Diamond Author
Investigating the lease and the tenant should be the number one priority for investors. This may involve quizzing the current tenant before committing to the purchase. After all, the value of the investment depends on who is renting the property, for how long, at what rent and on what terms. For the commercial property investor the lease term is critical. Therefore, looking at the stability of the tenant stability is paramount. The security of a five-year lease is useless if the company goes broke 10 months later.
Choice of Tenant
Investors spending $500,000 do not secure major corporates. The buyer of a commercial property, with a letting area of between 200-500 sqm, is more likely to have a small or medium sized business occupying the commercial property. This not to say they have not been running a solid business for over thirty years or they may also be a struggling new business. This is what the investor needs to determine and the best way to do this is speak to the tenant.
Many investors are unaware that they are entitled to check out the tenant. The investor needs to find out whether the tenant owns a serious and profitable business. The checklist is long and this is what makes commercial property so different from residential. In the commercial property market you are dealing with businesses rather than people and finding out the financial position of the business may be difficult. However, the incentive for researching your tenant can result in a more profitable investment.
The buyer should also ensure that they could secure future rental rises and replace tenants if they leave. Replacing tenants can be a very difficult and costly exercise and this is the real risk of commercial property, so astute analysis is needed here. It requires scrutinising the lease and occupier very carefully. Remember small businesses are very susceptible to change.
Buyers must look at whether there is a reasonable amount of time left on the lease. The tenant may have signed a 5-year lease, but they may already be half way through the lease at the time of sale. The option to extend should mean nothing to the owner. A 3+3 year lease is a 3-year lease, not a 6 year lease.
Many buyers have the lease scrutinised by experts. Leases have many different clauses that appear at first glance to be safe, when in fact they disadvantage the buyer. This is where independent advice comes into play.
The rent review clauses should be examined and checked to see whether they are in line with the market. Sometimes the rent maybe set too high and the tenant can ask for the rent to be lowered or threaten to find alternative accommodation. The outgoings should also be assessed to see whether the tenant or the owner pays them.
Zoning of the Property
Zoning refers to the property's present and potential uses in its current location. This usage can vary from type of industry, retail warehouses or bulky goods outlets. The information is available from your local council and is a major issue when it comes to commercial property.
Investors need to keep an eye on areas that are constantly evolving, as this can increase the value of your investment. For example, a premium is paid for industrial property that can be converted into office or warehouse facilities. Generally speaking, bulky goods' warehouses have the higher value and the highest growth in value for future development.
Investors should look for zonings that allow for different types of users and avoid areas that have highly specific zonings, which may place limits on finding new tenants. Investors often overlook this. The astute investor will use the zonings to their advantage to create windfall gains.
Location
Similar to residential property - location is everything. The better the location, the better leasing potential, which translates to higher rents and return on investment. There are a number of factors that constitute a good location. These range from the influence of infrastructure, accessibility to public transport and position within an established area for that type of property. However location should not be the sole determinant.
Look out for transitional suburbs and emerging trends. Identifying these trends will provide you with a shortcut to capital growth and better yields. However, it is most likely the improved infrastructure in certain areas that has resulted in the greatest increase in land values for industrial property investors.
Construction and Design
The construction and design of buildings will impact on the investor's ability to secure tenants. If the commercial property is a newer building, then it is likely to have more appeal to renters and require less renovation and building maintenance.
A new building also provides substantial depreciation benefits for the owner. Building depreciation for commercial buildings is approximately 4% over its 25-year life. Further taxation benefits can be claimed for any refurbishment works as well.
A well-designed building will suit a number of tenants and therefore will be easier to secure a new tenant should the current one leave. Buildings older than 25 years tend to suffer from functional obsolescence. Aging properties tend to have higher vacancy rates due to poor amenities.
About this Author
John Highman is a prominent investment real estate speaker and coach that helps real estate agents and real estate brokers globally to improve their commercial real estate market share and performance. He himself is a successful real estate agent that has specialised in commercial, industrial, and retail real estate of all types for over 30+ years.
You can join John Highman's global community of commercial real estate agents and brokers at http://www.commercial-realestate-training.com
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