The Importance of Location in Commercial Real Estate Purchases
It’s the biggest cliché in real estate: location, location, location. It’s so often repeated that by now it has lost most of its meaning. But the saying exists for a reason, and there are many considerations related to location that need to be taken into account when evaluating a potential commercial real estate investment. Issues with location are so important because they tend to be major issues: property access, zoning, environmental safety, flood zones, and, in especially in California, seismic activity.
These factors are not only important for the operating success of the building—they also come into play when an owner has to liquidate the investment. Missing a major issue during the original transaction underwriting can seriously impact the exit of the investment.
Location Premiums
Location always plays into the fundamental valuation and expected return on the investment. As the major urban real estate markets in the U.S. remain extremely hot, new investors have the choice to pay a premium for a prime location or move out of major markets to get more desirable returns.
Due diligence is of the utmost importance when evaluating a potential area. Investors who can accurately predict which areas are coming into or out of fashion stand to make significant returns. One great example of changing neighborhood dynamics that’s currently underway is Inglewood, CA. As the St. Louis Rams recently announced they will be moving their team to the area, the real estate market has taken note. Commercial properties that were getting no interest for years are now getting multiple offers and, naturally, prices are on the move.
Zoning & Title Surveys
Property zoning is also of the utmost importance, because it will determine the range of allowable uses for the building. Buyers should always request a zoning verification letter from the local municipality to confirm that the listing is conveying the full and correct information about the building. Fewer zoning restrictions mean that building owners can better adapt to shifting neighborhood dynamics. Re-zoning is sometimes possible, but investors should be fairly certain they can successfully get a building re-zoned to suit their purposes before proceeding with the purchase.
Along similar lines, investors should check limitations on what kinds of updates can be made to the exterior and interior of the building. Occasionally, there can be location-dependent restrictions, such as when a building resides in a historic neighborhood.
An ALTA survey should be obtained and reviewed in conjunction with the title. This survey should include all building improvements and all plottable title exceptions. The survey, which is more costly than a standard CLTA survey, allows a buyer to determine if there are easements, encroachments, or building setbacks that would get in the way of the planned development.
Property Access
Another key part of the survey is insurable access. Many investors think that if there is a road leading to a parcel, it has insurable access, but this is not necessarily the case. Insurable access means the title company will insure that the property has legal deeded road access, which is an important distinction. Insurable access is easiest when there are recorded easements or when the property adjoins a public roadway. In cases where the property does not have frontage on a public road, a best practice is for it to have deeded easements across every property between it and the public road.
Environmental Concerns
Next, it’s time to address any potential environmental concerns relating to the property. To do this, buyers should order a Phase I environmental assessment. Depending on the results of the Phase I report, a Phase II environmental assessment may be necessary. The building’s history becomes important here; any previous uses that involve chemicals (dry cleaners, gas stations, factories) can pose potential problems, but just because a building has a clean history doesn’t mean that the report won’t find something else. Your building is also affected by its neighbors, so adjacent properties should be briefly evaluated to determine any potential contamination issues.
Flooding & Seismic Activity
Depending on the area you’re buying in, flooding and seismic reports can also be a good idea to obtain, for two reasons: to ascertain the potential for damage to the property, and to anticipate any future expenses due to new legislation. The recently-passed L.A. seismic retrofit regulations are a great example of the latter. If a new owner didn’t adequately plan for a major retrofit expenditure, the investment can quickly go from profitable to unprofitable.
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This article has only scratched the surface of the factors investors need to stay on top of when it comes to evaluating the location of a building. RMC Realty Advisors provides the necessary due diligence resources to critically evaluate real estate investments, including the above considerations regarding location. We have extensive experience in engaging and coordinating physical, environmental, and seismic consultants to learn everything we can about the location of an investment.
Our expertise doesn’t only come from being able to find answers to critical questions—it’s knowing which questions to ask in the first place that can be crucial for the success of real estate investments. Have a question about your next real estate investment? Contact RMC Realty Advisors today.
