Commercial Real Estate and Property

10Oct/16Off

Commercial Real Estate Investment Properties

Over the years, my clients have understandably wanted me to pursue every avenue to sell their property. To do so, they often request that I list their property as an investment in addition to listing it under a particular commercial real estate category. While this may seem like a good idea, in my opinion, unless you really have a property that can be considered an investment property, it is not particularly helpful.

Recently, one client asked to have their office building listed as an investment property. Office properties can be an investment but in my opinion, this property did not qualify. It was about 50% vacant and all of the leases in place were short term leases.

Similarly, I have had clients ask to have land listed as investment property. Certainly, there are people who will buy and hold land for a potential windfall down the road but unless the land has a lease or some sort of on-going income potential, I do not think that it is appropriate to consider it an investment property.

For a true investor, neither of these cases would get you past first glance. For something to be an ideal Investment property, it should have the following -

Ongoing income streams - Usually this would be rent. In the past, some people have assumed an appreciation of the property over time in their decision process. In my opinion and in light of the tremendous devaluation of real estate over the last few years, that is a mistake. When making an investment decision, the best practice is to consider the actual income streams themselves in valuing the asset.

Long terms on the income streams - Ideally lease terms remaining should be 10 to 20 years. When buying an income property, a new owner does not want to pay for a property that may be vacant in 1 or 2 years.

Single tenant users - This is not to say that people will not consider multiple tenant properties however, as you increase the number of tenants, you also increase the number of potential headaches associated with the property.

Credit Tenants - Whether you have a single tenant or multiple tenants, the leases associated with the property are only as strong as the tenants.

Triple Net Leases - Ideally, an investor will simply want to collect rent and deposit a check. For them the best leases have the tenant responsible for the property taxes, insurance, utilities and maintenance of the building.

Full or nearly full occupancy - Some properties are advertised as income properties which have significant vacancy. These properties often advertise a cap rate for the property that assumes the vacant area will be leased at the asking lease rate and the asking price for the property. In my opinion, this is misleading. If a property is not fully leased, quoting a cap rate in this way makes no sense. An investor making an intelligent decision would be best served selecting a property which is fully occupied.

For Investors to compare apples to apples, they need an investment alternative that is basically as simple as any other investment option. With stocks, bonds, or interest bearing accounts, you simply invest the money and do not have to take on property maintenance, leasing and other chores and expenses. Of course, these criteria significantly reduce the number of properties which you might consider and I realize that not every property will have all of these features. But I will also tell you that properties like this do exist and can be found.

There are definitely properties which will sell that do not have all of these features and expectations of these features differ somewhat with the type of property (i.e. retail vs. office). However, if you are marketing the property as an Investment option, the successful seller will try to match these criteria as closely as possible.