Legal and Financial Tips for Buying Commercial Real Estate

Commercial Real Estate: Rent vs Buy?

Considering investing in commercial real estate for your business? Learn the pros and cons of owning vs. renting for your business needs.

Mandi Hunter, the founder of Kansas City's first full-service standalone real estate law firm, Hunter Law Group, joins us to share her knowledge. 

Key Topics:

• Timing: Considering interest rates, cash flow, and business growth stages before making a purchase.

• Due Diligence: Understanding the importance of thorough due diligence before buying commercial real estate. That means getting your surveys, appraisals, environmental assessments, and title work done right.

• Legal Contracts: What legal contracts are associated with commercial property purchases.

• Cash Flow Assessment: Strategies for assessing your business's financial readiness for commercial property ownership.

• Property Maintenance: Responsibilities and considerations for maintaining commercial properties. 

Links:

Connect with Mandi Hunter - www.hunterlawgroup.com

Time Stamps

00:25 Meet Mandy Hunter: Real Estate Law Expert

01:27 Understanding Commercial Real Estate

02:30 Financing and Cash Flow Considerations

04:23 Legal Aspects and Due Diligence

10:36 Leasing vs. Buying: Key Differences

19:49 Common Mistakes in Commercial Real Estate

26:39 Conclusion and Final Thoughts

• Transcript

  Introduction and Welcome

  Welcome to me financial the podcast designed to inspire your financial life. Hello everyone and welcome to the podcast. I am Michelle Moses, your host, and today we are going to be talking about buying commercial real estate as an investment or for your business and the things that you need to be aware of legally in order to do that.

  
  Meet Mandy Hunter: Real Estate Law Expert

  And to talk about that, Mandy Hunter is joining us. Mandy is the founder of Kansas city's first full service, standalone real estate law firm, Hunter Law Group, and can't and recognized several times as an elite super attorney by her peers. Sorry about that. Pause guys, uh, Mandy and her team represent their clients in a wide variety of transactions and litigation, primarily in matters involving real estate.

  Thank you for joining us, Mandy. Thank you for having me. I'm excited. It's exciting to be here and excited to discuss the real estate market. Mandy, uh, knows her stuff, [00:01:00] you guys. She is like really, uh, killing it in the Kansas city area when it comes to real estate. And I am honored to have her on the show.

  And she is a good friend of mine from high school. We were actually like best friends. And so we are going to switch gears. We don't normally talk about all of this stuff. stuff. And so we are going to be talking business today instead of families and kids and all of that. Yeah. Yeah. So thank you. Okay.

  
  Understanding Commercial Real Estate

  So, uh, can we just get started about commercial real estate?

  Are we talking when you talk commercial real estate, is it everything except for land and residential? So typically when people reference commercial real estate, they mean anything that is income generating anything that you're going to make money off of. So land could be, could be, you know, have a commercial venture to it.

  Um, you know, real like residential properties that are investment properties could be a commercial venture. But I mean, that's typically what, [00:02:00] what they mean. I mean, usually I think people, you know, Would say that it is office space or retail or industrial. Mm-Hmm. . But it really, I mean, that's really what it means is that it's gonna be, it's, you're gonna be making money off of it.

  Okay. And that, and I think most people think of it as in, you know, their business or it's a retail bus, you know, office space or a retail business. Right. Or you're going to be buying something and then, uh, having an office and then renting the other offices to other people too, or, you know, correct. Things like that.

  Okay. Right.

  
  Financing and Cash Flow Considerations

  So is there a certain time in your business. This is what I'm very interested in that it would be more beneficial to buy a commercial property than others. I mean, or is it just more like you just know you're going to be in the same place for a really long time? Well, I think that, yeah, I think that there's certain factors that you've got to look at.

  I mean, one thing that is driving the market right now is the interest rates. Um, so that is, you know, can you afford the, you know, not just The cost of the building, but whatever the cost of [00:03:00] your loan is going to be over the, over the term. Um, the other thing you've got to look at is, you know, what, what's your cashflow like in your business?

  Does your cashflow allow you to have extra money for, um, maintenance of the building, for the taxes, for the insurance, you know, anything that you might need? I mean, what if the parking lot needs to be repaired? What if the roof falls in? Um, Um, you've got to think about the cash flow of your business and not be so strapped with your monthly payment, plus your interest rates, that it wouldn't make sense for you to buy.

  Um, so, I mean, those are the monetary things that you need to think about. The other thing you ought to think about too is, where are you in your business? Do you have, um, are you in a growth mode? where you may not, you know, maybe you're going to double in size in five years. And so maybe that is not the time to make an investment of buying a building, or maybe you're stable and [00:04:00] you know that you're whatever business you're in is going to remain stable.

  And so you can go out and you can buy the 10, 000 square foot warehouse or the 5, 000 square foot office building, and you're and you're okay with it because you're going to be in it for the long term. So I think those are just some of the things that you probably need to need to think about before you buy.

  I didn't even think about like the parking lot and all that kind of stuff.

  
  Legal Aspects and Due Diligence

  So when you are when people come to you and want, have they already secured financing when they come to you as a lawyer, like you're doing the legal or do they come to you first or just kind of depends? Um, it just kind of, I mean, it just kind of depends.

  I mean, sometimes, um, you know, people, I mean, you know, remember, I'm also a real estate agent. And so I've got, so I see both sides. So I've got, um, You know, as an attorney, usually they have found the building and they want to go through the transaction, um, on the, on the real estate side with the, with the brokerage, [00:05:00] Cerrone Hunter Real Estate Advisory Group.

  Um, you know, they may, people may just be looking for, you know, they may be in the initial stages. So, um, but, you know, if someone, if someone comes to us and they're like, hey, I want to put an offer on this building, um, there's, you know, there's several things to think about. One is. You know, what, uh, what it's part of it is the contract, but then part of it is okay.

  There's an old building. Is it a new building? Are there other tenants in the building? Are there not? Are you, um, You know, do you have a lender in place? Mm-Hmm. . If not, we can help you get that. Do you need a survey? Depends on where you're at. I mean, a lot of times it's a survey, an appraisal for a commercial building.

  Mm-Hmm. Oh, okay. So a survey. So a survey is where the people that go out and they. And so that determines the [00:06:00] boundaries of your building. It's based on your, it's based on legal description. So it's rarely done in residential sales. It's mostly done in commercial sales. And a lot of times commercial lenders require a survey.

  Um, so, you know, you've got to look at. look at, do you have a lender? Do you have a surveyor? Do you need an environmental done? Like an environmental, like a phase one is where they just go out and make sure there's no, no, um, it's basic, just making sure that there's no toxins in the ground. Um, a phase two goes into, into additional, um, additional depth, you know, and then the biggest thing too, when a transaction is, do you have a title company?

  So the title company is really going to guide the process, at least in the Kansas and Missouri markets. A title company really guides the process. So, um, so do people have financing when they come to us? Maybe, maybe not. Um, I mean, it just kind of depends. And if they don't, we can help them get there. Okay.

  And right now, aren't the rates lower for commercial real estate than they are for residential? Or is that not true right [00:07:00] now? Um, you know what? I think they're coming down, but I don't, um, But I don't know, like I, I don't know, I mean, it'll be changed by the time this is released anyway, but a couple months ago they were lower.

  So I thought that was interesting that people, there was that incentive. Okay. I mean, like I know that I was talking to somebody recently who, um, was looking at a potential SBA loan and their rates were like nine something percent. Um, you know, I mean, the higher the dollar value, the less. Interest, you know, the less the interest rate is likely gonna be.

  Mm-Hmm. . Um, but, um, but I don't, it is just kind of in a state of flux. Okay. So I think it just kind of depends. So, so basically with your advisory firm, then somebody could just come to you without anything and just say, Hey, I really wanna buy a building and I'm a Yeah. You know, I sell. You know, body lotion and I need a building to sell it out of.

  Right. I need a 10, 000 [00:08:00] square foot building to sell my body lotion. I need like two, um, two, you know, doors, you know, garage doors that go up so we can have trucks back up to it. Um, what can you find me? Okay. And you, I'm assuming you help them figure that out too, because they probably, some people probably don't even think about like, Oh, well we could just use the dot, you know, that you probably go through and say, okay, what kind of deliveries do you get and what kind of customers do you have come to and how many people and how much parking and all that kind of stuff.

  Correct. Yeah. Yeah. I mean, yeah, I think that's, um, Yeah, I mean, parking is a, is a, you know, when you're looking at buying something, I mean, you know, do you have, um, how many employees do you have? Do they have to park there? Do you have, um, is it retail where you've got people coming in and out all the time or not?

  Um, you know, cause you see that in the, with the development of some of the, uh, Older areas now in Kansas City, probably Phoenix is the same way where, [00:09:00] um, parking may be at a premium. And so you have to think about does the, does the parking fit your needs for your business? I mean, it doesn't do you any good to have a retail space if you don't have parking for people to come in and out.

  Well, and then do you help them too? Or like, what if they have to build it out? What if it is a retail space and they need to make it pretty inside? Uh, do you help them price that out too? And is that, does that go into, or is that completely separate? Like you buy the building and then there's like a completely separate loan for all the construction costs for the build outs.

  So it just depends. So, um, so what we do is like, we would get, make introductions to, you know, construction companies that would do the, that would do the build out. But the, um, Some banks will wrap up the construction with the building purchase, and they will do one loan for both. Some banks will not. So, um, the, the [00:10:00] local, the, You know, the lending market right now, from what I hear, I mean, I'm not a banker, but from what I hear the, um, banks have got a lot of construction loans on their books.

  And so they may be a risk averse bank may not be inclined to make any investments. may not be inclined to loan additional money on construction right now. So, um, so we'll see. I mean, as those start to get paid off, you know, there should be a, an upswing and banks being willing to do that, but just kind of depends on the bank that you go to.

  Right. So it's just kind of shop around just like any other, yeah, any other option.

  
  Leasing vs. Buying: Key Differences

  So is there a difference between someone that just wants to invest? In a building, like they just want it as like a passive income money maker to be an office space or, you know, is, are the paths different if you're just wanting it as an investment versus, you know, to house your business?

  Yeah, I, oh yeah, for sure. Because like, as a, um, so if you [00:11:00] were, um. If you are going to be an owner occupied building, right, so you are going to go out and you're going to buy a building that is going to that's going to have your business in it. You are essentially looking at what are you going to pay if you had to lease space?

  You know, what would your rental rate be? There, versus what your rate would be on your, does Phoenix have deeds of, do they have mortgages and notes? Okay. So you're going to look at like, what would you, what would it be to rent versus what your payment is going to be for your, on your, on your loan? Um, and then, so you've got to look at, so you've got to look at, look at that.

  Um. In some cases, like right now, the Kansas City market, there is, it seems to be a real drive for 5, [00:12:00] 000 square foot and under office space. So the rates on those are going Which that kind of makes sense now that there's like more work from home and hybrid that you don't need to house everybody. Yeah, right.

  So they're reducing, so the, so the smaller office space I think is, is in more demand. So the Once you lease a space and you've got your TI, your tenant improvement costs, you have to evaluate whether that is going to be the same as what you would pay to buy a building. You know, what that would be to buy your own space, okay?

  And so you've got to weigh those two things. Now an investor has to look at How much money are they making on the building? So an owner, an owner, I mean, is going to look at, okay, is this, if I'm paying 10, 000 in rent versus 10, 000 on my loan, well, I'd rather just, you know, build [00:13:00] equity in a building and buy and buy it.

  Um, whereas an investor is going to be like, okay, well, you're going to pay 10, 000, but I want, also wanted to make 30, 000. At least 7% or whatever would be, you know, they're hedging their bets against the market. Right. Or they're trying to diversify. And that's what I always, I found so surprising with commercial real estate was that when you're a retail company, that a lot of times they would take, you know, charge you a fee or a rent and then a certain percentage of your sales.

  And then also you're paying for the upgrades inside of it and I was like, man, I don't know how they even like afford to be in these spaces. Right, right. So then at that point, which I, you know, the Kansas City market, I think is a little bit that way right now. You're like, okay, well, um, It may not make sense to rent, you know, I mean, it may make more sense to try to find something to buy, um, you know, but again, it depends.

  It like I said in the beginning, it depends on your cash flow. It depends on what type of business you have. Are you stable or are you growing, you know, things like that. But I think from the [00:14:00] investor, um, Um, You know, the investors may be looking for buildings that already have existing tenants, right?

  They're not going to be using it and they, or maybe they are, but they know that they're going to be making. You know, six, seven, eight, 10 percent or at least, you know, on their money. So, yeah, so I think that that's what they're, you know, I think that that's what the difference between an investor and a buyer.

  Okay. And then if somebody comes to you, so let's say somebody like me, where's, To come to your advisory company, and so then what happens? I just say, okay, I'm interested in buying a building. Do you have like a fee to go through my business and my needs and all of that? Like is there like an assessment done or, you know, or, or is it just kind of you just talk and then start stuff starts rolling.

  You know, that's a good question. I mean, really your fee is, comes from a commission. If you, you know, from the real estate, like from the real estate brokerage, from that aspect, your fee is going to be, is going to be [00:15:00] from the commission. And so you're just doing what's best for your client based on the needs, you know, from the, our, when people come to the law firm, um, You know, they already have the building and we're working on the contract or, you know, that's, that's an on a, we usually do that on an hourly basis.

  Okay. Okay. So that kind of is my next segue is so when you buy a new business or you're buying a new building, what kind of legal things need to be in your contract? Because that always fascinates me because it is so different than anything else I've seen. Yeah, so I think like one of the biggest things right now, and this just depends on where you're at, like in the country and stuff, but one of the biggest hangups right now is, um, is the due diligence.

  And so your due diligence is typically, you're going to get your title work, you're going to go out and you're going to get your survey, you're going to get your phase one, you're going to get all the documents, you're going to figure out You're going to bring your structural engineer out. You're going to bring [00:16:00] out anybody that you need to that you need to make sure that this building is going to suit your needs.

  And I think that, um, what I don't know what exactly is driving this, but it's taking. It's taking a long time in Kansas City like your surveys are going to be, it'll take you six to eight weeks to get a surveyor out to the property and then they've got to do the report after that. So, um, so the due diligence, you know, a lot of people, they want a fast close.

  They want, um. You know, they're, they're, they'll say 30, 45 days and then they don't, and then the buyer doesn't negotiate an extension. And that is really problematic. Oh, so it's really important when you're negotiating in the first place that you need an extension if the due diligence goes long. Okay.

  Yeah. Cause I mean, your due diligence, like, I mean, realistically, like in the Kansas city market is going to be, you know, [00:17:00] You know, I, I'd say at least 90 days and so, um, so you've got, you know, you've got to be able to have that. I mean, I think I see that a lot because you pay all the money, you know, the buyer, the prospective buyer.

  They put this building under contract and then they have, they pay to have the engineer go out, they pay to have the surveyor go out, they pay, you know, so they're spending thousands of dollars to have these professionals go out and then if they don't have an extension in there. They just wasted all that money.

  Correct. Yeah. So because if it's, um, you know, it does happen where like, say you get it under contract, but then there's a backup offer that may be better. Maybe it's more enticing for the, for the seller and a seller that. You know, they, they may use that legal avenue to get out of the contract so they can take the higher contract.

  Right. Yeah, so it really is really different between renting. Or leasing a space versus [00:18:00] buying, because I mean, once you buy it, I mean, really, it's all your due diligence and doing all of that negotiating versus if you're leasing. I mean, there's this like, so we could probably do a whole show on that, right?

  I mean, all the little things that you would need to negotiate in a contract. The other thing too, that I see, I'm seeing a lot in the Kansas City market in terms of leasing is, um, Is I don't know, I don't know why in the last 6 months, there's just been a lot of issues with like cam charges, like the common area maintenance, you know, those are typically, um, if a tenant is responsible for the common area maintenance, um.

  Those are it's typically it's it's you know, they charge it out over the year like you pay an estimate and then and then at the end of the year, it'll be reconciled. And so we've just seen a lot of issues with that. So I just think with if you're going to be entering into a commercial lease with a landlord, you just really need to know what Is your responsibility for your [00:19:00] payments?

  You know, I mean, you're going to pay your monthly amount, but then what else, what other types of operating expenses are you going to be responsible for? And I've seen some of your posts too, where you're talking about with a lease of, I feel like ways that the landlord can get out of it or something, like the things that would void it that are like surprising or like people are very surprised at all the little things that are in there that get like snuck in.

  Uh, yeah, that I feel like it should always be reviewed by a lawyer, honestly. Right. Typically, I will say that the, that the contract that is presented by the landlord is probably written in the landlord's favor. So, um, So, yeah, always get a lawyer. Yeah. You should always, you should always have a lawyer, lawyer review it, so, yeah.

  Yeah. Don't be cheap on that kind of stuff. Okay. Yeah. Yeah. Okay.

  
  Common Mistakes in Commercial Real Estate

  And then, uh, what are some things that you see, like, so if people are buying a commercial property, what are some things that you see people mess up on or that you see like mistakes? Do they try to do it on their own? [00:20:00] I, I mean, you know, without a lawyer or a bank or, I don't know.

  What are, what are some of the things that you see there are. There are any number of things. I think that, I think you're probably, you're probably right. Um, people that try to avoid the costs, those upfront costs, it is, um, you know, we're here for a reason, you know, we have a lot of experience for, you know, and it's, we're here to help our clients.

  Um, I mean, I say attorneys are, we're a helping profession and, and that's what we're here for. Um, so. Okay. I think that not having, um, not having a transaction properly documented is, um, that can be, you know, because then you're just, you're, you're relying on the goodwill of the other side. And, um, and what do you mean by properly documented?

  Do [00:21:00] you mean like going through a title company so that all the steps are like even having like a contract that is sufficient, you know, like what if somebody doesn't pay on time? Um, you know, what if somebody doesn't make their monthly payments? What default provision? You know, what are you, what happens if they don't pay?

  Are you in tight? What are you entitled to do? You know, just anything on, um, just it we see. We, we, we see lots, a lot, lots of issues in our office. And so I think that's 1 of the things the other thing to that. I think that. Is, um, that I think that even if you do, um, even if you do use a real estate agent, um, I think sometimes like sometimes tenants and buyers, they're not necessarily accounting for all of the costs associated in, you Their purchase or in their lease, like such as the operating expenses in a lease, what are your cam [00:22:00] charges gonna be?

  Um, just like I was talking about when you buy, it's your, the maintenance, you know, the maintenance of, of the, I mean if you, um, if the roof falls in. Because of a structural issue and you don't have the money to fix it. How is your building? How are you going to operate? How are your employees going to be there?

  Do you usually help them estimate? Do you help them estimate? Is that part of the advisory services that you're helping them estimate? Um, what their maintenance costs would be when they buy a building? Yes. Okay. I mean, I don't know why you would want to buy a bill. I mean, cause that's a whole new, I mean, we all kind of know about houses cause we live in them.

  Right. But I mean, commercial real estate is its own beast. And so I can't imagine going into it and just being like, okay, I'll fix the lights. And I don't know. And not knowing about like asphalt and what, cause there's so many laws that go into place about, Um, like you do need to have a, uh, handicap [00:23:00] parking and, you know, like there's so many ADA regulations and like laws that pertain to public buildings.

  Am I right about that? Yeah. Yeah. I mean, yeah, but remember there's always, um, You know, your cities are in place with, with, you know, ordinances and things to help you in terms of that. A lot of the commercial areas, at least in Kansas City, they're probably part of a retail association or some type of commercial association that may have some guidelines about it.

  Um, so yeah, I mean, you know, but you, you know, you say that and it is, you're, you, Having to account for the deferred maintenance on a building or for any type of maintenance, you know that you would do, but it's just like owning a home and when you, um, and when you think about, you know, if you are in a stable spot and your cash flow for your business is good and you think about, well, am I going to spend, am I going to pay a landlord a million [00:24:00] dollars over the next 10 years?

  Yeah. Or instead, I, you know, you could have purchased a building within that amount of time, you know, you, you, you, you bought a building and then you've got another asset in your portfolio. Yeah. Yeah. I have, I have some clients where they have a retail company and then they own the Commercial space. And, uh, I'm just bringing them up because I met with them last week and, uh, their commercial buildings, I mean, and they're just worth so much.

  And so it's like, then they can sell the business and that business will now rent back to them the building that they own. So the, the business is for sale, but the buildings aren't. And so now they're going to go into retirement, just making income from those buildings when they just sold the business.

  And it's just genius. Yes. You know, yeah. Well, yeah. And I think that that works really well on a building that has appreciated in value. Yeah, location obviously is I mean, with real estate location is a big deal, no matter what. Yeah. And so if you have, but like, if [00:25:00] you do have a building where, you know, right now, I think that this is going to be tough because of the interest rates.

  But if you have a building that, um, Yeah. That, I mean, you're seeing this a lot where people who own property and they have a building and they bought it at, they bought it at a cheaper price. Now, the rental rates in that area may be so, so much higher that they can have a holding company. And then you can rent it to the current tenant, even if it's their existing building or their existing business, you know, and then they can make that, they can, they've got a good margin where they're making some, they're making some money on it.

  Right, right. Yeah. Because if they've purchased it 10, 15 years ago and then yeah, they can kind of transition to that. Right. Yeah, I know. It's fun to see all the different ways that people put it together. I think it is anyway. Yeah. Yeah. Well, I think it sounds like you have an awesome service. I mean, the advisory, I mean, if, cause it's always intrigued me to buy a [00:26:00] commercial building and I mean, real estate is just intriguing, but, uh, the commercial side is, I think just more daunting just because again, it's not in everyone's everyday life besides just going shopping.

  And so I think it's really cool that you have, Uh, an advisory service where you could just go and say, Hey, I need some help and show me the way. Yeah. Yeah. I mean, that's, that's our goal is just to be helpful and, um, you know, kind of figure out what people's needs are. Everybody's needs are different and, um, just try to meet, meet our clients where they're at and, and try to.

  Help 'em get to where they wanna go. Yeah. Yeah. No, I think that sounds great.

  
  Conclusion and Final Thoughts

  And so now, and you mentioned before the podcast, now you're looking for a commercial building for yourself. And so I am, I just curious, are you in, is, is it hard to find one because you're looking in a certain area and there's only so many in the area of where you're looking?

  That's part of it. Um, um, that's part of it is, is the area that I want to be [00:27:00] in. And the other, um, the other part is that there's just not a lot on the market right now. So, um, I don't know, I don't know why the Kansas City area is. I don't know. I don't know what, what it is with the market with the commercial market specifically, but, um, just, yeah, there's just, yeah, yeah, there's just not tons.

  So, well, the interest rates, everything that I'm reading is that the interest rates for all these commercial buildings are going to be adjusting this year. So it will be supposed to be an interesting year. So you never know. You might get a good deal. Yeah, it will be interesting. And I do think that there's, um, The generation, you know, above us, or maybe a couple generations above us, um, a lot of them invested in real estate and a lot of them are going to start, you know, selling because they want the cash.

  And so, um, I do think we're going to start seeing a shift. Yeah. Yeah. Well, good luck. I hope you find a business building. Thanks. Yeah. Yeah. [00:28:00] Well, thanks for being on. I really learned a lot. I appreciate it. I appreciate you taking the time because I know how busy you are. And, uh, you guys, if any time it was fun.

  Yeah. And Mandy's information will be in the show notes, you guys. And if you have any questions, just let us know. And if you enjoyed the show, share it with your friends and, uh, be sure to leave us a review. So thank you so much for listening. Yeah. Go Chiefs. Yeah. Yeah. Go Chiefs. Exactly.

Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.