Is Managing Commercial Real Estate Completely Different Than Residential Management?
If you have ever owned a house or duplex that you have rented out and you feel like you are ready to move to the next level, I have a few guidelines to help you get started. First and foremost, you’ll need to decide what asset class you would like your next investment to be in. Here are a few different types of assets that you can focus on:
The Commercial Leases
You will find the commercial lease is a lot longer and much more detailed than your residential lease and it will spell out common area maintenance fees, increases in rental amounts at certain dates, concessions, tenant improvement work, and just about everything else. Even in the same building, the terms negotiated on a commercial lease can substantially vary from one tenant to the next. There is a good chance that your tenant will have an attorney review all lease documents and you will have a few revisions before the lease is actually executed.
Commercial leases are either a gross lease (the owner pays all the utilities, taxes, and insurance), a net lease, or a modified gross lease. There are several types of net lease, but the one you’ll hear about most often is a triple-net lease where the tenant pays their proportional share for everything (taxes, insurance, utilities maintenance, repairs and capital improvements) on the building. A modified gross lease is where a tenant may pay their share of any (but not all) of the Net lease expenses. Typically, a modified gross lease is net of janitorial and utilities (tenant pays their own janitorial and utilities).
Many landlords will have an attorney create or modify their lease for their properties whereas with residential more often than not you will see a standard form (template)
Length of lease
Average commercial lease lengths are 3-5 years, however it’s contingent on market conditions, the existing condition of the space, your credit, and the scope of tenant improvements needed. Some leases can be even longer (20 plus years). Typically, a commercial lease will also have an option to extend the lease beyond the initial term.
Management Issues Are similar
Somethings do not change, you will still have the typical situations where one tenant might create a parking issue or sometimes be a nuisance, this can be handled with multiple write ups and eviction if need be. Typically, though, most commercial tenants do not have as many rights or protections as a residential tenant, and therefore it can be easier to enforce any nuisance action.
Tenant mix is critical for your investment. You will want to vet the business as well as the perspective tenant by asking for tax returns, or company financials for the last 2-3 years. If the company is a new start-up ask for their business plan as well, and you may want to ask for a personal guarantee on the lease . The guarantee doesn’t have to be for the full term of the lease as it can burn down as you go. A big thing to keep in mind is to try and have your tenants not detract and/or cannibalize from one another ie: two hair salons next door to each other is not a good situation to get yourself into, now if you have a spa that isn’t offering the same services this can be a good mix. Keep in mind the area you are in and the services that will best be used in your community, driving traffic to your property will be a home run to your tenants.
Know the Laws/Requirements
You need to be aware of the local tax laws and several regulations, ie: the parking requirement for a gym use is going to be different than the requirement for an office.