Ready to buy in?


Contrary to the home real estate market today, sellers have the upper hand
in commercial investment property transactions. Attractive capitalization rates
are encouraging investors to present developers with competitive offers. Meanwhile,
current owners are being pursued by buyers who sold a previous property to avoid
capital gains taxes and must reinvest in a
new real estate project before their escrow
deadlines. Both factors drive up property
value.

“You are competing in a scenario where
there are a lot of dollars chasing different
projects,” says Steve Nielsen, senior vice
president of commercial real estate at Sky
Bank in Northeast Ohio. “If a property is in
a good location with a stable occupancy, a
decent tenant mix and longer-term leases,
it is definitely a seller’s market.”

A number of creative lease-to-own programs allow business owners to settle into
a purchase arrangement over time. And the
Midwest’s historically stable real estate
market, along with overall low interest
rates, sweeten the deal for those who
decide now is the time to invest.

Smart Business asked Nielsen to discuss
strategies for investing in commercial real
estate and the state of today’s market.

What market factors will buyers of commercial property face today?

Northeast Ohio is not considered a
growth market for real estate, but it has
always been a solid market. The Midwest
avoids the roller-coaster ride and fluctuations of highs and lows that some markets
face. This area is more of a steady road,
and it is a dependable region to invest in
commercial real estate. But what buyers
must consider is the phrase you always
hear in real estate: location, location, location. Wherever you invest, how attractive is
that location to other potential suitors?
And is it a building that has a stable tenant
history?

What investment opportunities do you see in
the retail and office space sectors?

Currently, retail property is saturated in Northeast Ohio, with the exception of
small pockets of growth. Development
tends to follow the job market. Vacancy
rates in Class A buildings are stable, but
you don’t see a lot of new building projects
because there is sufficient space out there
to satisfy tenant demand. Meanwhile, capitalization rates are lower than five years
ago, which drives up the value of property.
So you’ll find investment properties for
sale because owners want to see if they
can reap the profits of this attractive market. This means buyers may have some
competition at the dealing table.

What does a business owner who is interested in buying office space need to bring to the
table?

Typically, banks will require about 20 percent down for a commercial real estate
loan. So, if you are considering a property
that is $5 million, you’ll need $1 million for
a down payment. And with the way leases
are structured these days, the tenant pays
operating expenses. Is it in your best interest to buy or lease? The first question you
must consider is whether you have the capital to lay out for a down payment to purchase a building. Second, are you prepared
to assume the responsibility of covering the expense to maintain and repair the
facility?

Are there creative options for business owners who can’t lay down that kind of capital but
still want to invest in commercial property?

There are various ways to structure a
lease, and many lease-to-buy arrangements
can help you defray the cost of the down
payment. For example, a lease may offer
you the option to buy at a certain point in
time during the lease term. Lease payments
may be structured so that a percentage
each month goes toward the purchase
price. Other leases offer first right of
refusal. This type of agreement does not
bind you into an eventual purchase agreement, but instead says that you have the
first chance to buy the property if the
owner decides to sell it during your lease
term. These are a couple of lease-to-own
options, and there are many more.
Essentially, you could enter an agreement
where you earn that $1 million down payment over a 10-year lease period.

Is it better for business owners to buy or
lease these days?

It depends. The interest rate environment
has been attractive for some time. But you
must decide whether you want to put this
asset (investment real estate) on your balance sheet. It will affect your debt ratio,
and there are some accounting pros and
cons to purchasing a building. So you
should consult with an accountant to
determine if this is truly a suitable investment for your business.

STEVE NIELSEN is senior vice president of commercial real
estate for Sky Bank in Northeast Ohio. Reach him at
[email protected] or (330) 628-8709.