Is a Commercial Property Right for You, Part 2

Is a commercial property investment for you?

Here is the Commercial Property Investment Checklist.

Sorry, I’m late getting it out today.  I’ve been at one of our properties(residential) all day getting it ready to rent. 

Commercial Property Investment Checklist

 

1. Tenant Credit (Who guarantees)

The commercial broker brought out the very important point that you need to know the main company will back up that franchise owner or business should bad times happen.

 

She mentioned one very well known fast food business  as an example that suddenly went dark one summer day  in Nashville a few years ago.  The owner who had hit hard times had 16 of those stores.  One of the landlords was so desperate to rent he had to put in  a neighboring florist, which made that property look somewhat odd.  

 

If the small fish goes bankrupt the big fish needs to be able to put everything back in business almost immediately.

2. Flat Rent

Raise the rents a little every year so that they will not remain flat.

This is something a lot of landlords, commercial and residential, often neglect because they don’t want to get the tenants riled up.

 

Make sure a reasonable rent increase is built in.   The commercial broker gave the very reasonable example of 3 per cent  per year which can add up to big bucks after only a few years.

 

If you’re still not convinced how much such seemingly small rent increases can add up, do the math.  You’ll be in for a pleasant surprise. 

 

This concept is built on compound interest which one of the old timers in the room pointed out most people simply don’t understand.  (That may be the single biggest reason most people go into debt).

 

3. “Outs”

If the tenant is not maintaining sales(according to the lease) and is not bringing in enough revenue, you need to get rid of  him and bring in another tenant who can deliver.

 

One of the worst problems you can have in commercial real estate  is a tenant sitting on a lease who is holding you up so you can’t rent the space to someone else.  This can make your whole property go down fast.

 

Always have a means of escape built into all your leases.  Remember the  fox with the two exits out of her hole.

 

4. Caps and Exclusions

This is what a Triple Net Lease is really all about.  Get as much in your favor as possible.  Try to put as much of the responsibility on the tenant as possible.

 

5. Performance Reporting Requirement

All tenants should report sales figures to you so you will know what your property is really bringing in per square foot. 

 

This is very important to a buyer who may be considering your property since is goes without saying, the higher the sales figures the most valuable the property.

 

This will also keep some tenants in line who will tend to under-report how well they are really doing, so that their rents won’t increase.

 

6. Length of Lease Remaining

 

If you’re selling the property how much time the tenants have remaining on the lease is a big consideration for the buyer.  The more time, the better. 

 

As a buyer, you do not want to invest in an empty property.  Make certain you won’t have to go looking for new tenants any time soon after purchase.

 

In summary, commercial real estate investment can be very lucrative, if you know what you’re doing.  As the commercial broker stated, “it ain’t rocket science”.  However, make sure you’ve done your due diligence just as you would do with a residential property; only there are many more factors involved with commercial.  Keep in mind the power of the Triple Net Lease and  how to properly use it as a tool.    

 

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