
4) A bank will usually want not just security over the property you are intending to purchase, but security over any other assets you possess, plus (probably) your personal guarantee as well. Additionally, if you are an owner-occupier, they will want details of your business, and to be assured that the underlying business occupying the property is sound and profitable.
5) The time it takes to have the finance approved will always be longer than you think.