Owner occupied commercial real estate refers to commercial properties from which the property owner operates their business. Instead of being owned by a landlord or corporation who is not connected to the property, the owner is physically present and conducting business on the property. If you are considering purchasing commercial property to house your business, these are some of the basics you should know about.
First, consider the business structure of your company and whether it is positioned to own property. Your company does not have to hold title to the property, but whatever entity does hold title should be owned by your company for the property to be owner occupied commercial real estate. Familiarize yourself with business structures such as sole or joint ownership, general and limited partnerships, and Limited Liability Companies (LLCs), and work with an attorney and an accountant to determine which ownership structure is best for you.
Next, identify properties for consideration. Of course price will be a factor, but you should also keep in mind location, size and features of the building and the local area.
After narrowing your search to selected properties, consider the details of lease agreements. While it is possible that your company will occupy the entire building that you purchase, it could be a smart business decision to occupy the majority of the property and lease the remaining space to tenants. In this case, you will want to examine the current net operating income and vacancy rate of the property to help determine how easily your company can cover the mortgage.
Obtaining a loan to purchase owner occupied commercial real estate can be relatively simple. To qualify for financing, your company should have a profitable history, strong financial statements and a down payment sufficient to ensure the loan-to-value ratio is no more than 80%. That is, if the property is worth $1 million, you should be prepared to make a down payment of at least $200,000. Additionally, if you intend to lease a portion of the property to tenants, your debt service coverage ratio should be at least 1.2. This means that that if your monthly mortgage payment is $10,000, the monthly net operating income of the property should be at least $12,000.
Owner occupied commercial real estate can be a wise business move in many ways. Not only can your property function as a business investment as well as your operating headquarters, but you can collect rental income from tenants. Being the owner means that you can determine who the tenants are, and you can exercise control over the features, appearance and security of the property where you do business.