Buying commercial property

Press, 25 February 1987, Page 53

Buying commercial property

Real estate agents say that most newcomers to commercial and industrial real estate investment become- glassy-eyed when the facts about what their money will buy are explained to them.

"Many have little idea about the nuts and bolts of a deal,” said one manager whose agency specialises in commercial real estate. “They read a few advertisements in a newspaper and pick out a couple and say, ‘We’ll have a look at these ones.’ That’s fine, it’s our job to service such clients, but coming in that cold they are likely to be jolted by the realities.”

Another agent made similar comments, adding: “We get prospective purchasers coming in with something like $lOO,OOO or $200,000 cash. They are interested in buying a big property, perhaps a multi-unit factory development, and because they have cash they confidently expect to beat the vendor down to secure a really good deal. We try to let them down gently.” The agents said that in the main centres and commercially industrially active provincial centres such as Tauranga and Rotorua, prospective purchasers would perhaps only get a single factory unit for $200,000 to $300,000. “What is more,” said one agent, “the chances of beating a developer down on price just

because the would-be-buyer has cash, are not brilliant, to say the least They might win some concession but it pays to remember that professional developers usually are very hard businessmen.”

Still, property prices have to be pitched right in order to attract buyer interest. If that is the case, then how does one judge what is its true market price?

That can be a little difficult for first-time investors, say the agents. In many cases, the properties are new premises with no tenancies, which means no values have been established. Ordinarily, would-be-investors would be unwise to buy unoccupied property, but in the case of buildings under construction some developers are prepared to guarantee a rental — say for three months beyond the agreed possession date. With that guarantee, the investor has breathing space — a time for prospective tenants to be attracted to view the completed or near completed premises.

In other cases, the asking price will be known, as well as the income and average outgoings, leaving the would-be purchaser to work out his prospective return — and that might have even been advertised — i.e. “A sound investment returning 10 per cent net.” There may also be independent valuations on hand, or

the purchaser could secure his own before committing himself/ herself. When locating a suitable property, (with or without the help of a real estate agent), it is usual for the buyer and seller to both sign, a conditional sale and purchase agreement which will be subject to the purchaser’s solicitor checking out the contract, lease(s), title (for any caveats or easements). In addition there is often a finance clause, giving the purchaser four weeks to raise $X at an interest rate not exceeding X%. In larger deals of $750,000-plus or even smaller properties which are expected to produce keen competition among purchasers, the vendor would probably insist on the would-be purchaser fronting up with an unconditional contract.

By this stage, * the intending purchaser should be thoroughly conversant with all aspects of the property, including likely longterm expenditure on structural maintenance, the stability of tenants, provisions for rent reviews and how rentals compare with market rates for similar neighbourhood tenancies. It is usual for the purchaser’s solicitor or accountant to check out the tenants, asking about the shareholding, securing references from their bankers and suppliers and where necessary, speaking to former landlords

about the tenants’ reliability in paying rent and other dues and the reason why they left their former premises. The degree of this inquiry would depend on the risk perceived, with tenants ranging from, , say, a branch of a trustee savings bank to a mechanic who decided to set up his own business after seeing his previous employer buy a new Jaguar and always being able to find time to play Wednesday afternoon golf. At the same time the intending purchaser should be prepared for possible tenant inquiries into his ability to operate and maintain his investment because it vitally affects the security of their own business investments and endeavours. Property .investment is not something to rush into, there are many considerations. But if the investor reacts slowly he could miss the property of his dream. The first priority is to be prepared — do all your homework, consult advisers, try to get a feel for the property investment market — and then and only then make your first decisive moves. Next month’s article will have more about tenancies and detail an actual investment property purchase. Mr McGregor is Editor of the New Zealand Real Estate Journal.