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Utilize Commercial Real Estate Notes To Purchase Property

First Floor Commercial Businesses With Apartments Above


By Robert Duplicki      June 22, 2024

There are many opportunities in commercial real estate, and commercial real estate notes will help you buy and sell such properties.

One of the current opportunities is buying largely vacant office buildings for development. Many of these buildings might be too large for the typical real estate investor to acquire. But the examples that attract media attention, illustrate the possibilities with smaller properties as well.

Here is a link to a June 12, 2024 New York Times article titled “Buyers Snap Up Aging and Empty Office Buildings for Deep Discounts.” Focused on the large property category, they indicate that properties are being sold for as much as a 70 percent discount over their last sale price. What happened to the price appreciation along the way?

A storied office tower in Manhattan sold for $185 million. A decade earlier Blackstone, the world’s largest alternative asset manager, paid $600 million for this building.

For smaller investors there are also deals to be made using seller financing to acquire commercial property.

What Is Commercial Property?

To answer the question “What makes something commercial real estate?” Google provides this answer from Investopedia:“Residential real estate is used exclusively for private living quarters. Commercial real estate refers to any property used for business activities. Types of commercial real estate include hospitals, assembly plants, storage warehouses, shopping centers, office spaces, or any other location for a business enterprise.”

This definition seems to leave out apartment buildings from commercial real estate. But Investopedia clarifies that “the four main classes of commercial real estate are office space, industrial, multifamily rentals and retail.” This list can be expanded to include lodging, mixed-use and alternative properties.

The break off point for apartment buildings is that up to four units are considered residential property. Five or more units are commercial property.

What Is Happening Now With Commercial Real Estate?

As with other industries, commercial real estate moves in cycles. We move from buyers’ markets to sellers’ markets, and that will vary based on the type of property. Office and retail properties are struggling and have been for awhile.

Peter Harris of Commercial Property Advisors produced a recent podcast titled Is Commercial Real Estate About to Collapse. To answer the question “what is fueling the collapse” he indicated:

  1. Decreased demand for office space.
  2. Remote work is now the norm.
  3. High interest rates.
  4. Online shopping.
  5. Lower city tax revenue because property values have lowered.

These factors work together and combine with others such as the stipulations of bank financing for commercial property. Institutional loans usually have five, seven or ten year terms. As these loans come due they typically are refinanced. The problem owners of office buildings now face is interest rates that are about double of the expiring rates.

Because of the reduced use of office space, current cash flow does not support new loans at the higher interest rates. So owners are selling offices at steep price reductions. Some owners will simply default and give the buildings to the banks.

This situation is referring mostly to offices owned by investors who lease out their buildings. Such leases often have five year terms. If we consider the COVID-19 pandemic concluding around the end of 2022, what is the impact now of leases signed in early 2020? As the way we do business has changed, how well can business owners predict their future needs for office space?

As one door closes another one opens. The properties left behind or for sale by motivated sellers, open the door for new entrepreneurs. Seller financing using commercial notes will work to solve many such opportunites. And the low prices available to purchase the properties, makes them more affordable to finance.

Commercial Real Estate Opportunities To Consider

  1. If you lease space now, purchase a building with room for yourself and others. By taking advantage of lower prices and seller financing, you can replace your lease, and have rental income from others to pay your expenses and still produce positive cash flow. Of course for a lot of small businesses a large building isn’t needed to make this work.
  2. Adaptive reuse is another great opportunity right now. The United States has a shortage of affordable housing. Office buildings available at discount prices are a popular conversion to apartments.

    The Biden administration has offered their support. Commercial To Residential Conversions: A Guidebook To Available Federal Resources is a 54 page PDF that provides an overview of federal programs, loans, grants, guarantees and tax incentives to support commercial to residential conversions.

  3. There are existing apartments in favorable locations that could use an improvement in management. In some situations the rents being charged have not been increased to keep up with market rents. You can update the process and increase the rents which will increase your net operating income (NOI). Doing so will increase the value of this property for you.
  4. Of course adaptive reuse is not restricted to office buildings. Gas stations are another great opportunity. Many gas stations have been repurposed for a variety of uses such as housing, restaurants and other businesses. Many old gas stations have also been identified as petroleum brownfields by the EPA.

    Here is a resource from the EPA (Environmental Protection Agency) that provides much information about petroleum brownfields including financing and grants. It is possible that seller financing could be used to purchase such a property.

    To help stimulate your imagination check out America’s 7 Most Beautiful Gas Station Conversions from Architectural Digest. Just scroll down the left side of the page without paying for digital access, unless you want to.

  5. There are deals to be found in other areas of commercial real estate where you can make use of seller financing. These property types are not facing the same struggles as office and retail, but you will find good deals if you persist. This group includes multifamily, mobile home parks, self storage, industrial, warehouse, data centers, flex space and other commercial.

What About Institutional Financing?

Will you qualify and do you want to? There are many financing options, and commercial property buyers have a wide array of potential needs. So it will take some effort on your part to find institutional financing that best matches your situation.

Despite all the programs available, it doesn’t take much about a buyer or a property to not match up with insitutional financing. In such cases seller financing can often be the answer.

One of the institutional programs you don’t presently qualify for may be a better alternative in the future. So seller financing can also be the best temporary choice, until you qualify for better alternatives.

Seller Financing For Buyers

Much of what you will find about seller financing on this website takes the perspective from the seller’s viewpoint. While buyers haven’t been neglected, seller financing does require sellers who are willing to provide it. So NoteSolutions provides information to help create notes and sell them when the time is right to do so.

For buyers of property and businesses, much of the same information is helpful. So I suggest that buyers learn about seller financing in order to make the best use of it.

Many sellers will not be prepared or interested to offer seller financing. This gives properly prepared buyers the chance to present offers using seller financing to their advantage. So learn the information at this website so you can construct winning offers.

Here are two articles to start with:

Here are some ideas to help you put deals together:

  • If you don’t want to qualify for bank financing, what is your cash position like? Who might you partner with? Have you pursued private lenders? What combination of these resources can be used in conjunction with seller financing?
  • Is the seller willing to finance the entire deal for no money down, for the right price and terms?
  • Look for motivated sellers and sellers who own the property free and clear.
  • It’s not necessary for the property to be owned free and clear to obtain seller financing. So learn as much as you can about the seller’s situation before you construct your offer.
  • If there is an existing mortgage on the property, consider using a wrap around mortgage. For more information take a look at Should You Use A Wrap Around Mortgage?
  • Could you use a partner's credit to assume the existing debt and arrange seller financing for the remainder?
  • If the property has defects that prevent bank financing, these defects will not prevent seller financing.
  • Your credit history may be acceptable for the property owner to provide seller financing, while it won’t meet the requirements for bank financing. So seller financing will give you more time to improve your credit history.
  • As you improve your credit history by making all seller financing payments on time, this will make the seller held note more favorable to sell. With this in mind,you can sell yourself to the seller to get the seller financing in the first place.
  • If the seller doesn’t like something about you or your offer, you have a much better chance to negotiate than getting past bank requirements.
  • While I don’t suggest that you present yourself as a tax advisor, you could mention the tax advantages of seller financing to the seller. For more information review What Are The Tax Implications Of Seller Financing?
  • You might consider a Home Equity Line Of Credit as a source for a down payment or rehab expenses. 34 Questions About Home Equity Lines Of Credit (HELOC’S) will give you additional information.
  • Balloon payments are a common part of seller financing. As an alternative you could use stepped payments. I cover this in more detail at What’s Better, A Balloon Note Or Stepped Payments?

Thank you for spending some time at my website and good luck with commercial real estate notes. If you ever have a note for sale, please complete a worksheet so that I can get to work for you.

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