OFFICE BUILDING FINANCING

Office buildings are a great source of income. However, it is important to know the ropes if you expect your investment to be profitable. The more you know about office building financing, the better your chance of making a great investment.

The property should be located on a major thoroughfare with high visibility and easy access, or in an established office park. A good investor will look for locations in primary office markets or have the ability to compete at market rates. Can the space be leased again as needed? The investor must demonstrate that the property has solid market strength as determined by such factors as absorption and trends in population and employment. The property should exhibit a stronger market appeal than the competition. There should be a history of retaining its tenancy, sales volume and competitiveness.

There are some things to take into consideration when you are seeking office building financing. Most lenders will require three years of operating history. Rent revenue is typically taken from tax returns or contractual base rents. The ability to recoup expenses should reflect the operating history of the project to qualify for office building financing. Expenses are normally underwritten based on the last full fiscal year plus a percentage of inflation subject to industry averages.

Vacancy is another market factor that must be taken into account. The local market average or the vacancy rate for the last 12-month period has to be calculated. Properties that have a considerable roll-over risk are subject to scrutiny by lenders. Many lenders will consider this type of property on a case-by-case basis when an investor approaches them for office building financing.

What you actually pay for the property is not necessarily the value that a lender will place on the property. You should never pay more for an office building than what is justified by its annual gross operating income and subsequently the net operating income which is the net income after expenses. Most appraisers of office buildings put the emphasis on the income generated by the property. They also consider office property in terms of appreciation, location, and visibility to the general public. Lenders rely heavily on appraisals when the consider office building financing.

There are some important points to remember as you seek office building financing. You make your money on an investment when you buy real estate, not when you sell it. Just like in the stock market, if you buy too high, you will probably lose big when you try to sell. If you pay too much, the lender will only lend on the market value. You will have to make up the difference with a larger down payment.

Look for income property with good net operating income. You will identify this by the fact that the property will have a positive cash flow and a high occupancy rate. Buy the property on your terms at or below the fair market value.

Have the patience to wait for a motivated seller. Investors who pick up the bad habit of paying too much by buying from sellers who are not motivated will constantly be trying to make up the amount they overpaid. This will not only hurt your current status as an investor but will not play favorably with lenders when you apply for the next office building financing.