Commercial Property

Purchasing a property as a rental can prove to be one of the most important assets of an investor’s portfolio, but what kind of property is best for you? Most investors will tell you commercial properties are the best real estate to invest in because of their unique advantages. This is true, but there are some disadvantages as well that might deter some investors from commercial property.

What are the advantages of a commercial property versus a residential or an association? One aspect is the unique lease terms. These terms set commercial properties apart from the rest of the real estate properties. Typically, a normal rental lease is anywhere from three to five years minimum. Because the tenants are tied in for so long, a high amount of income is generated. This also implies that tenant turnover is relatively low. A lease can include an escalator clause, which states that the landlord can raise rent in the middle of a lease agreement in the event of higher inflation or other economic conditions stated in the clause. The lease can also include a portion stating the tenant must share a pro-rata share of certain expenses. This may include some maintenance expenses and property taxes. With that said, there is much less maintenance work involved for the landlord with commercial compared to a residential property.

There are also a few disadvantages. For starters, it can be much more difficult find tenants. It is not uncommon for commercial properties to stay vacant for extended periods of time. Once a tenant has been found and basic terms of the lease have been agreed upon, attorneys from both parties review and negotiate the language of the contract. This process can be time consuming and costly. Financing can prove to be quite a challenge as well. Unfortunately, most lenders are stricter on their requirements for a commercial loan because of the high volume of capital needed. Some lenders require evidence of a sufficient projected cash flow and debt coverage ratio to prove the property will be able to generate enough return to pay back the loan.

There is no right answer to which type of real estate you should invest in. It is all a matter of what resources are available to you and your priorities for your real estate investment. Do your research and find the best fit for you.

Over the course of my 30 plus year career in commercial property management and brokerage, I have worked for several different employers and numerous clients. Each of these individuals approached their business of commercial real estate from a slightly different angle. Some were very aggressive, others more passive, some were in the business for the money, others for the shear enjoyment of what they viewed as a game.

From each of these individuals I have gained pieces of wisdom that has helped to form an approach to Commercial Leasing that I apply to each of my leasing assignments. None is more important than the other, but when combined, are a formula that will help you gain an edge over your competition. This formula applies and can be used whether you are an Owner, Property Manager or Leasing Specialist. This article covers the first part of the formula – space assessment and preparation.

Space Assessment and Preparation

Your first step in the formula is to assess the space and gather information regarding your product. Remember, lease space is a commodity and the market will want to know what you have to offer.

Next, you will want to determine what the space needs in order to be competitive in the market place. I generally start this process with a physical inspection of the space; for me this begins at the street, that’s right I said the street. You’ve heard the term “Curb Appeal.” Don’t under estimate the power of curb appeal. Make sure your property is clean, neat and well groomed. Take care of any deferred maintenance that may exist. The potential tenant will start their process of space evaluation as they approach the property and their scrutiny will intensify as they get closer and closer to the entrance of your space.

One of my former employers taught me the lesson and importance of curb appeal; they focused on detail and things that might seem obvious to some, but that few actually implement. For instance, the entrance to each space should be spotless, flowers planted when possible, doors and thresholds free of dirt, debris, cob webs and junk mail. Make sure the key works easily, the door swings properly and does not hang up or slam when let go. Seems obvious, right? Not so much, you would be surprised at how many times I have previewed a space and found these basics missed.

Once you’re on the inside of the space, the same scrutiny should be given to the inside that you gave to the entrance. What is the condition of the floor, walls, ceiling, lights and HVAC vents? If the flooring is in less than good condition, it should be removed. Whether you replace it or not depends on a number of things; including the condition of the floor beneath the flooring, the size of the space and whether or not a tenant would expect to select the flooring for the space you have for lease.

The walls should be free of holes, have a consistent texture and generally receive a fresh coat of off-white paint. If you have a drop ceiling, the tiles should be uniform throughout each room and the entire space if feasible. There should be no evidence of roof leaks or missing tiles. If there are stains from current or past roof leaks you should not only repair / replace the stained tiles, you should make any needed repairs to the roof or HVAC system if that is the source of the leak.

If there are interior restrooms, the same applies to the floor, walls and ceiling. All of the fixtures should be clean and in proper working order. Don’t forget to have the power on and make sure all the lights work. Replace non-working, humming ballasts and replace yellowed light diffusers. Proper and functional lighting is essential to a good showing.

Extended periods of Vacancy

If your space will be vacant for an extended period of time, make sure you visit the space at the very least once per month and touch up the work you have already done. Over time, spiders will do their thing, mail carriers and solicitors will do their thing and landscapers will do their thing with the leaf blowers. Your vacancies need regular maintenance and care, things happen, pipes break and roofs leak even when they’re not occupied. The last thing you want to happen is to have all the time, energy and money you spent to prepare the space properly in the first place erased by time and the lack of proper maintenance.

Your next step is to implement an effective marketing plan; this includes pricing, concessions, incentives and identifying the target of your marketing. Most of the successful people I work with and for in commercial real estate have tried leasing in-house or by themselves at one point or another and for a variety of reasons have ended up hiring this service out.

I highly recommend that you hire a leasing specialist in your area to handle the marketing and leasing of your vacancies. A qualified and experienced leasing specialist should work specifically in the area and product type that you have for lease. Don’t make the mistake of hiring a friend, relative or someone you have used successfully in another market.. If you are not a leasing specialist, don’t try to lease the space yourself. You will most likely find yourself at a distinct disadvantage to those in the market that have professional representative. Negotiating skills, forms, market knowledge, including lease rates, concessions, incentives and availability of like kind space are just some of the information a leasing specialist will be able to provide you.

The above suggestions if implemented properly will most definitely enhance the first impression prospective tenants have of your space and give you a leg up on your competitors. Note, another aspect of preparing your space for lease would be configuration of second generation space, but that’s a topic for another article.

One of the most important aspects of your real estate business, if not the most important ones is lead generation. The object of the game and it’s a game in a sense, is to not get into the shotgun approach of hunting for leads. There’s only so many hours in a day and in the beginning you’ll be doing everything yourself. You want leads that are the most qualified to meet your criteria of the type of real (real estate) property you’re looking for.

The best leads are actually come by word-of-mouth. This would be your local real estate club. They’re easy to find. Just go to Google stick “real estate club” in the search box. How far do you want to drive? Three miles or five miles? Most likely there’ll be one in your area. See what night they’re having a meeting.

At these clubs there’ll be all the contacts there that you need to develop your own personal team. There’ll be other investors there with varying degrees of experience. You’ll find all the professional people mortgage brokers, landlords, real estate agents, rehabbers and general contractors.

Real estate is a networking business, a people relationship business. Find out whom each one is and let them know who you are and what you’re looking for. These folks will be your best bet on getting the most qualified leads for the real estate deals you want. Some people like to get involved with the single family homes. However, many like to jump over and go right to the multi-family apartment buildings. Some like to start with homes in the beginning and then purchase apartment buildings later on.

Other methods of generating leads can come from direct mail. Find you a good list broker online or in the yellow pages. You can find multi-family apartment building leads in bankruptcy lists, pre-foreclosure list and sheriff sale list. Yes you can find apartment complexes in these list just like single-family homes. When using direct mail for leads you can send out letters or postcards either one. The letters work better…but postcards work just the same. With the postcards anyone in the mails can read your postcard, which is good. Who knows you might get a great lead from someone in the mail system by a friend of a friend who owns an apartment building.

As you can see all ready, you can actually come up with more leads than you can possibly handle. All the way from no cost to free! Other than word-of-mouth I personally like bandit signs. You know the little signs people put up on the side of the road. For apartment buildings? Yes, everyone involved in your lead generation efforts drive cars don’t they? Of course!

Pick two or three busy intersections, freeway exits, Wal-Mart and Home Depot anywhere there’s heavy traffic. You might check with your city ordinances to make sure there’s not a ban on placing them. Most cities you can’t put them on telephone poles. Politicians use these types of signs heavily during elections. Check with your friends and neighbors. They’ll most likely let you place the signs in their yards. All these methods are low cost to no cost. Later on when you can afford it go for billboards, ads in newspaper and commercials on television.