6 Questions to Ask Before Buying Florida Commercial Real Estate
Investing in commercial real estate is no small undertaking. Few purchasers sign agreements to buy commercial property on a whim or without conducting significant due diligence to determine whether the purchase makes sense and whether it will lead to lucrative returns.
Part of that due diligence involves asking questions – of yourself and others. Knowing what you want to achieve with your investment is the first step in determining whether a given opportunity fits the bill.
Here are six questions all prospective buyers of commercial property should get answers to before taking the plunge:
- Are you in the right place? Location, location, location. That is not just a platitude about real estate. For commercial property, the success or failure of your investment often comes down to whether the property is in an area which can attract renters and consistently deliver high occupancy rates. That can often depend on the nature of the commercial property. What may make for an attractive industrial or warehouse property may be a wasteland for retail tenants who need visibility and customer traffic. Also, consider the area of your investment on a macro level, looking at the longer-term economic, employment, and population projections.
- How are the existing tenants? You will want to look at the property’s rent rolls, tenant payment history, and credit histories for current tenants to evaluate the risks of default. Also, determine whether the leases have been personally guaranteed by a tenant’s principal as that can offer another level of protection against any arrearages or defaults.
- Can you get a pro forma? A pro forma is a document which lists the details of expenses and income related to the property. The pro forma will show you the net operating income (NOI) for the property. This information will help you calculate the expected return on investment.
- Are there any defects with title or the physical plant? You don’t want to invest in a property only to discover that you need to expend huge sums on necessary repairs to a building or remediating other issues with the property. Similarly, you need to know of the existence of any liens, easements, title issues, or other encumbrances which could lead to costly disputes.
- How much time will be involved in managing the property? When you buy commercial property, you are also buying the day-to-day and long-term responsibilities involved in managing the property. If you are a first-time commercial property investor, it is important not to underestimate the time commitment involved in property management. Existing leases may make you responsible for all of the maintenance of the property. While you can hire someone else to manage your property, make sure you factor in the costs of retaining a management company into your calculations.
- How much can you afford? There are no guarantees or givens when investing in commercial property. Your investment could be a huge success or a costly albatross. Make sure you know how much debt you can afford to assume and consider establishing a reserve to pay for unexpected expenses or repairs.
At McDonald Fleming Moorhead, our Pensacola commercial real estate attorneys understand the issues commercial property investors face in Florida and have experience working with investors from Florida and out-of-state. Our knowledge of specific real estate development issues helps us better understand our clients’ needs, and we can walk you through the entire process.
Board Certified Real Estate Attorney Stephen R. Moorhead has been general counsel to the Home Builders Association of West Florida, Inc. for nearly 20 years and has represented a host of commercial buyers, sellers, and investors. builders and developers. R. Todd Harris has significant experience in land use approvals having appeared before the following counties in Northwest Florida: Bay, Escambia, Okaloosa, Santa Rosa and Walton, as well as numerous other governmental agencies.