Buying commercial real estate in Wisconsin is not like purchasing a new family home. The costs are more, the funding is harder to get, and to top it off if you need tenants, you will have to cover the expenses of marketing, identifying, and securing new leases. Purchasing commercial property for a new investment endeavor or a new business is rewarding and can be quite profitable if the process is undertaken strategically and in compliance with state, city, and local laws.
At Heritage Law Office, our commercial real estate attorney in Wisconsin handles commercial property transactions from start to finish. We will discuss what your goals are, help you find the right property, negotiate contracts, and more. Contact us at 414-253-8500 or fill out our online form to schedule a free consultation and to learn more about our commercial real estate services.
Types of Commercial Real Estate in Wisconsin
Commercial real estate (CRE) is property used for purposes related to business rather than residential. A CRE can be a mom-and-pop store or a huge shopping mall and includes restaurants, hotels, office spaces, hospitals, and doctors' offices. CRE is generally broken down into five distinct categories: industrial use, multi-family rentals, office space, hospitality, and retail.
- Industrial Use. Industrial use properties consist of businesses that make and store goods, like manufacturing facilities and storage warehouses.
- Multi-Family Rentals. A multi-family rental is generally a large property with multiple smaller units that families rent to live in as their primary residence. They can be small, housing only a couple of families, or large, housing hundreds of families.
- Office Space. Office space is another type of CRE often considered to be the most high-risk. These properties are generally broken down into three different classes based on their condition and location: Class A for the highest quality buildings, Class B for older but still high-quality buildings, and Class C for older buildings in deep need of maintenance and care.
- Hospitality. Hospitality properties are meant for travelers and include hotels, entertainment sites, or restaurants.
- Retail. Retail properties include small stores, strip malls, and restaurants.
Commercial Real Estate Purchasing Process in Wisconsin
Buying commercial real estate can prove a valuable investment if it is handled correctly. There are various steps to purchasing a CRE, though the exact process may vary depending on the jurisdiction.
Identification of a Property
The first order of business is to locate the property to be purchased. While this may seem an easy task, there are many things that must be considered, including:
- The history of the property and whether it has the potential to provide a steady stream of income
- The location of the property, and whether this type of CRE is needed in that location
- Any work that must be done to the property to make it ready for its intended purpose
A real estate lawyer who specializes in CRE properties can help you find exactly what you are looking for in a CRE.
Decide on the Initial Offer Price
The property will definitely have an asking price, but the purchaser must do their homework to ensure they do not offer too much initially. There are different approaches used in the industry, but two of the most popular are:
- Income Capitalization Approach: This approach requires dividing the net operating income (NOI) of the rent collected on a property by the capitalization rate.
- Cost Approach: This approach requires looking at what it would cost to build the CRE from the ground up. The cost of the land combined with the cost of construction, less depreciation, will yield the cost approach value.
There may be other ways to calculate the offer price depending on the CRE being purchased. As your commercial real estate attorney in Wisconsin, we will look at all options to identify the best offer price.
Purchase and Sale Agreement
The purchase and sale agreement contains all the terms of the sale and should include everything agreed upon between the seller and purchaser. At Heritage Law Office, we will negotiate, draft, review, and analyze these agreements to ensure they favor your needs and that there is no hidden language that may negatively impact you or your property.
Financing and Inspection
Securing financing for the property can be a complicated task, but due diligence must be performed to ensure the best terms are found. You should compare several lenders before settling on one. You want to know what the interest rate is, what the fees are, and whether there are penalties. Commercial property financing options that can be employed for various purposes include:
- Permanent loans
- Small Business Administration (SBA) loans
- Bridge loans
- Hard money loans (which are a last resort but could be useful in certain situations)
In most cases, the purchaser of the CRE will put a down payment of 20-40% of the purchase price and finance the rest of the purchase price amount.
Close on the Property
Once all the terms of the agreement have been agreed upon and the financing obtained, the purchaser can move forward with buying the property. Other important matters, such as a title search and execution of the documents, must take place before the keys are actually exchanged. Once the purchase has been completed, the buyer can move forward with their plans for the CRE.
Factors to Consider before Purchasing Commercial Property
Before purchasing a CRE, there are various questions to consider, including:
- Will this property suit the needs of the investors long term?
- How hands-on are the investors willing to be in the CRE?
- How will local demographics impact this type of CRE's success?
- What are the zoning laws of the area where the CRE is located?
Other factors exist, which is why it is a good idea to hire someone who specializes in this area to provide legal and professional guidance during the purchase process.
Commercial Property for Investment Purposes
If you are purchasing commercial property for investment purposes, several different strategies exist that could prove beneficial in this type of investment. Some of the most common real estate investment strategies include:
- Land banking, which requires you to purchase and hold land and is often used to protect and grow investors' money.
- Development, which is probably the most common and is where an investor purchases raw land upon which to build.
- Fix and flip, which is a tactic popularized by reality TV and occurs when a property is purchased, renovated, and resold for a profit.
- Buy, Rehab, Rent, Refinance, Repeat (BRRRR), which is a way to enjoy passive income through flipping properties that are rented out to tenants.
- Wholesaling, which involves purchasing a contract from a property seller below market value and reselling or assigning it to an interested buyer.
- Passive investment, where you do not want to be involved in the property so you simply put capital into a real estate endeavor through a partnership with an active investor, crowdfunding, or stock market.
If you have not yet decided on how you wish to invest in commercial property, at Heritage Law Office, we can help you determine a strategy most suitable for your goals. Each strategy involves different roles, responsibilities, and requirements, and so each should be carefully considered.
Seller Disclosure Requirements in Wisconsin
Seller disclosure requirements vary from state to state. In fact, many states do not require the same (if any) disclosures for commercial properties as they do for residential properties. Some states specifically outline what information must be disclosed, while others leave it up to the seller to choose whether or not they want to disclose any information. Typically, most states still require disclosing any property defects or environmental concerns even if the property is a commercial one.
As a commercial property purchaser, it is imperative that you are aware of your jurisdiction's disclosure requirements and that you receive accurate information from the seller. You should also inspect the premises. All of this is critical if you live in a state that does not strictly regulate commercial property like they do residential properties.
Contact a Commercial Real Estate Attorney in Wisconsin Today
Buying commercial property is not simple, but it is profitable – much more profitable than residential properties, plus your money is secured to something physical helping protect it. At Heritage Law Office, our real estate attorney will guide you through any commercial property purchase, making sure the transaction goes smoothly. Contact us by filling out the online form or calling us at 414-253-8500 to schedule a free consultation and to learn more about real estate investments.
Frequently Asked Questions (FAQ)
1. What is Commercial Real Estate (CRE)?
Commercial Real Estate (CRE) is a property that is used for business purposes as opposed to residential use. It covers a broad range of categories including industrial use properties like manufacturing facilities, multi-family rentals such as large properties with multiple units for families, office spaces which are generally classified into Class A, B, and C, hospitality properties meant for travelers, and retail properties such as stores, malls, and restaurants.
2. How is the buying process of Commercial Real Estate in Wisconsin?
The process of buying a CRE begins with the identification of a property that fits the prospective owner's goals and needs. This process involves considering several factors such as the property's history, its location, and the work needed to make it ready for its intended purpose. The initial offer price is then decided based on either the income capitalization approach or the cost approach. This is followed by property inspection, negotiation, and finally closing the deal. It's recommended to have a commercial real estate attorney throughout this process to ensure all steps are done in compliance with local and state laws.
3. What are the types of Commercial Real Estate in Wisconsin?
Commercial real estate in Wisconsin includes industrial properties, multi-family rentals, office spaces, hospitality properties, and retail properties. Industrial properties include businesses that manufacture and store goods. Multi-family rentals are large properties with multiple smaller units rented as primary residences. Office spaces are classified into Class A, B, and C depending on the condition and location. Hospitality properties include hotels, entertainment sites, or restaurants. Retail properties encompass small stores, strip malls, and restaurants.
4. What are the different approaches to decide the initial offer price for a CRE?
The two popular approaches are the income capitalization approach and the cost approach. The income capitalization approach involves dividing the Net Operating Income (NOI) of the property by the rate of return that the investor hopes to achieve. The cost approach, on the other hand, calculates how much it would cost to replace the property in its current state.
5. What role does a commercial real estate attorney play in the CRE purchasing process?
A commercial real estate attorney handles commercial property transactions from start to finish. They discuss the client's goals, help find the right property, negotiate contracts, and more. They ensure the process is strategically undertaken and in compliance with state, city, and local laws. Their knowledge provides valuable legal advice and protection throughout the transaction.