With many store fronts sitting vacant, many investors have started considering commercial properties as a way to diversify their portfolio. I am seeing a rise of beginning investors asking for commercial properties in their search as they face continued difficulty with residential distressed sales and competition from cash heavy investors, REITs and hedges. Some commercial units are also facing similar financial burdens and high vacancy rates, making them more feasible investment models for beginning investors. Leasing residential apartments versus commercial properties are vastly different however.
Lease types. Unlike residential leases, there are various types of leases – net and gross. Among these there are several variants. I strongly recommend always using representation to protect your interests. They know what the market is and what is available and can help get negotiations and concerns addressed quickly.
Gross Lease which is common for most apartments and some storefronts is a set rent amount paid. Taxes, insurance, maintenance and related costs are the responsibility of landlord.
Net leases require tenants to pay for some or all property expenses, such as taxes, insurance, maintenance, utilities and related costs. Costs are paid in addition to rent. Net leases are broken down to several types: Single Net (“N”) have tenant paying a portion of additional expenses related to the building. Triple Net (“NNN” / “Net-Net-Net”) has tenant responsible for all costs related to the building.
There are other modified versions of these leases, including shopping/mall lease, land lease and bondable leases. These are used in very specific cases, and have set terms. Some leases may also ask for percentage of gross sales as part of lease terms.
Commercial leases also are not afforded the same level of consumer protection that residential leases provide. There is no landlord-tenant type of ordinance.
Rented square feet may not be the actual square feet inside the space. It could include proportional share of common areas, parking and external areas.
Depending on business/zoning, there may also be additional expenses related to testing the environment as well. Planning ahead can help minimize expenses and avoid vacancies.
Tenants will also have different needs; some may need to drastically alter the vanilla box. Be prepared and address construction, fixtures and punch list items if there is delay in specific areas of the build-out in which tenants may ask for abatement.
Some commercial units may also share common areas with a condo HOA. Check what rights, assessments and voting power you may qualify for. Having representation can help you understand market conditions, negotiations and the type of model that suits your needs.
Sherwin is a REALTOR® in the Chicago & Suburban area with @properties. Questions can be forwarded to [email protected]
Sherwin is a REALTOR® in the Chicago & Suburban area with @properties. Questions can be forwarded to Sherwin Sucaldito
”Beginning Investors Looking at Commercial” by Sherwin Sucaldito is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.
Based on a work at Realty Evolved
