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How do I find a lender for an office building?
You will probably have to talk to the commercial real estate lender from several financial institutions. Titles and authority vary widely. Be sure to mention the approximate purchase price and the part of town where your office building is located. Ask to be referred to the appropriate people in that lender's company.
Should I buy an office building with one or two large tenants or many smaller tenants?
The answer to this question depends on the tenant, your risk tolerance, your financial resources, and what I call the "fooling with it" factor. One or two large tenants can mean nice steady income for many years with a minimum of headaches. The hurt comes when that tenant moves out. The space can remain vacant for a year, sometimes more, until another large tenant can be found. You may have to remodel the space for the new tenant, or to split it into smaller offices for multiple tenants. Office tenants desiring larger space generally expect the landlord to fund a certain amount of what is called tenant improvements - TI for short. This could include something as simple as new paint and floor covering to something as large as gutting the space and installing all new walls, doors, lighting, finishes, and cabinetry. The landlord eventually recoups the money from the tenant through higher rents but must front the expenses. That requires a good bit of financial strength with either cash or borrowing power.
Most new investors will not be able to pay the TI up front. The good news is smaller office dwellers do not typically expect this. They are usually happy with new paint and carpet, or even new paint and carpet cleaning. They are generally more flexible regarding office layout. Part of the reason is that they have fewer choices in the marketplace. Large apartment buildings rarely want to fool with small tenants. Most will not rent less than 5,000 square feet to anyone at all. Smaller tenants generally require something in the range of 800 to 3,000 square feet. Beginning investors should usually focus on office buildings with many smaller tenants. If you can find a single-tenant office building with a national company and nine years left on a ten-year lease, you will probably be facing a bidding war among nationwide investors. It is unlikely that you will be the successful bidder.
Should I hire a management company?
This is a matter of your own time and strengths, and the size of the property. Smaller office buildings may not support the expense of a management company. A residential management company will usually keep tenants in your property without charging any additional fees. A commercial property management company typically charges one fee for pure management and a separate percentage for obtaining new tenants. Make sure you cover that in advance, and have a clear understanding of all fees and expenses. Commercial management companies are also more likely to charge you for copies, long distance calls, mileage, and other such internal expenses.
When I am ready to sell my offices, what is the best way to find a buyer?
Your three best prospects for a buyer are:
- existing tenants who would prefer to own rather than rent;
- other owner-clients of your current property management firm, if you have one. It is an easy decision for clients to buy more properties if they are satisfied with their property managers; and,
- landlords who own nearby, similar properties. Find them by driving around and doing research in the real estate records or by asking tenants who owns their buildings.
If these obvious sources of buyers do not work, think about hiring a real estate broker or doing some intensive advertising and marketing. It is usually harder to find a buyer for a commercial property than for a home. The potential buyers are spread over a wider geographic area and take longer to make decisions. A broker will usually ask for a one-year listing agreement and a higher commission because of that. Many office building investors choose a strategy of buying properties, improving occupancies and rental rates, and then selling the building for a large profit. Tenant selection can be an important part of that strategy.Try to find at least one good local tenant who has the possibility of buying your building in the future. If it does well at that location, he or she might want to be a property owner rather than a tenant in a few years. The other tenants in the building could remain in place, providing valuable rental income, until the tenantowner needs to expand and take over additional space. Law firm tenants are always good prospects for this strategy, which is called grow your own buyer.