A fter looking at the commer- cial properties in your area, you’ve finally found one that seems to meet your investment criteria. It’s in a great location, the price is right, and you’re already thinking about putting in an offer. But before you take the plunge, you should ask some tough questions. The key to success with any invest- ment property is in the details, so gather all the information you can about your potential investment. Here are nine not-so-obvious ques- tions you’ll want to ask before making an offer on a commercial property. ARE THERE TENANTS IN PLACE? Even though the commercial market has experienced a significant slowdown, it’s likely that any 1 commercial property you’re buying already has a few tenants in place. Request the rent roll and copies of the current leases from your broker. These documents will tell you who the lessees are, when their leases expire, the terms of those leases (including allowed rent increases), how much rent they pay, and how much they may contribute to common expenses.
Collectively, this is just the cost of doing business—similar to how a seller generally has to pay real estate commission. Combining the income and the expenses should get you a net operating income (NOI), which is what you can expect to pocket each month from the property. Whether you’re planning to buy and hold or resell in a year or two, the NOI allows you to calculate your return on investment (ROI)—making it arguably the single-most important factor in any commercial property decision.
boost customer traffic and increase your profitability, or it could dilute demand and siphon business away from you. Buying a commercial property is a lot riskier than investing in an REIT. Look into commercial building permits that have been recently filed for projects near you and talk to your broker about any new developments in the area, including rumors and possibilities they’ve heard about. Then conduct a careful analysis of the impacts these new projects could have on your property.
CAN I SEE A PRO FORMA?
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A pro forma is a complete account- ing of all the income and expenses of a commercial property, so this is vital information. Once you receive copies of the leases, make sure all the rents and fees detailed in the leases add up to the amount of income indicated in the pro forma. If they don’t, ask the broker for clarification. The expenses should include everything the owner pays to maintain and market the property, from trash removal, routine building maintenance, and landscaping to professional property management.
WHAT OTHER PROJECTS ARE PLANNED FOR THE AREA?
IS THERE A GROUND LEASE?
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Many commercial properties have a ground lease, which means you’ll pay rent on the ground under the property you buy. There are pros and cons to a ground lease. On the plus side, it can make a commercial property much more affordable since you’re not paying to own the land under the building. On the other hand, you won’t benefit from appreciation on that land either.
Future developments can have a massive impact—positive or negative—on your future profitability. For example, a new highway being built nearby could bring in the commuter crowd, or cut you off from the neighborhood, depending on the placement. An influx of new construction in your area could
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