5 avoidable risks for commercial property owners - part 1
“I thought the only risk you had was making sure the rent check cleared the bank,” exclaimed Paula, a friend of mine who is considering investing in commercial real estate.
Jokingly, I had to explain that investors do not just sit back collecting rent checks each month. There are ongoing responsibilities an owner should perform during her ownership to not only ensure a happy tenant but also mitigate risk.
Here are five avoidable risks:
Holding the wrong form of title
The time to think about how you should hold title to a property is during escrow.
Be sure to consult your attorney beforehand, but holding title as an individual could open the door to having your personal assets involved if a lawsuit were ever to arise.
A limited liability company (LLC) is one of the most common ways of holding title. If you own multiple properties, many investors go so far as having a separate LLC for each property. Separate LLCs in a way creates a shroud around each property making it difficult for a lawsuit to extend to the other properties and your personal property.
The downfall is that each LLC requires registration, which in California is $800 per year along with requiring to file a tax return for each along with other administrative duties.
A new form of title called a Series-LLC allows for an umbrella LLC to have a series of members, managers and assets under the umbrella LLC without the need to form additional entities. Series-LLCs offers the protection of individual LLCs without the additional administrative costs.
Not periodically evaluating your insurance
Avoid having your insurance on “auto pilot,” instead plan on assessing annually with the help of your insurance broker.
Properties and tenants change over time. The replacement cost and market value of your property could substantially be different and could change over time. It would be unfortunate to have a loss only to find you were under-insured or to find you have been over-insured and paying too much.
The use of the tenant could also affect your insurance coverage and cost. I have seen this occur on two different occasions the first being an owner who had a retail space who leased to a church. This change increased the occupancy load of the space which is looked at differently for risk by the carrier adding more cost.
Then a client leased an office building to a medical clinic. The issue was not so much the medical use, but more of the type of medical being high-profile in the community and prone to potential grievances and conflict by others.
Also, any improvement to the property made by the owner or the tenant could increase the value and inherently require a change in the coverage. A tenant could spend hundreds of thousands of dollars on interior improvements to their space, which could affect your insurance coverage.
In part 2 we will cover the three remaining risks, maintenance, safety & security and ADA (Americans with Disabilities Act) upgrades.
Burt M. Polson, CCIM, is an active commercial real estate broker. Reach him at 707-254-8000, or firstname.lastname@example.org. Sign up for his email newsletter at BurtPolson.com.