Commercial Real Estate Guide

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Commercial Real Estate Guide

The world of commercial real estate (CRE) offers anumber of benefits for established businesses lookingto grow operations and improve stability, cash flow, andcapital appreciation.Perhaps you are looking for an ideal space for yourbusiness operation. Or, maybe you’re envisioning thepotential returns commercial real estate property mayyield for you as an investor.This guide covers a variety of topics to help you betterunderstand the complexities of commercial real estate.Explore how to navigate purchasing steps, comparebuying and leasing, consider financing options, and getthe most out of commercial real estate.Whether you’re entering into the commercial real estate world as a business owner or an investor, Wells Fargo offers guidanceas you navigate the lending process and provides financing for owner-occupied and investment properties. Utilize the insightsand tips in this guide as you pursue your commercial real estate venture.Table of Contents4 steps to remember when purchasing commercial real estate . 3-4Considerations for commercial property: buy or lease? . 5Discover the benefits of commercial real estate financing . 6-9Getting the most out of commercial real estate . 2

4 steps to remember when purchasingcommercial real estateWhether you’re a business owner or an investor, include these itemson your real estate to-do list.As you prepare to shop for commercialreal estate, you may have a lengthylist of considerations and to-dos. Insearching for the right investment,you’ll want to be sure the property haspotential to yield a return. Though,if you’re a business owner, ensuringthis real estate will foster continuedgrowth is likely at the top of your list.To set yourself up for a smoothacquisition: aim to establish clearobjectives, collect the properdocumentation, research the propertyhistory, and focus on building apositive landlord-tenant relationship.Set objectivesClearly identify yourexpectations and understandwhich terms you are willing to negotiateon. For example, as an investor, howmuch are you allocating for propertyimprovements? If your budget onlycovers the down payment and closingcosts, then you won’t want to viewproperties that need major renovations.1If you’re a seasoned owner, you mayonly be interested in properties ina specific neighborhood becauseyou know your client base residesthere. Keep your search in scope, asoverspending or compromising in thewrong areas could put your business orinvestment property at a future risk.Commercial Real Estate Guide 3

2Prepare documentsIf you’ve chosen to financeyour purchase with a loan, it’simportant to be ready with the necessarydocumentation to help prevent delays.The required documents will likelydepend on your intentions for theproperty.For instance, during the loan process, abusiness debt schedule is only requiredfor owner-occupied commercial realestate. In comparison, commercial realestate investors must provide currentrent roll and lease agreements.For more detailed information, WellsFargo offers checklists that identify thedocuments required for financingcommercial real estate valued up to 5 million. 1 Talk to a banker tolearn more.4Establish a positivelandlord-tenant relationshipAs an investor or as a businessowner occupying only a portion of theproperty, you may plan to rent out theextra space to tenants. In this case,it’s especially important to set clearexpectations and build good rapportfrom the start.First, learn your rights as a landlord.For this task, it might be helpful toconsult a legal professional. To bestprotect yourself, your business,and your assets, be sure all tenantexpectations are clearly established ina written contract.Clearly identifyyour expectationsand understandwhich terms youare willing tonegotiate on.Consider all aspects of the leaseagreement, including the length of thelease, which utilities will be included(e.g., water, electricity, etc.), and whichupgrades you’re willing to cover.3Study the property historyTake time to research thehistory of a property and thecurrent state of the surrounding area.Gaining this insight may help you handlepotential challenges during the lendingprocess or once you own the property.For example, perhaps the propertypreviously housed a gas station. Werethere ever above- or below-groundtanks? Maybe the location is currentlyoccupied by a dry cleaner. Are theyusing or storing chemicals onsite?Similar considerations for the localcommunity should also informa decision. What other types ofbusinesses are nearby? How successfulare their operations based on thelocal economy? How does this relateto your business? How will theproperty values affect an investmentopportunity? Balance the answers tothese questions with your knowledgeof where your client base lives.Financing from 50,000 to 1,000,000 on purchase and refinance loans in first lien position; 50,000 to 500,000 for equity loans and lines of credit, cash-out on refinance loans, andsecond lien position refinance 4

Considerations for buying vs. leasingcommercial propertyExplore the benefits, considerations, and costs to determine the best option for you.BenefitsBuying and owningLeasing and rentingControl – Design and improve a property.Liquidity – Tie up less funds by leasing. Growingbusinesses can allocate money elsewhere.Stability – Budget and plan with knowledge ofmortgage payments and avoid losing a location due torising rent or non-renewal at the end of a lease.Financial benefits – Build equity in the property andpotentially benefit from capital appreciation and moreincome from market rent increases .Opportunity – An owner using only part of a propertymight rent out extra space and create a secondaryincome stream.ConsiderationsLess liquidity – Assets tied up in the property.Recovering assets could mean selling or utilizing a cashout refinance.Potential capital loss – The property’s value coulddecline, resulting in a potential capital loss when selling.Flexibility – Potentially lease a more expensive property,move to a new location without having to sell, or trial an areaby leasing in it first.Low property responsibility – The landlord is responsiblefor repairs and maintenance while the leasee can focus onthe business.Less control – Rent could increase and strain budget. Leaseesalso have less freedom to make changes to the space.No equity or appreciation – You won’t accumulate equity orpotentially benefit from capital appreciation.Liability – The owner may be responsible for injuries onthe property. If the property is rented, the owner maybe subject to property manager liability.Credit-specificconsiderationsA business with the borrowing power to take on amortgage might lean towards buying. Note that creditprofiles will be analyzed during the purchasing process.When financing equipment or other investments, leasingmay help a business avoid using its available credit on alarge mortgage.CostsExpect to provide a down payment and pay anapplication and potentially an appraisal fee.Signing a lease requires less cash up front. Costs typicallyinclude a security deposit, plus the first and last months’ rent.For more information about the tax implications or benefits of buying or leasing a commercial real estate property, consultwith a tax advisor.Commercial Real Estate Guide 5

Discover the benefits ofcommercial real estate financingThe chart below provides information about the variety of financing availableto you to fit your business needs.Great forPurchase LoanRefinance LoanEquity LoanEquity Line of CreditBuying commercialproperty for yourbusinessPaying off an existingmortgage on yourcommercial propertyfor a lower rate or alonger termFunding propertyimprovementsFunding propertyimprovementsExpanding your businessExpanding your businessPurchasing largeequipmentPurchasing largeequipmentSmall business ownersexpanding to a newlocationReal estate investorspurchasing commercialproperty to lease to atenantRefinancing a privateparty or maturing loanLeverage equity whenrefinancing an existingcommercial real estateloan for propertyimprovements, businessexpansion, or businessexpensesLoan amounts 50,000 to 1 million 50,000 to 1 million 50,000 to 500,000 50,000 to 500,000Title and escrow fees1Standard for purchaseloans, no lenderclosing feesNoneNoneNoneAppraisal feeNoneNoneNoneNoneLoan-to-value ratioUp to 80%Up to 75%Up to 75%Up to 75%Other featuresLow closing costs andcompetitive rates.2A wide variety of termoptions – Term optionsare available in fixed orprime-based adjustableinterest rates.Wells Fargo offers rate andfee match assurance so youcan decide confidently. WellsFargo will match or beat acompeting offer (rate andfee combination), when acompetitor’s formal writtenapproval is provided, or payyou 200*.If environmental insurance or an environmental assessment is required, you will be responsible for this one-time fee. You will be responsible for any mortgage or deed of trust filing fee imposed by astate or other taxing authority. Wells Fargo Bank will pay title policy costs, but you will be responsible for all other title-related closing or attorney fees and costs.12Based upon analysis of application, appraisal and origination fees, and interest rates, for competing U.S. lenders as compiled by an independent third-party research firm on a quarterly basis.*Terms for credit products are subject to final credit approval of the business and when applicable, its owners. A physical address is required to receive a Wells Fargo business credit product. Terms andconditions apply. Please speak with a banker to discuss eligibility 6

Property types eligible for commercial real estate financingTypeDescriptionMulti-familyResidential properties with 5 family units.Mixed-useProperty contains both business (commercial) and residential spaces.OfficeCommercial property with primary use as non-retail space, with layout improvements of a typical office environment.RetailCommercial property with primary use as storefront(s).WarehouseCommercial property with primary use for storage of goods. May include small office space.Light industrialCommercial property that is zoned for industrial use, typically for manufacturing but may include office orwarehouse use. Would exclude refining and heavy manufacturing.Commercial condoCommercial unit (typically retail or office) in which the owner has an interest in improvements and a partialundivided interest in the land. First lien position only.Special purposeCommercial properties designed for single end-use and cannot be converted to other uses without significantinvestment. Generally, these are businesses with few potential buyers or sellers at any one time. First lienposition only. Generally accepted special-purpose property types: amphitheater, amusement park, auto repair/auto body, car wash, convalescent home / care facility, crematorium/mortuary, day care/preschool, funeralhome, health club/ gym, ice or roller skating rink, move theater, parking garage, refrigerated warehouse,restaurant, school (non-public), self-storage facility, medical/dental facility, gas station (less than 10 years old).Commercial Real Estate Guide 7

Line of credit optionsWhen working capital is needed, small business owners have a few options when it comes to lines of credit.Below is a comparison of three options designed specifically for businesses.Business Line of CreditPrime Line of CreditCommercial Equity Line of CreditSupplementing cash flowProviding short-term working capitalSupplementing cash flowExpanding your businessCovering large purchasesExpanding your businessCovering unexpected expensesMaking bulk purchases forpricing advantagesCovering unexpected expensesRevolvingcredit limits 5,000 to 100,000 100,000 to 500,000 50,000 to 500,000BenefitsNo collateral requiredSecured by business assets1Secured by commercial propertyRewards programInterest-only paymentsNo application fee; no appraisal feeEvergreen1-year draw period, renewableannually5-year draw periodAnnual feeOrigination feeOrigination feeMultiple ways to access the accountAnnual reviewAnnual fee (after the first year)2Great forOtherconsiderationsEarly closure fee if closed within firstthree yearsA variety of lines of credit areoffered to support workingcapital needs.1 The security interest taken will be a first priority lien on all present and future accounts receivable, inventory, equipment, general intangibles and certain other non-cash personal property ownedby the applicant business, and a Uniform Commercial Code financing statement will be filed against the applicant business to perfect the security interest.2 After the first year of the 5-year draw period, a fee of 0.25% of the line amount will be assessed annually for the remainder of the draw period; minimum of 250 and maximum of 1,000 8

Loan optionCommercial Real Estate Equity LoanGreat forFunding owner-occupied property improvementsExpanding your businessPurchasing large equipmentLoan amounts 50,000 to 500,000ConsiderationsLow closing costsCompetitive rates – fixed or prime-based adjustableWide variety of term options, up to 25 yearsOther considerationsOrigination feeEarly closure fee for prime-based loans if closed within first three yearsPre-payment fee for fixed-rate loansCommercial real estate products generally come with an origination fee, which typically covers the cost of the propertyevaluation, standard title work, and loan processing. Depending on the property type, use, or location, environmentalinsurance may be necessary, and purchase transactions may require state tax or filing fees. Be sure to consult a financialprofessional as you compare options to suit your needs.When it comes to purchasing or improving your business property, traditional financing sources may have stricterrequirements or take longer to access funding. Weigh the terms, interest rates, fees, and speed of funding carefully whenchoosing a financing or credit option.Commercial Real Estate Guide 9

Getting the most out ofcommercial real estateCommercial real estate requires careful consideration and deliberate planning.Do your research, work with a professional, and weigh your options. Continueto reference the information in this guide along with other resources found and and tips provided in the guide are general in nature for your consideration and are not legal, tax, or investment advice. Wells Fargo makes nowarranties as to accuracy or completeness of information, does not endorse any non–Wells Fargo companies, products, or services described here, andtakes no liability for your use of this information. Information and suggestions regarding business risk management and safeguards do not necessarilyrepresent Wells Fargo’s business practices or experience. Please contact your own legal, tax, or financial advisors regarding your specific business needsbefore taking any action based upon this information.Equal Housing LenderAll financing subject to credit approval. 2022 Wells Fargo Bank, N.A. Member FDIC. NMLSR 399801Materials expire 03/31/ 10

for owner-occupied commercial real estate. In comparison, commercial real estate investors must provide current rent roll and lease agreements. For more detailed information, Wells Fargo offers checklists that identify the documents required for financing commercial real estate valued up to 5 million. Talk to a banker to learn more. 3

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