When looking to invest in a commercial property, there are a number of points which merit careful consideration before you take the final step. Although location, condition of the building, area zoning and growth potential are all important, another primary aspect which should be carefully examined is the current tenantry. The tenants play an important role in determining the value of the property. Good tenants will improve the value of the investment, while bad or dissatisfied tenants may detract from it.
Tenant mix and description
The health of a commercial building may best be assessed by examining the current tenants. Making time to speak to the tenants in order to sound out their attitude towards the building, while also enquiring whether they are likely to renew their leases when the time comes, will give you a fair idea of what the future may hold. Looking at the type as well as the standard of tenants over a period of three years should give you a realistic idea of how well the property is being managed at present, in addition to showing the perception of the tenants towards the building management.
Financial standing
Determining the financial strength or credit rating of the existing tenants would also prove helpful in making your decision. Identifying the economic sector into which each business fits will assist you in ascertaining whether all or the majority of the tenants are reliant on a buoyant economy. This could be problematic, should the economy suffer a dip in the future. For the same reason it is preferable not to have tenants who all fall into the same economic category.
Operating needs
It helps to understand the operating needs of each business in order to better manage the prospective commercial property, while also ensuring that the tenants flourish as far as possible. Happy tenants are more likely to renew their leases. Assembling a description of each tenant’s method of operation, including any unique requirements they may have, will give an overall idea of what management efforts may be required of you in the future.
Tenant leases
Besides acquiring an insight into the businesses represented in the prospective commercial property, it is also necessary to ascertain the strength of the current lease agreement between the tenant and the landlord. A priority should be to check that there are, in fact, valid lease agreements in place with all the existing tenants. In addition to this, one should ensure that these leases are properly executed by all the parties. It is important to confirm the remaining duration of the current leases before buying the property. It might also happen that there are sub-leases in existence; these should be carefully perused as the conditions pertaining to these may require specific consideration or attention.
Rentals
Some suggestions with regards to rental costs, which may assist you in your decision to purchase the commercial property:
Compare the asking rentals of the commercial property in question against those of the current property market in order to ascertain whether the rentals are realistic or overly high or low. Be aware of the escalations to which the tenants are subject within the parameters of the lease. Confirm that the rentals have been correctly calculated on the leases; then ensure that this is the actual amount which each tenant is paying on a monthly basis. Enquire whether there are any overdue amounts outstanding.
The information you have amassed with regard to the tenants before making your offer to purchase will put you in a stronger position for selecting the most effective strategy as you will have a comprehensive understanding of the tenant situation. It should also help to prevent any unpleasant surprises which could occur after you take over the management of your new investment.
