Tips for Purchasing Commercial Property in Washington State

Are you looking to buy commercial real estate in Washington and the Seattle area?

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.

Buying commercial real estate in Everett metropolitan area is not like purchasing a new family home. There are generally more costs and expenses involved, the funding is harder to get, site testing is often a requirement, and to top it off if you need tenants, you will have to cover the expenses of marketing, identifying, and securing new leases.

At Meyler Legal, PLLC, our local commercial real estate attorney in Seattle handles commercial property transactions from start to finish all over Washington, including Seattle, Bellevue, Tacoma, Everett, Kirkland, Redmond, Renton, Bellingham, Yakima, Spokane, Vancouver and everywhere in between. We will discuss what your goals are, help you find the right property, negotiate contracts, and more. Contact us to schedule a consultation and to learn more about our commercial real estate services.

Types of Commercial Real Estate in Washington

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. 

1. Industrial Use. Industrial use properties consist of businesses that make and store goods, like manufacturing facilities and storage warehouses.
2. 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. 
3. 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.
4. Hospitality. Hospitality properties are meant for travelers and include hotels, entertainment sites, or restaurants.
5. Retail. Retail properties include small stores, strip malls, and restaurants. 

Commercial Real Estate Purchasing Process in Washington

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

Meyler Legal, PLLC is an affiliate firm of the Commercial Brokers Association (CBA)and has the connections and experience in CRE to help you in your search.

Decide on the Initial Offer Price

The property may have an asking price or maybe off market.  Sometimes even listed CRE properties request offers rather than marketing a specific listing price.  Regardless, 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 are various other ways to calculate the value and determine the offer price depending on the CRE being purchased. When you are financing the purchase, the lender may require an appraisal or conduct their own valuation regardless of the value that you may place on the property.  As your commercial real estate attorney in Washington, we are here to assist and support you through this process.

Letter of Intent (“LOI”)

Although a letter of intent is not always used, frequently the buyer and seller will nail down some of the specific terms of the proposed transaction before jumping into a contract.  Parties often call letters of intent “nonbinding,” but this can be a bit misleading. 

Generally, LOI’s are nonbinding with respect to the obligation to close on a transaction but they often contain certain terms that are deemed binding, such as a duty to maintain confidentiality.  Further, although it is “nonbinding,” the buyer or seller may refuse to negotiate terms that were “agreed” to in the LOI once they begin drafting the purchase and sale agreement. 

For these reasons, it’s important to have an attorney involved at this early stage.  At Meyler Legal, PLLC, your real estate attorney can assist at all stages of the process, including the LOI if one is used.

Purchase and Sale Agreement

The purchase and sale agreement contains all of the terms of the sale and should include everything agreed upon between the seller and purchaser. At Meyler Legal, PLLC, 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. 

Due Diligence and Feasibility

While certain information regarding the property will available prior to entering into a Purchase and Sale Agreement, the bulk of the due diligence typically takes place once the purchase and sale agreement is signed.  Typically, there will be terms that require the seller to provide certain information and documents within a specified period of time, and there will be terms that provide the purchaser with the opportunity to review what is provided and conduct their own due diligence, inspections and investigations, generally referred to as a “feasibility contingency.” 

A feasibility contingency may be broken down into narrower contingencies with different timeframes for completion or waiver.  Sometimes there are strategic reasons for foregoing or waiving certain contingencies, but this should only be done after careful consideration and consultation with your attorney regarding the risks and options available.  Some of the more common contingencies used in CRE property transactions are general feasibility, financing contingency and title contingency, but contingencies can be drafted and used for any number of reasons.

All of the terms should be negotiated with the assistance of a skilled and knowledgeable commercial real estate attorney.  At Meyler Legal, PLLC, we are here to help you.

Financing

Securing financing for the property can be a complicated and time-consuming task, but you can ensure the best terms are found by shopping around. 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:

• Term loans
• Small Business Administration (SBA) loans
• Bridge loans
• Hard money loans
• Debt service coverage ratio (“DSCR”) loans

While there are programs that provided for term loans on residential mortgages with as little as 3% to 5% down, CRE loans will typically require a down payment of 20-30% of the purchase price but this is really dependent on the purpose and exit strategy as well. 

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 transfer actually takes place. Most closings are handled through a commercial escrow agent that serves as a neutral middleman between the buyer and seller.  The escrow agent collects the money from the buyer and their lender if necessary, prorates and pays things like utilities and property taxes, collects signatures on all of the necessary documents, records the deed and pays submits the real estate excise tax due from the seller, and disburses the funds to the seller and any other parties.  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 requires you to purchase and hold land and is often used to protect and grow investors’ money.
• Development is probably the most common and is where an investor purchases a teardown or raw land upon which to build.
• Fix and flip is a tactic popularized by reality TV and occurs when a property is purchased, renovated, and resold for 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 involves obtaining a contract to purchase property from the owner of the real estate 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 Meyler Legal, PLLC, 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 Washington

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 commercial property.

The law in Washington requires a seller of real estate to provide a potential buyer with a seller disclosure statement unless an exception applies, or the buyer waives the right to receive the disclosure statement.  However, even if a buyer wants to waive the right to receive a seller disclosure statement, the law does not allow the buyer to waive the “Environmental” section if the seller would be required to answer “yes” to any of the disclosure questions in that section. 

In many commercial real estate transactions, the buyer waives the right to receive the seller disclosure statement and assumes the risk of conducting their own due diligence, testing, and inspections.  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. 

Contact a Commercial Real Estate Attorney in Seattle Today

Buying commercial property is not simple, but it can be profitable – potentially much more profitable than residential properties.  Over long-term periods of time, investing in real estate has proven to be an excellent way to build wealth. At Meyler Legal, PLLC, our real estate attorney will guide you through any commercial property purchase, making sure the transaction goes smoothly.

We have represented clients from all over the world.  With the use of videoconferencing and technology today, even when you are thousands of miles away, it’s like we are a local commercial real estate attorney right near you.  Contact us by filling out the online form or calling us at 206-876-7770 to schedule a consultation and learn more.