4 The Power of Commercial Real Estate: Location, Investments, and Business Opportunities

COMMERCIAL REAL ESTATE: THE BASICS

A lot of businesses have found that their location is vital to their business. Another way that commercial real estate is used is just buying it and holding it. One of the biggest things you've got to understand is the market. If you don't know those, you're going to be left behind.

WHAT IS AN ANCHOR TENANT?

An anchor tenant is in commercial property. Jimmy John's is now the anchor tenant, right? They're essentially holding that property. Now you have these opportunities to expand two more businesses that are just simply speculative.

DO COMMERCIAL FINANCING THROUGH FIRST CHOICE CAPITAL MAKE SENSE?

First Choice Capital would be the owner of the real estate and lease it to tenants. The company would then go to a bank for the rest of the financing. With a good relationship with your banker, you can get better financing.

WHAT IS THE COMMERCIAL REAL ESTATE MARKET IN SHERIDAN?

Sheridan is super interesting because our commercial stuff has not taken off. Our population is what, 18,000 ish maybe 19,000, I can't remember. In order for our commercial real estate to start booming, we really need an influx of people.

ECONOMY OF MULTIFAMILY REAL ESTATE

What I would hate to see happen is businesses move out of town because they can't find employees. If they're able to get people to move here, they could hire employees that are actually at the standard wage that the company can be profitable at.

MULTIFAMILY VS COMMERCIAL: DO YOU NEED A COMMERCIAL PROPERTY?

Would you rather invest in that sort of commercial thing where it's higher money up front or would you rather be more involved in the multifamily providing for that commercial demand? It depends.

COMMERCIAL REAL ESTATE

Ultimately your location is going to be first priority. What route do you want to go? Multifamily or more of a retail or office or mini storage? How are you going to get your financing? On a different episode, we'll probably dive a little bit deeper into a specific one.

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Transcript

Okay, so a business will require people coming and going from their location in order to stay in business, right? A store, a gas station, whatever type of business it is. A restaurant, maybe it's a construction company. They need a place for customers to come and go, and they need a place for deliveries to be dropped.

And they need a place to do business to make money. What a lot of businesses have found is their location is vital to their business. Their business wouldn't even survive in a lesser location than it currently is.

At franchises specifically are this way. There's companies who go through so much due diligence to find the right location for their business that it costs them thousands and thousands and thousands of dollars just to find the right location. And now they've found the right location.

Now they have to figure out how to buy it. Because it's not necessarily for sale, they're going to contact the landowner and because it's not for sale, the landowner says, well, I mean, I would sell it. But as he's chuckling to himself, it's going to be this much money, right? It's going to cost a ton of money to get this perfect location.

Right. But if the location is good enough and the business can make it work, it's going to actually pay for itself just by having that spot. I think of McDonald's.

I've often heard that McDonald's is truly into real estate, not into fast food. Yeah, I've heard that too. I've worked with some franchise before and it's pretty amazing how much work they go through.

They have crews, they have dedicated personnel just to find locations and ensure that they're right. They're like scouts. So the location everyone knows the first three rules of real estate, right? Location, location, location.

And in commercial businesses have found that to be especially true. People can find you, you can produce more income even though it costs more, it's exponentially better income even though you're paying for the location. So that's a big reason, right? That's a big reason why people need commercial real estate.

They have a business and they need to earn money. And the American thing, the traditional American way of doing things is bigger and better and faster. So therefore they need a bigger and better location to make more money.

That's kind of what it comes down to, all about that money. Yeah. Another way that commercial real estate is used, that's not even for a business, but still a method of making money is just buying it and holding it.

So, for example, the example, what I used earlier was somebody's looking for that commercial real estate and it's not on the market and they see it. That's because maybe an investor actually bought it and they're just holding it. They bought it 30 years ago and it's on this prime heavy traffic location.

So whatever company X, Y, and Z reaches out and says they want to buy it, and then the landowner bought it in order to sell it and makes a bunch of money doing that because he's been holding it for 30 years and it's a prime location. So if you were to get started in commercial real estate, being an investor or an agent, one of the biggest things you've got to understand the market. How are things moving, how much are they selling for, who's buying them, what type of businesses are moving to town, who's moving out of town, and who wants to sell their building or business, and what is the highest and best use for that property.

Those are all the basics that every commercial agent or investor needs to know. If you don't know those, you're going to be left behind. The if you have the inside stream on all that knowledge, the possibilities, the investment opportunities just fall right in your lap.

You're constantly out talking to people. You're introducing yourself, hey, I just stopped by this business and who's the owner? And I'd like to get to know you. Let's go to lunch.

And you're constantly interacting with these business owners or networking is a huge part of it. You're saying constantly, and that goes for investor or for real estate agent. You've just got to be in these circles with these landowners, which then gives you the first you're the first line of communication when they do decide they want to do something.

Hey, I've decided I talked to you a couple of weeks ago and I decided what you said makes sense, and it looks like I can make some money on my real estate. I want to sell it. Whether you're an investor or an agent, that's a benefit.

That's the call you want to get. I'm tired of holding onto this property, and I realize that it's worth more than I had originally anticipated, and I'm willing to let it go. Now.

If you're the first person who receives that call, you have the upper hand. He who holds the real estate has the power. And so when you can get that power sorry, you need to cut that out.

When you get the definitely leaving that in. When you have the real estate, then businesses are the ones approaching you to build on it. Like us, we're a builder, right? So if we bought a piece of real estate and I'm just going to make something up because this actually has not happened specifically with this brand.

But let's say Jimmy John's reached out. Hey, I seen you on this property. We want to build a new building.

And what can we do? Well, obviously what I'm going to do is I'm going to say, great, I'll sell you the property and I'll build you the building, and I can set you up on a long term lease. So saving him a bunch of money by not buying the property. Oh, shoot, I just misspoke.

I said sell the property. I was trying to put together. Yeah.

So, hey, how about I hold onto the property, build you the building, and then do a long term lease? Yeah, exactly. So we would custom design and build a building for that business and then set them up with a long term lease. That way they don't have to actually purchase the property and put that massive down payment.

They can save their money for operating their business. That's a super popular model for anybody that's wanting to expand their business. But you're still owning the real estate at that point.

Yeah, own the real estate. So the beauty there is that you are still getting that appreciating value on that chunk of land. Exactly.

So you can essentially have this business pay for your expenses, and you get the tax write offs of real estate and you have depreciation and the income from the tenant, appreciation of the real estate and the income from the tenant all at one time. So there's multiple benefits in one shot. This can be done in other areas other than commercial, but commercial is our subject for today, and so we're kind of sticking with that.

But I don't want to chase too many rabbit trails, but yeah, it will definitely be falling down rabbit holes. So I don't know if this model that I just spoke about, sometimes you need extra cash, like the person buying the real estate. Let's just use this example.

Somebody comes to me and says, I want to buy your property. I can actually roll that into our real estate fund, First Choice Capital, and get financing that way for developing this commercial. Maybe it could even be a multi unit.

It could be like a retail strip or something like that, where we actually lease one part out and maintain ownership of the entire building. And we have anchor tenant and lease the other two to speculative tenants. We don't even know who they are yet.

But as long as we have anchor tenant, it's awesome to be able to have the financing in place through First Choice Capital, build this thing out and get a return. And we're actually raising money from investors who will then see that return on their investment from our commercial strip, retail strip. Going back a little bit, describe to this simple minded folk like myself.

What qualifies an anchor tenant? Is it somebody who assigns something for an extended period of time? Do they have money in it? What is an anchor tenant? So an anchor tenant is the business because we're talking about commercial. An anchor tenant is in commercial property. Who they're the they were the first people on board in this project.

You've designed the building with them in mind. You have them preleasing, you have them signed up for a lease before you even start construction. And they are a well known brand that are going to attract other okay, so Jimmy John's would be the example you build a strip mall with or say there's three business spaces, right.

Jimmy John's, you're building it for Jimmy John's, but there's still two that are vacant. Jimmy John's is now the anchor tenant, right? Yeah. They're essentially holding that property.

And they're probably going to be, at best, making the property break even. The property still might not even break even, but at least they're in there from the beginning and they're ready to they're paying a lease when the building is done. Now you have these opportunities to expand two more businesses in there that are they're just simply speculative.

So how does First Choice Capital you were talking about First Choice Capital and how you can get them to help out with people who don't have the money that you can get funding for a said product. Say it's Jimmy John's to move forward on that. What is the position that first choice capital takes? Talk a little bit more about that.

Well, First Choice Capital would be the owner of the real estate, and so we would be the one funding the project. We'd own the real estate and we'd lease it to these tenants. Another thing that here's the thing though, is we're not necessarily through First Choice Capital going to fund the entire thing.

What we're going to do is we're actually going to fund, say, 30% of it or maybe 40%, and we're going to go to the bank for the rest. We're going to actually get standard commercial financing through a bank. Now, the reason we want to do about 30% is because that's going to give pretty much any bank a good warm and fuzzy feeling like, hey, these guys got 30% into this project, equity down, and we're going to give them the best rate possible because they have an anchor tenant, they have 30% down cash, and they're in a great location.

They want to see that skin in the game. Yes. And the other thing too is as being a partner in First Choice Builders and First Choice Capital, it's like these guys have been building buildings around here for the last 15 years.

They have a proven track record, never fallen through on any of their previous deals. They have the money down, the plans already drawn, they're able to handle all the construction, and all these things start adding up. And a bank's like, please take my money, right.

It almost makes it a no brainer for the bank's perspective. Commercial financing from a bank, let's just say for anybody in general, you're going to be looking at a higher interest rate than your regular mortgage. Generally, it's a one point over prime.

And right now that's pretty high. I think it's like 7% or something like that. And you're going to require more money down, minimum 20%.

And that has to be most banks. It's cash only. Sometimes you can there are certain instances where they'll allow sweat equity for like a builder, but generally it's cash down 20%.

Or if you buy the land outright, that would count towards that too, because they're going to take a lien on that land anyway, and they have shorter terms, so higher interest rate, shorter term, plus more money down, which makes it a high point of entry. It's hard for people just to get into commercial real estate because of those reasons. As far as short term, is that like ten years and less 20 years? Good question.

No, 20 years is your standard. Okay. And sometimes you can with a good relationship, there's certain things you can do to get better financing.

One is it all depends on your relationship with your banker. So I highly encourage anybody wanting to do this stuff to become best friends with a really good banker. So your standard, just quick review, standard person, first time person walks in, 25% down, probably max, a 20 year loan, depending on the deal, they might even say 15 year because if it's more risky or something like that.

Wow, I lost my train of thought. 20% down, possibly 25% down, 20 year loan and the high interest rate. So maybe it's like 8% or something.

Now they're like, Dang, I can't do this. It's a lot of money. How are you going to do that? Well, you have a really good relationship with the banker.

They're going to say, you know what? You've gone through all these steps. We're going to give you prime, prime interest, we're going to better interest rate, we're going to stretch our loan out to 25 years. And let's just say you put in your sweat equity with building this building, and we're going to require 10% down.

So now you have this entirely different scenario, which totally adjusts your payment and the cash flow for the project, all because your banker was willing to work with you. Again, going back to always, we're always about the relationship, right? Yeah, absolutely. We just want to benefit the most out of the people that we meet, and that's all we care about.

Well, the banker makes a lot of money, right? No, but even just I think what it is, is it's just a level of trust. If they're trusting that you can be successful if they see the probability of you pulling through or you have a good reputation, that's the relationship you're talking about. Right.

Just they trust you, you trust them. You've developed this. Yeah.

And that comes with proof. I mean, a first time, somebody first walking in. I'm not going to lie, I got turned down a whole bunch of times.

I don't even know how many times I've been turned down from the gate. But you can't just give up. You got to try and be more thorough and prove yourself and do it again.

And over the course of time, after a while, banks start calling you, hey, what do you got going on? Are you ready to start another project or, or we're, we're looking for we got money in the bank. I've been told that number of times, you know, and and I'm not saying that to brag. I'm just simply saying because you, you make friends with these people and and they know and trust you and so they have money and they need to give it out because that's how they make money.

Right. If they don't, then they're going to have some unhappy customers at the bank. Right? Yeah.

So more specifically, what is the commercial real estate market like in this area in Sheridan? Sheridan is super interesting because our commercial stuff has not taken off. So where I grew up in Kalispell, I moved out in 2004, and there was this big area that was just a couple of stores in where the main commercial hub is at. There was, I don't know, a few name brand places and the population started increasing.

And then all of a sudden, the commercial started increasing. Sheridan right now is actually not I would not say it's a booming commercial market. Our population is what, 18,000 ish maybe 19,000, I can't remember.

I think it's gone up a little bit. Yeah, 19,000, maybe 19,000 people. And then the surrounding towns are really small.

So in order for our commercial real estate to start booming, we really need an influx of people. The interesting thing is there's a lot of jobs that are hiring right now, and so we're basically like, we're trying to get employees here so people can move and then in turn, the funny thing is it makes the commercial stuff go up more. There are certain population requirements for franchise owners and business owners, and the reason that is is because they know they can hire people if there's a certain population to choose from.

But those people got to have somewhere to live. They got to have somewhere to live. And I guess we could just basically segue into multifamily real estate just for a short minute here.

It's not really my intention for this podcast, but multifamily real estate is a super good and easy option for people to move into if they're moving from one place to another. It's generally available, not in Sheridan right now, but generally in cities it's available and it's quick access and they can live in it for a year or so while they start their job and maybe a couple of years, they start their job and get comfortable and they find the house they want and they move out. But it was available and it was nice and easy and blah, blah, blah.

Right, well, and that's the benefit to the, you know, say it's a manufacturing company or whatever. They got somewhere where they know their employees can live. Right.

Well, what I would hate to see happen is businesses move out of town because they can't find employees who in turn the reason they can't find employees is because they can't find a place to live. So then the business is like, well, we can't make it work here. We're paying these substitute workers, like the day labor type workers.

I can't think of the name of it right now, but the day labor type workers where you actually hire a company and they provide employees, they pay a lot of money for that and it makes it so the company hiring them can't hardly be profitable. And if they're able to get people to move here, they could hire employees that are actually at the standard wage that the company can be profitable at. And it would fit that housing category too, multifamily or whatever.

Because most people can't afford to just go out and buy a house, right? Yeah, that's right. I don't know what a starter home here is usually over $400,000 and there's a lot of them, like four 8460 in that range. And those are kind of the least expensive new homes in our town.

And so your average person has a hard time affording that. So move into a rental and build up your savings while you're doing so and get your place a couple of years down the road. Is there any sort of benefit to, I guess if you had to choose and kind of going back to the commercial thing, would you rather invest in that sort of commercial thing where it's higher money up front or would you rather be more involved in the multifamily providing for that commercial demand? It depends.

Actually, the best answer you can get. Everyone loves this. It depends.

So multifamily is commercial. So there's a little bit of that right there. You have the same financing as you would on apartment as you would on a retail strip.

Okay. The real estate is still handled differently though. On a retail strip, you have long term leases.

15 years is not uncommon on an apartment. One year is common. Okay.

So you're likely to have a much higher turnover rate with with your apartments than you are with the anchor tenant and all that. Higher turnover. The costs are generally less on like a multifamily.

The a property is generally maintained by the landlord on a multifamily, there's more people to deal with, so there's generally more opinions, which could be complaints. That's a nice way of putting it, opinions. The thing is, it's a high need, so it's easy.

You could build an apartment building and rent it out quickly with a retail or I'm just going to say something other than a person's residence. You have to find a specific person to fill that building who's willing to sign a triple net lease long term and be able to pay the price that's there. And you could sit on a retail type building for a year empty, waiting for the right person to come along.

It's a little bit more risky that way. The other thing too is I mentioned triple net lease a business is a lot of times going to be paying the property taxes, the maintenance and all the insurance and everything for that building. Which means the landlord is not paying for those things.

Bonus. Right. And that's why that type of building is real estate is good for a lease.

You get the triple net, you get the long term, but it costs more. And it's a little bit more risky because you have to get that specific person who wants that. Right.

So it's really higher risk, higher reward. It's as simple as that. Yeah, it definitely can be.

Residential is easier as far as getting it leased out. The other thing too is if you buy, let's say you build a restaurant, let's say it's a coffee shop. Build a coffee shop, you get it set up with a long term lease.

When the property is leased out, the value of that commercial real estate is higher than when you finished it and it was not leased out. Commercial appraisal is based off of the amount of money it makes. Really? Yeah.

So you finish a building and there's no lease signed up for it. Essentially the value of the building is what it costs to build and the real estate that is. So they're not going to evaluate any sort of potential or could be, would be they're going to see they're occupied or not.

Well, an appraiser is going to keep that in mind, but the physical value comes from the lease that's assigned on that property. So if a property leases for 100 grand a year, the value of that building is going to be way higher than a 20 grand a year lease. So what a lot of people do is they'll actually get the building built for a specific business.

They'll move that business in, start collecting rent, and then they'll actually just turn and sell that thing as a whole. They'll include the lease and the building because it is now worth more. That business is up and running and making money.

Yeah. And especially if it's a franchise type business. That's been proven.

Okay. Interesting. So this is sort of like it's more or less the same theory with say, standard real estate, like a residential real estate where you would buy land, but then you build a house on it and you develop that land and then sell it.

Not only have you appreciated with the land value itself, but you've also done improvements on that land. Sort of the same theory. Yeah.

So if you look at, let's just compare this to this way. If you buy a residential piece of property and you just turn around, sell it, it's going to take a lot longer to sell that than if you bought it, built a house and sold the house. Because people don't want to go through the building process if they can just buy what they want already done.

Right. And like we talked about, in a different podcast about custom home building and the benefits of it. We're custom home builders, so I don't in any way want to say that it's not good, but it's not for everybody.

There's a lot of people who don't want to go through the building process, and that's okay. There's more people who would prefer to buy. But my point in this is that we want to just associate the residential to the commercial in a way that anybody can understand.

Right. So kind of, kind of just a quick recap over this entire thing is ultimately your location is going to be first priority. It always is with real estate, but you would say more so, more so with commercial because it's going to depend on yeah, it's going to change your income depending on your location and the desirability.

But yeah, always location second. What route do you want to go? Multifamily or more of a retail or office or mini storage? You have tons of different options, but choose a direction you want to go and then how are you going to get your financing? Are you doing it through the bank? Are you doing it through a private investment fund? Generally, if you're doing this for commercial real estate, you're dealing with a business of some sort. So what's your business needs and then what's your exit strategy? How are you going to get out of this property? Are you going to keep it forever? Are you going to just turn and flip it like an investor or there's different options there.

So I think that's just kind of a quick rundown of how commercial real estate works in general. On a different episode, we'll probably dive a little bit deeper into a specific one, but we kind of want to just give an overview of what the options are, essentially. Awesome.

Well, thank you. I myself certainly have a better understanding of it now. Awesome.

Okay, thanks a lot, guys. Bonvoyage.