Are you interested in investing in industrial commercial real estate?

Read this article to find out the key team members you need before you do your first investment. Ronald Rohde Law is available to help first time commercial real estate investors invest in industrial commercial real estate so click the link below or check out our new e-book on Amazon!

This article is going to break down all of the different team members that you need to execute your first industrial commercial real estate deal now evaluating these types of triple net properties is a little bit different than your normal residential or multi-family property so it's important to understand who the key players are and when to build relationships and the right questions to ask them.

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Overview of Commercial Real Estate Team

To start, we recommend an investment sales commercial broker (sales versus leasing) they aren't always the same person, your lender who will be a key partner in terms of the capital stack, your attorney somebody like Ronald Rohde Law that's going to help you review the contracts form your entities (LLCs) and ensure that the Purchase and Sale Agreement matches the Letter of Intent. Your attorney also reviews due diligence leases, title and survey review and title objections, your CPA also known as your accountant versus a bookkeeper there are subtle differences within that accounting, but it's really important to understand the tax ramifications and ongoing reporting obligations. You may have a property inspector you work with that is a specific person or just a firm that provides a PCR (property condition report) you're going to need engineers and contractors who can look at the building and give you an analysis based on the age of the structure and any deferred maintenance costs. A residential inspector is not going to cut it when you're looking at commercial building.

Who do you need on your team to execute value add multifamily?

If you have a value-add plan, you may want a general contractor to walk the property and provide a ballpark estimate. Bringing him early is critical to obtain accurate estimates prior to submitting an offer. Don’t rely on general square footage estimates or per unit amounts, an experienced general contractor will see construction elements that may increase the cost or suggest improvements that utilize existing building elements to save money.

What does a Property Manager do on an industrial (NNN) property?

We recommend interviewing a property manager prior to executing the PSA. if you intend to retain a third-party property manager it's important to have them walk the property and get a sense of the age of the building, the types of tenants and some of the issues and work involved with a specific property. A common structure is for an investor to self manage their property, however its difficult to walk a property and look for simultaneous issues. You can only wear one hat at a time. Being aware of this and bringing specific checklists will help focus your attention on critical items.

What does an Investment Sales Broker do?

Your broker is going to be a first point of contact for a lot of these different deals and because once you've identified your market and property type you're probably going to want help identifying the actual properties that suit your needs. We recommend working with a local broker who can provide you access to different off-market deals, they can advise on pricing and as well as helping you connect you to other professionals in the area that they've worked with as well as providing some form of oversight throughout the acquisition process.

I talked a little bit about the distinction between leasing and sales, and initially you're going to want to make contact with an associate or an agent/broker (or salesperson) or you may work with the actual broker if its a smaller shop. I use the terms kind of interchangeably, but I know that's not all equal, but for my purposes they're all interchangeable--broker etc. That is the real estate brokerage that represents your interest and gets a commission from the sale of a property so once we have that out of the way your broker, e.g. the person that is responsible for sourcing these off market or these investment deals they're going to have a geographic specialty or they're going to have an asset type specialty depending on the size of their team and the length of their experience there are different brokers that can sell throughout the state of Texas just based on their experience. They are agnostic on property type so they might sell flex they might sell outdoor storage they might have some tilt wall distribution new construction, etc. Anything that comes up in the state that's where their connections are and on the flip side you may have people that really specialize in a niche like refrigerated storage and throughout the state people know that this refrigerated guy he can get you the deals throughout the state and maybe even bleeding over to Oklahoma or smaller markets where they don't really have some of those dedicated brokers that know the nuances of that particular market.

What to ask an investment sales broker before hiring?

I recommend that you interview a few different brokers and my one piece of advice is really to make sure that you're a good fit for that broker and that means whatever your experience level whatever your purchase price or the strength of your offers make sure that it’s a fit for a broker who's hungry for your business and you may need to move down the totem pole a little bit to find that agent that's going to work with you directly who wants your deals and i can't stress that enough but having somebody who appreciates you and values the size of your deal and look looks forward to that commission check that's what i think is going to produce a good relationship. Yes, you want expertise yes you want some oversight from an experienced broker who has done this before but in terms of your actual personal relationship find somebody who is really hungry for those deals who maybe has a little bit of experience but can really work and grow with you. Just make sure people are right sized; you don't want to be too big than your broker and you don't want to be too small either!

Leasing Commercial Real Estate Broker Questions to Ask before hiring!

Finally, let's discuss leasing needs. If you acquire a property, you should also have some contingency plans if there is a vacancy in your property whether you have a multi-tenant building and there is some existing vacancy. You can have the property manager also source some tenants, but you may also want to interview a specific broker for finding new tenants for the entire building. This is a financial trade-off that you have to make with your property manager but it's another one of those decision points.

The broker who sourced my deal may not be the same broker that has the connections to potential tenants and also doesn’t want to do leasing because leasing tends to produce smaller commission checks, but it's steadier. If you build a relationship with a leasing agent then you can get steady landlord commission checks as leases are signed throughout the life cycle and the investment hits those will be less frequent but that will help you understand the two different hats; they can be the same person, but not necessarily!

How important is a Commercial Lender?

Let's go to the next team member-- this is your lender. I'm assuming that most people who are reading this article are not paying cash so they will have some debt perhaps as low as 40% LTV or as high as 80%. Some of these lenders are aggressive for the strong credit quality product they're pushing LTV (Loan to Value) to 80% which is a sign of the heady times but if they are anywhere in that capital stack between 50 to 70% then they're a big part of the purchase price. Therefore, they're an important partner. If you had a single equity investor putting 50% of your equity raise, you would certainly hold them with kid gloves and would do a lot of due diligence.

My piece of advice is again work with the lender who appreciates you and wants your business. I would recommend going with the smallest lender in terms of assets under management/revenue whatever your metric is, but the smallest lender that could do your size of deal. For example, if you have a $25 million dollar purchase and you're getting a loan of $18 million you probably can't go with a credit union or even a small regional ban. You're going to exceed some of their individual borrower lending limits just because they only have $300 million to loan out, and they can't give $18 million on a single borrower if they don't have a pre-existing relationship with. You should go with the smallest bank which may be now a regional bank or a statewide bank that can do an $18 million loan for a first-time client but choose the smaller one don't automatically jump to JP Morgan Chase, N.A. don't go to Wells Fargo and definitely don't go to Truist! Those national lenders won’t value you, if that's your first interaction with them because if you're not doing $100 million dollar loan with a repeat business pipeline.

You're just not going to be a priority for them and while that’s been my experience please test for yourself. The money is all fungible at the end of the day so unless the technology platform is really lacking and maybe you want the apps or single logins maybe you need the ACH, etc., but again choose the minimum level of competency that you need to get the deal done and if that's technology driven--that's okay.

See this article for more information on QUESTIONS TO ASK YOUR COMMERCIAL LENDER

Do I need a Commercial Real Estate Attorney for an industrial property?

Your attorney can also make or break your deal. Obviously, I think what we do is super important I think it's critical to understanding what the lawyer does and does not do, in order for the client to properly value these legal services. At the end of the day, I humbly admit that we're just a tool and a tool that can be used in varying, finite amounts because there is a quantity of lawyer that you as a consumer can choose to buy. I think that it's really important for you to understand what the lawyer does and what we don't do based on the situation.

There's a lot of situations where my clients don't have brokers because they feel very confident on their own underwriting in their pricing, maybe they’re very active in the space, and have done multiple deals in the past year. They don't have a broker and then they're going to ask the law firm to run point over the rest of the deal in terms of coordination or getting documents from the seller, title, etc. We are happy to serve in that role as long as you communicate it early in the engagement and there are clear expectations for responsibilities and the fee structure. What I don’t recommend is going into a deal with a lawyer and saying “review this contract”.

Those are very vague instructions and doesn’t provide enough guidance to your attorney. Instead you should seek to build your toolbox as an investor and understand how to utilize all of these tools.

What you are faced with is seven different partners that make up your team and the investor has to decide how much of each tool to use. What is a “good cost” versus “over priced” benefit for every tool or service. For every vendor, these are professional vendors or contractors or trades people and you have to know how much to use. In the event you’re unsure, you can defer to the vendor and say “Hey I trust you, you tell me what's the best solution in my situation.”

Different types of commercial real estate lawyers

For your legal team there's going to be distinctions between specialists such as securities if you're doing a Reg D capital raise you have Purchase and Sale Agreement (PSA) review, survey review and title objections. You may also want your lawyer to review other due diligence such as leases or zoning issues. You may also have a lawyer for loan document or financing negotiations depending on how complex your financing is. If you securing CMBS or public type financing, you may have a separate securities/ corporate finance attorney to ensure compliance with your corporate attorney separate from the real estate attorney

You may also have a zoning or land use attorney that if you want to apply for a change to the existing use. These are just more examples of different lawyer tools that may be applicable to your situation. We’ve described four or five different types of attorneys that all may be involved on a single transaction so it's up to you to decide if you want the jack of all trades that can cover most of these tasks or do you not need certain roles.

What are the costs and benefits to each type of lawyer? How you communicate your knowledge will give you an advantage when you're talking to the lawyer because you're going to come across more credible and with a clearer communication of your needs.

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Accountant, CPA, or Bookkeeper

Let's talk about the accountant, broadly I’m going to lump all these services together because I encounter them as usually a one-stop shop with a bookkeeper, which may be related to property management, but it's it's only going to feed into your asset management. You're also going to need a Certified Public Accountant (CPA) they will be responsible for filing your actual tax returns and you may also have a separate tax structure accountant who will put together a high level structures of entities, contracts, management agreements but they may not be involved after that initial structuring conversation. For the CPA and bookkeeper, it's important to have a handle on what you expect on an ongoing basis. Make sure that you hire the right sized accountant for your project and for your needs.

Ask the accounting team who is responsible for responding to questions outside of tax returns. What is the expectation for calendaring a meeting? Many firms will not commit to a timeline and that's a redflag.

What does a property inspector do on a commercial industrial acquisition?

Next, we have your property inspector and while there are many companies out there--large national vendors that do these PCRs. They're very standardized reports I would recommend that you get a copy of a sample and review the report. You don’t need to become an expert, but try to understand the construction of the building, the size of different areas, the different mechanical systems inside. If there are sprinklers, full sprinkling is a big issue for a lot of different tenants who may need that. It can be a value you want to make sure they're operating as intended. Maybe there's crane systems there could be hydraulics or rail service. You have a variety of loading or access doors. There are all sorts of mechanical systems in an industrial building and you need a good property inspector to tell you what's working what's not. Is that system important? How much does it cost to repair?

These inspection reports will directly lead into the conversation with your general contractor who will provide cost estimates. These two roles are completely different, and you should not rely on a general contractor to inspect or evaluate mechanical systems. The property inspector is there to give you an assessment like a snapshot observation of the building and systems.

These are the names the makes the models, etc. While your general contractor is going to implement a plan to maintain and renovate a building. Perhaps installing dock high doors, dock levelers maybe some bigger roll-ups or man doors.

On a smaller level, even paint and restriping the parking lot would be covered by your general contractor. Larger projects would be replacing rooftop HVAC units or a build out of office Space. Your general contractor may want to walk the property with you to start building a budget for your vision of what you may need to spend on this particular asset.

How to find a commercial NNN Property Manager

The reality is that a lot of people self-manage triple net (NNN) properties and depending on the complexity, the investor may need some part-time staff but for the most part triple net you can fully manage online ACH payments, online bill pay, mortgage payments, property tax, etc. Other than the two to three months transition period thereafter things are on autopilot assuming nothing's going wrong with the building. The tenant is paying rent on time, you're paying your mortgage on time there's not a whole lot of management needs and I think that's a nice feature of triple net industrial.

Industrial NNN self-management as compared to multifamily--which constantly has turnover and significantly more expenses, in addition to responsibility to maintain items which age a lot faster. The needs of those tenants are also much higher than most industrial users. A property manager is critical and vital for smooth multifamily operations. In industrial the property manager becomes optional based on what they cost and what value they deliver. One approach may be to hire a property manager in the beginning, then decide to self-manage once you know how to handle the process.

Conclusion of Building Your Commercial Real Estate Team

That's a brief overview of the major players, if I've forgotten about anybody, I already want to add a section on commercial real estate insurance brokers, cost segregation experts, etc. If you're a part of the commercial real estate process email me down below because I know we couldn't cover everything. These are some of the most critical partners to include on your first industrial real estate deal.

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