Repair and Maintenance on Commercial Property
Repair and Maintenance on Commercial Property
Calculating repair and maintenance costs on commercial property, how should that be done? Generally an investor is going to look at repairs and deferred maintenance on commercial properties as a percentage of the potential rental income. Potential rental income is not net operating income and should not be confused with NOI. We can also call potential rental income on a commercial property estimated gross income or EGI. Investors will use different figures on how they base the figures they use for these calculations so we must define how expense figured are determined.
Using dollars versus percentage for repair and maintenance
Sometimes it makes sense to use a dollar figure versus a percentage number. An example of this would be if an investor knows the HVAC is old and needs replaced, than an actual dollar figure can be used or perhaps the HVAC is going to need replaced in 2 years , the cost can be averaged out and that figure can be used. What about a percentage number, what should be used? We have to get down to a reality issue to consider costs involved in repair and maintenance of commercial property which would include lease obligations.
Primary Guidelines
- Age and physical condition of the commercial property
- Condition to the other improvements to the property you are considering
- An investor’s responsibilities under the lease being a landlord
General Rule of Thumb for repair and maintenance
As a general rule, repairs and maintenance should be calculated as a default from 5-10% of the effective gross income generated by the property. This number would be included into the expenses of the property (NNN) or OPEX operating expenses. This deduction will have a direct affect on the net operating income of the commercial investment property.
Building Commercial Real Estate
What does it take when Building Commercial Real Estate?
Building a commercial real estate property is not an easy task, and there are alot of moving parts. Step 1 is identifying the land in which you want to build upon. With your commercial real estate broker., the process gets alot more detailed and potentially complex. This series is provided as an educational foundation to help buyers identify the various areas of potential concerns. It also summarizes facets and processes required when building commercial real estate property. Shire Commercial represents the buyer-developer typically in this type of transaction.
Developing Commercial Real Estate
Below you can view part 2 of a series of development video interviews done with Larry Nelson of Nelson Development Company in Austin. Let’s hammer out some commercial real estate building bullets.
- Timing – your personal income picture. Look for declines in inflation and unemployment declines. Demand is on the increase in your target city. Major economic incentives and population increases.
- Location analysis and zoning reviews
- Site Details- you can understand more about this in the video below
- Marketability – Due Diligence Studies. Make sure your project has good site quality, convenience, and exposure. There are also technical considerations such as size, environmental, utilities and traffic patterns to understand.
Poor Decisions
Making a bad decision about building commercial real estate is obviously something you want to avoid. Here are some things to not ignore when you are digging into due diligence.
- Selecting a weak strategic position in a highly competitive market
- Access- having a new location that is not easy to find or access
- Locating next to low income developments
- Having a location that can be out-positioned by a competitor
- Not bothering to find out why there is no competition?
- Locating near retail that doesn’t operate within the same hours you operate. This means they close earlier that you do.
- Ignoring demographic reports that show you do not have the right customer base.
- Not understanding the Permitting process
Module 2: Interview Regarding Build to Suits (time 10:45)
The following interview continues with Larry Nelson of Nelson Development Company regarding build to suits for commercial real estate. In this module we are going to review the following attributes:
- Sub Surface issues
- Contours of the commercial real estate property (land)
- Coverage dilemmas
- Potential environmental concerns
- Utility availability
- Build To Suit Module 1 video
Cap Rates effects on Commercial Real Estate
Cap rate effects on Commercial Real Estate
Long term leases have a stabilizing effect on cap rates for Austin office space or warehouse property. Cap rates on commercial real estate typically lag interest rates and money markets by at least 6 months on a mid sized investment and up to one year on larger investments. In other words cap rates (values) of commercial real estate do not move as quickly as bank rates or money market rates. Office space and warehouse space lease rates do not change every time there is an interest rate change in the market. So keep in mind a cap rate is going to change more slowly and is a lagging indicator.
Interest rate affects on Commercial Real Estate
When interest rates rise, investors for commercial real estate may expect a lower cap rate on an Austin office property or warehouse investment . On the flip side, when interest rates are declining, most investors expect higher cap values. Stocks and real estate have been described as inverse of each other, higher stocks correlates to lower real estate values. Commercial Real Estate is often seen as a flight to safety if stocks are declining. All of these factors can affect the cap rate on an office property investment or warehouse investment.
- Current interest rates
- Ratio of mortgage money to fair market value- Loan to value
- Amortizations available
- Balloon or maturity dates
- Market conditions
- Forecasted market changes
- Yield
- Other investments that compete with commercial real estate
Shire Commercial represents Buyers in finding the right properties and helping clients execute an investment or purchase on office properties , office condos or warehouse space in the Austin, Texas area.