10 hidden costs of commercial real estate - part 1
Although all known circumstances of a property need to be disclosed to a buyer by the seller as stated in a purchase agreement, issues creep up over the years of ownership. Laws change, improvements are made to the property, tenant’s needs change and some issues may not had been fully researched at the time of the purchase.
In this first of a three part series we will highlight some of the unexpected expenses a commercial property owner may experience in the ownership of their asset.
City business license fee
I just learned that the City of Napa is enforcing a long held ordinance of the municipal code allowing them to require a landlord or property manager apply for and maintain a business license. I already received a call from a client who received a letter and business license application from the city. The tax rate is $1 per $1,000 of gross annual income for the prior year. So, say you have a monthly gross rental income of $10,000 you would expect a tax of $120 per year. Not much, but one more tax to track and another administrative duty to maintain.
Commercial sewer fees are based on consumption above a standard, multiplied by a strength factor and then multiplied at the current rate. If your commercial tenant is a retail store for example you have a strength factor of one. When you consider a laundromat or restaurant you will see a factor of 1.4 and 2.7 respectively. As these types of businesses produce sewage that require more treatment than the average use, the fees are higher. I have a client with a laundromat as a tenant. The sewer charge assessed on the property tax statement is an additional $10,000 per year. Fortunately, the lease is constructed as such where the tenant must reimburse the property owner.
It would be a horrible discovery to find an old abandoned underground storage tank used decades earlier for fuel or some other substance, but it has happened. Less severe, but more common is the discovery of asbestos either in sheetrock, ceilings or heating systems. The replacement of an old HVAC (heating-ventilation-air conditioning) system that fails or the removal of a few walls for a new tenant could trigger a costly abatement process. A building that was constructed in the sixties was going through some minor renovations. With the removal of a drop ceiling an old spray acoustic ceiling was discovered that was peeling and in overall poor condition. The tenant, who was a high-profile corporate entity, was very concerned and had the acoustic material tested. The test came back positive for asbestos. Being it was a pre-existing condition the property owner was responsible for abatement of the material. At a cost of $20,000 the material was properly removed and the tenant completed their renovations.
In subsequent articles we will examine other unforeseen expenses that could cause concern for a property owner.