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

1. Age and physical condition of the commercial property
2. Condition to the other improvements to the property you are considering
3.  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.