Commercial Real Estate Success Tips

  • From Day One of your real estate investment career, put and keep yourself in the mindset that all fees (read, all) are negotiable items - whether brokerage commission or fees for other professionals, such as accountants, attorneys, engineers, and special consultants. Never be hesitant to request a lower fee; after all, the most that they can do is refuse. Usually, however, as a business relationship is forged, the service provider will become more amiable to the idea of a reduction in his or her fee in order to guarantee ongoing future business. And because of the typically large amounts of money involved in commercial real estate transactions, brokerage fees can often be negotiated. As a general rule, the larger deal, the lower the commission percentage the broker will receive.

  • In order to handle potential disputes between landlords and tenants (whether commercial or residential), the real estate laws of most states incorporate some form or another of the Statute of Frauds. This regulation, briefly summarized, states that in order for any real estate agreement to be valid and legally binding, it must be in writing. Simply put, if it's not in writing, a valid agreement does not exist. This effectively eliminates all "this-person's-word-versus-that-person's-word" situations, which can be virtually impossible to prove one way or the other. Therefore, only the points that are specifically spelled out in the lease (including any and all agreed-upon improvements) are binding, and until the lease (or purchase agreement, if the transaction is a sale) is signed by both parties and a good-faith deposit has been made, there is no agreement, no contract, and hence no grounds for contention.

  • Although many experienced real estate investors often recommend the "hands on" approach to property management for beginning residential investors, when it comes to commercial real estate ownership, the merits of hiring a professional management company for your first investment property shouldn't be overlooked. The education that you'll receive can be well worth the management fees you'll pay for the first year. By overseeing and working closely with the management company, you'll gain first-hand knowledge and experience of the inner workings of commercial property management and the real estate profession in general. The management company actually has everything that you're probably lacking as a novice real estate investor: years of experience in the field; an up-and-running real estate accounting system; and established relationships with contractors, vendors, tenant brokers, and other useful real estate professionals.

  • Commercial tenants typically fall into one of three general categories: mom-and-pop retailers, which are small local entities; regionals, those organizations of larger area; and majors, which are typically very large, well-known, and creditworthy companies. When negotiating a lease with a major prospective tenant (especially one that will be a substantial draw to the surrounding smaller merchants, such as a big-name drug store or supermarket chain), the more powerful the store with regard to anticipated shopping traffic, the more lease concessions that will likely be demanded. One that you'll almost certainly be confirmed with is a reduction of the rent per-square-foot you're charging. Any rent negotiations that you consent to enter into should be based on the quality of the tenant; the desirability of the location; and your operating, financing, and new-tenant preparation expenses.

  • One method by which you can command top-dollar rent for your commercial property is with the use of a form of leased land ownership known as a build-to-suit. As the name implies, with this option you'd build on or convert your land or property to meet the specific requirements of a particular tenant. This can be accomplished in one of two basic ways: either the tenant gives his or her plans and specifications to the owner/landlord to build, or the tenant directly handles the construction with the landlord financing the activity. Using the first option, the landlord, after receiving the construction plans from the tenant, would obtain a detailed estimate of cost from a building contractor. The landlord would then use this data to set the tenant's rent. For example, if you own a $100,000 tract of land that you've agreed to develop for a tenant at a construction cost of $250,000, the total value of the improved property would be $350,000. Assuming that you desire a capitalization rate (or, percentage rate of return) of 10 percent, you would charge the tenant $35,000 rent per year ($350,000 x 10% = $35,000).

    With the second method, you would finance the tenant's actual construction costs and, again, set a desired cap rate for those expenses. The amount of the tenant's rent would be determined by adding a base rent for the land to the cap rate amount.

  • Many commercial property investors find it advantageous to buy a property and immediately make all necessary capital improvements and repairs, especially for properties that need a substantial amount of refurbishing. This not only increases the property's value but also quickly allows for higher rents, and could also result in easier overall property management. Additionally (to the extent allowed by the IRS), this strategy also maximizes eligible first-year tax deductions.

  • Although a prudent measure for all real estate transactions, it's an especially good idea for commercial deals to engage the services of a competent real estate attorney to represent and protect your interests. Once you've negotiated with the property seller and come to an agreement on price and terms, the contract of sale will be prepared - usually by the seller's broker or attorney. Before signing, be sure to have an attorney that's looking out for you review the document. Furthermore, an experienced real estate attorney can also facilitate contact with bankers, industry professionals, and other real estate investors.

  • If a non-broker gives you a tip on a potential investment property, don't neglect to reciprocate with a small token of appreciation. You can give either a gift or cash, with the amount being dependent upon how valuable the information turns out to be. If you follow through with a successful deal at a good price, extend this token as a nice referral fee and incentive to keep an eye out for other properties that might be of interest to you.
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