10 hidden costs of commercial real estate - part 2
In my previous article we discussed the first three hidden costs of commercial real estate: city business license fee, sewer fees and environmental cleanup fees. In this second article of a three part series we are going to highlight other not-to-thought-of costs: capital expenditures, commissions & readying the space, vacancies, prepayment penalties and building code upgrades.
It is always prudent to set aside cash each month in reserves. The premature failure of an HVAC unit, water heater or other building component could set you back $5,000 to $10,000 easily. Property owners should keep records of all major building components, the age and life expectancy of each to help alleviate surprises. However, there is always the unexpected mechanical failure. This a good reason to keep maintenance contracts on all equipment.
Commissions and Readying the Space
Tenants come and go. Again, this is something that should be set aside in your reserves. When a tenant leaves there usually is work that needs to be complete to ready the space for a new tenant. A qualified commercial real estate broker should be contracted with to secure a qualified tenant. With that you would pay the broker a commission, which could be tens of thousands of dollars. Oftentimes, tenant turnover can be anticipated, but there is an occasion a tenant folds-up unexpectedly and the vacancy must be filled.
Speaking of vacancies, the loss of income could wreck havoc on your profit & loss statement, your reserves and possibly your personal savings. Plan on the worse-case scenario for time without income so you are not left without funds to cover the operating expenses or loan payments.
Many commercial purchase loans are for a five, seven or ten year period of time. Quite often a property owner may choose to refinance the property into a loan with more favorable terms. Many commercial loans have a prepayment penalty, which could apply to the first five years of a loan period. You usually see a penalty of three percent the first three years, then it drops to two percent at year four and one percent the fifth year. If a property owner pays off the current mortgage by securing a new one or selling the property, he could end up paying several thousand dollars in a prepayment penalty.
Building code upgrades
There may be an occasion an owner makes improvements to the property to secure a new tenant or to add value to the property as a whole. The improvements desired could trigger other requirements being met to bring up the building to current standards. For example, a client wanted to repave and restripe the parking lot. He was required to provide several ADA (American with Disabilities Act) parking spaces, signage, path of travel and the installation of a significant ramp in order to be within current guidelines.
In my last article of the series we will discuss special assessment districts and tax misconceptions.