12 Step Annual Check-Up for Commercial Property Owners - Part 1
It can be easy for commercial property owners to become complacent. The nature of some types of commercial properties can develop a sense in their owners that all is good when they should be proactively performing an annual check-up.
The terms in a lease could require the tenant to take care of the maintenance causing the owner to take on the attitude that all is good as long as the rent is being paid.
Scott, contacted me regarding his portfolio of industrial properties to help get his leases in order. Scott owns several thousand square feet of industrial space comprised of multiple tenants and unfortunately had not stayed on top of lease expiration dates. Many of his tenants were on expired leases at below market rent. I spent several hours working with him and his tenants to execute new leases.
Being on top of lease expiration dates are important for both the landlord and the tenant. Plus, what property owner/investor wants to leave money on the table in the form of below market rent? Current, market-rate leases are just one part of an annual check-up of commercial property ownership.
Being in the fourth quarter of 2016 there are oftentimes things from the past 12 months that are overlooked in the ownership of a commercial property. Whether you are an investor or an owner-user you should annually perform a 12-step check-up:
1. Review your leases - Make sure your lease agreements are up-to-date not only for the term and rent, but also for the rent increases, common-area-expense (CAM) and triple-net (NNN) reimbursements. In some cases the CAM expense and NNN reimbursements need to be reconciled each year and the new amount for the following year provided to the tenant.
If you are a property owner and you run your business from the property you should also have a lease. It is a good idea to have your property ownership under a different entity then your business or your personal name for several reasons we cannot go into here. But, do not overlook executing a lease and paying rent from your business to the ownership entity.
2. Visit your property - a lot can happen in 12 months so you may want to consider semi-annual or quarterly inspections depending on the property. It is also important to meet with your tenant, discuss how their business is doing and how the property is meeting their needs. In a cordial conversation by listening intently a landlord can learn if their tenant’s business is growing, shrinking, merging, is for sale or about to implode.
I learned the hard way years ago and since perform inspections more than once a year. My tenant calculated my annual inspection schedule and in between my visits constructed an elaborate marijuana growing facility at my property. This included a reconstruction of the electrical system and water line as well as the ruining of the flooring and walls.
This amounted to a $30 thousand dollar learning experience--I now perform quarterly inspections.
In the next part of the series we will discuss the next 10 steps which includes servicing systems, obtaining bids, planning, energy upgrades, meeting the professionals on your team and ADA access compliance.
Burt M. Polson, CCIM, is a local real estate broker specializing in commercial, luxury estates and wineries. Reach him at 707-254-8000, firstname.lastname@example.org. Sign up for his email newsletter at BurtPolson.com