Hey WSO Real Estate folks,
My wife wants to buy a Class B/C office building (probably slightly closer to C than B, but the brochure says "B") for reasons I won't get into here (DM me if you need further details).
There is a specific property she is interested in which is listed for $2 million and she asked me for help with this since I'm "the business guy" of our family. Commercial real estate is totally outside of my circle of competence, so I am reaching out here for advice. There is a guy who I am friendly with at JLL who would potentially be willing to help me, but I wanted to learn what I can here first before approaching him.
As I said before, commercial real estate is outside of my circle of competence, so I truly don't know what I don't know.
e.g. What % can I finance? Some quick googling suggests I would need to put down at least 30%? What kind of terms would we be able to get in today's market? Who are the lenders I should approach? How long does it typically take to put together financing? Will I be required to provide a personal guarantee in some cases? What other things should I be considering?
I realize I can ask ChatGPT, but would much rather get responses from real people who are in the industry.
If you made it this far, thanks for your time and consideration. I look forward to reading your responses.
-Deo
Based on the most helpful WSO content, here are some key insights and advice for your situation:
Financing Terms:
Lenders to Approach:
Personal Guarantee:
Timeline for Financing:
Key Considerations:
Additional Resources:
Final Note on Class B/C Office:
If you need further clarification or have specific questions about the property, feel free to ask!
Sources: Q&A: Non-Bank Commercial Lending, https://www.wallstreetoasis.com/forum/real-estate/state-of-the-cre-debt-markets?customgpt=1, I Want to Learn About Distressed Debt Investing, Breaking Into Commercial Real Estate, Breaking Into Commercial Real Estate
Lol dude class C office is quite literally the equivalent of dog shit in CRE today. Even Class A, pristine office buildings are struggling to get leases. No one is giving you 70% acquisition financing on what is basically CRE dog poop.
If you’re going to take class B/C office and somehow make money on it, you need to be an extremely skilled operator. Tell your wife to buy a 40-unit apartment building or something. That’s how all noobies get their start
Presumably she'll use the office space, not treat it as an investment property...
Wow, super helpful insight, thanks Ozymandia
I can’t imagine you getting financing for this at an interest rate that is accretive. Options are probably sketchy hard money lenders or seller financing given you don’t have much experience in CRE. Wouldn’t be shocked if you were asked to guarantee the loan.
Office is also a dumpster fire and you may need to put a lot of money in tenant improvements to have someone move in.
Buy an NNN Arby’s, a small apartment complex, or an industrial asset
Appreciate the responses so far!
I said initially I won't get into why she wants to buy this property, but worth mentioning that this would be an owner-user situation (i.e. so finding tenants is not really a factor). Again, please feel free to DM if you want specifics.
Depends on your income (tax return) and depends on the property itself, specifically is there any income coming from it or if it is strictly owner occupied. If you go the private lender path you can expect much higher interest rates probably around 9%, maybe 12%, but the benefit is that private lenders can act on their own accord, so you just need to be able to convince the lender that you are a worthy borrower and whatever business you plan on running at the property will be profitable. Local/regional banks will give you a much better rate, probably around 7%, but they are a lot more stringent as to how much they will finance, if at all. I would say max LTV 75%, but this assumes that 1.) your financials are strong enough (typical rule of thumb is you need to make 3x the mortgage payments, so for a $1.5mm mortgage, the monthly mortgage payments are ~$10k, so you would need to make $360k. However, since this is not your primary residence, banks will probably require a bit more, so I would say you need to make ~$500k.) 2.) What are you planning on doing with the space? If you wife is already running a profitable business from home and the office is for expansion purposes, then perhaps a bank would be comfortable with 75% LTV, but if this is a completely new venture, that's going to be a tough sell to a bank. They may require 40%-50% down. Some banks may turn you down right off he bat, so I suggest calling up different banks, running the deal by them, and getting pre-approved. Also, if you plan on submitting an offer, unless you have a pre-approval letter from a lender, I would advise slapping on a financing contingency in the event you are unable to finance it; however, this does make your offer less competitive (if there is any competition at all for class C office).
As mentioned above, local/regional banks or look up some smaller/mid-sized real estate private lenders, depending on which path you want to take. If you're not in a rush, I would try traditional local/regional banks first before private lenders.
For traditional bank financing, I would push closing out to at least 60 days after Purchase and Sales Agreement. For private lenders, maybe 2-4 weeks. I'm less experienced with private lenders since I don't use them, but I know they can move very fast; however, since they don't know you, they need more time to vet you.
For traditional banks since you are a new borrower, I would say almost definitely. You could inquire about non-recourse and maybe some more aggressive banks will be willing to give that at a lower LTV (50%-65% maybe?) and higher rate, but I wouldn't bet on this. For private lenders, I would assume non-recourse is the norm, but in reality, there will likely be grey area and terminology in the loan docs that allow for partial recourse/"bad boy carve outs". So if you don't fulfill certain covenants, the lender reserves the right to pursue you personally (that's what's going on with a lot of syndicators. Read up on this thread: https://www.wallstreetoasis.com/forum/real-estate/the-day-of-reckoning-is-here-for-tides-equities). So for all intents and purposes, I would treat any and all loans you get to be recourse, even if it is supposedly non-recourse.
Given the state of office today, I would not treat this purchase as an investment. For you and your wife, it is a business expense/capital expenditure for your business. There is a good chance you may sell it lower than what you bought it for in the future, so make sure you truly think you are getting a good price. If you buy it for $2mm today, do you think you can sell it for at least $2mm 5-10 years later?
Lastly, I highly recommend you look into an SBA Loan first. SBA loans are designed specifically for this purpose i.e. to help small businesses get up and running and lending to small businesses where traditional banks will not. I know for a fact that there are SBA loans to help small businesses purchase real estate for their business (a friend of mine acquired a property in California for his business with an SBA loan). I think an SBA loan could solve all the disadvantages that come with traditional lenders and private lenders for you.
Amazing! Thank you so much for taking the time to write this up!
For SBA, I see that there is something called a 504 Loan that could be a possibility.
If I am understanding this correctly, the way this would be structured is:
Borrower puts down 10%
Certified Development Company (2nd lien) provides 40% at a fixed, attractive rate
Conventional lender (1st lien) puts in 50% at market rates.
My understanding is to apply for this loan, you have to go through the CDC first? Excuse my ignorance, but if the CDC you engage with approves you for their loan, do you have to go out find the remaining 50% on your own? Or does the CDC typically have arrangements / partnerships with conventional lenders for the remaining 50%?
Unfortunately, I have never used an SBA loan before, so I really can't provide any further info. You should call the SBA or go to your local SBA office to inquire about their programs.
I would say you should talk to wherever your wife has her business checking accounts and say you are looking to buy a building with SBA financing. Owner-user lending helps them keep the business’s deposits with their bank, so they should be motivated to be helpful in your next steps.
Do not do this. Run, Forrest.
Why not?
groupthink here is funny sometimes. People just hear Class C office and their brains shut off lmao
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