Business Plans for Property Acquisitions
With the increased stringency in lending within the
United States, many banks are now requesting a business plan specific for the acquisition of a commercial property or large-scale residential property. This is due to the fact that the bank or financial institution wants to see that the owner has a good way of properly transitioning the property to their ownership and what the plan is for maintaining a near 100% occupancy rate. One of the primary differences with for a business plan that is specific for real estate is that it does not need to be nearly as comprehensive as if it were an operating business. The income that is generated from both residential and commercial real estate is always the same and that it comes in the form of rental income from tenants. One of the other things that can be mentioned within this type of business plan is the anticipated capital appreciation as it relates to the building itself. However, the financial institution is far more concerned with the individual properties
ability to produce enough of rental income to cover the monthly principal and interest payments. The financial model that is specific for this type of business plan should include a depreciation schedule so that the bank can understand that a positive cash flow will be produced even after expenses including utilities, taxes, and other fees are paid. A specialized financial model is available on this website that is specific for an individual commercial or large-scale residential property.
Within the real estate focused business plan a full analysis of the market area should be included as well. This includes over viewing the demographic profile of people within the area which is an examination of median income, median family income, household net worth, and the average amount of rent that is paid for by individuals who are seeking a one bedroom or two bedroom apartment. If this business plan is specific for commercial property that an examination of how many other commercial properties and their proximity to the building should be discussed as well. As has been discussed many times on this website, obtaining a tenant for a commercial facility is significantly more difficult than its residential real estate counterpart. Additionally, in the business plan – especially if it is specific for commercial building – a complete overview of how the owner-operator will review a potential commercial tenants viability should be included as well.
Many banks may request what minimum standards will be needed from each tenant, whether commercial or residential, when placing new renters in a facility. If this is a residential building then the section analysis can be kept somewhat short given that most people that rent properties within the United States typically heavy income ranging anywhere from $30,000 to $70,000 and they cannot afford the down payment for home or simply choose to be a renter instead. For commercial clients, an examination of what their minimum revenues will be, minimum anticipated profits, and how long the business is it been in operation should be included as well. A small handbook may also be needed to be developed as a relates to how the owner-operator will deal with a tenant default whether it is for the commercial property or a residential property.
One of the other things that needs to be discussed as well is whether or not the business will retain a real estate brokerage that will assist the company in placing tenants in acquired buildings. Generally, a real estate brokerage charges a fee equal to two months rent when they place a new tenant in a residential building. For commercial buildings, this may be slightly more but it is negotiable depending on the number of units that are available for rent within the facility. Most of the investment firms do use real estate brokerages in order to place tenants given that it lessens the expenses relating to marketing the property for rent. Usually all of these costs are borne by the retained real estate broker.
In closing, this is a much more straightforward business plan that an operating business given that there's really nothing that can be done to expand operations but rather it is an overview of how operations will be maintained once the property is acquired. Usually these documents range anywhere from 10 pages to 20 pages depending on the amount of financials requested by the bank. An overview of the rental should be included within the business plan and is part of the overall profit and loss statement of the business.