Can Commercial properties be run absentee?

Question

I know that with residential properties, you need to be there for your tenants or have a property management watch over the place.

Is the same true with commercial? Or can you basically write into the lease agreements that the owners will not be there to babysit the property and that all repairs and maintenance must be done by the tenant immediately/as required?

Ashan D · Answer

Interesting, I would have thought government tenants would be the best! What problems could they possibly cause?

Rebecka Melson · Answer

It depends on the tenants and what type of leases they have how "maintenance intensive" they are. In a multi-tenant office building you will always have a few difficult ones. The worst are government agencies. NEVER again will I manage a property with government tenants.

James T Saint · Answer

A part of it also depends on your own experience.

If you are knowledgeable about tenant relations, property maintenance, lease negotiations and tenant improvements;   AND you are local to where your investment is, then you could consider managing it yourself.

I have known many an investor who derive great pleasure out of taking care of their own properties.   But I have also known several who ended up hating the process and switched to a property manager so that they could have some time to themselves.

Plus there is a big difference in the size and type of asset that you invest in.   A small 5,000 sf retail center with 3 to 5 tenants takes a lot more management than a 50,000 sf bulk warehouse / industrial center with one or two tenants.

But if you don't want the late night or weekend calls to resolve issues, or you are not knowledgeable, AND especially if the investment property is out-of-your local area, then I would recommend using a local property manager.   Your role then becomes similar to the asset manager who manages the macro strategy vs the tactical day to day operations.

If you do not know anyone in the area you want to invest in, send me a PM of where it is you want to invest and I may be able to referr someone to you via my contacts and network of CCIM and CPM associates.

Good luck with the new year.

Ashan D · Answer

Everyone is in favor of property managers so I guess i was definitely wrong there. Maybe it is reading all the horror stories of residential property managers that has had me biased against them. Maybe thing are generally better in commercial (the tenants are a lot less maintenance intensive I would think)

James T Saint · Answer

All things are relative with regards to any lease that is the so called "net" format vs those that are "gross" or "modified gross".

The term net lease has been chopped up over the years to include "net - N", "double net - NN", or "triple net - NNN".

N - generally refers to the actual property operational maintenance costs.
NN - generally refers to the property maintenance and limited other costs, i.e. adding in insurance or RE taxes or some other limited set of items.
NNN - generally refers to all associated property operational costs.

For clarification a "net lease" means that the tenant is fully responsible for some or all of the property's operational items;  On the other end of the spectrum is the "gross lease" which means that the owner is fully responsible for the operational items;  "a modified gross lease" is a combination of the two and usually includes an expense stop for the tenant.

Expense stop means the owner is responsible for all costs up to that point, i.e $3.75 per sf per year, and the tenant is responsible for the pro rata difference over that amount.  So if the budgeted or actual expenses for the year were at $4.95 per sf, the tenant would be responsible for $1.20 per sf or $0.10 per sf per month.

If you are an out-of-area investor and do not invest the time to monitor your investment property, you are going to lose in the long run and may lose in the short term.

Reason being, even if the property is a Net lease, whether it is single, double or triple net, who is to say that tenant will actualy maintain the property to the same standard that you desire.

Secondly, most tenants are not in the real estate business and as such, depend on either the owner personally or his property manager to take care of the issues relating to the ongoing maintenance of the property.

Who are you going to call at 2 am in the morning when someone finds water all over the floors and flowing into the streets?   Most tenants do even have a clue where the water shut-off valves are, let alone which vendor to call to clean up the mess.

If the owner is attempting to handle the property themselves, how are they going to be able to respond from several hundeds of miles away, or have the relationship with the vendors to get a timely response.

Good property managers can save owners a lot of money, and at the same time keep the existing tenants happy so that they will renew their lease.   It costs a lot less to keep a tenant than it does to get a new one.

What tenants will do is pay for the maintenance to be done for them via monthly CAM payments (Common Area Maintenance).  CAM payments ussually consists of all costs relating to the operations, but not the capital improvements of a property, including but not limited to, RE Taxes, Insurance, maintenance, on or off-site property management, and in some cases, off-site asset management.

With such CAM programs in place along with a good local property manager, AND properly supervised by the owner, the investment property should bring a reasonable and good return on his investment.

Rebecka Melson · Answer

I have worked for commercial real estate investors for years who had properties in other states. It is possible to manage from out of state, but to do this effectively you need local assistance. We had a local property manager who was an employee of our company plus our own maintenance personnel. We visited the property at least semi-annually, but more if needed.

Unless the leases are NNN, then the Landlord is responsible for most maintenance and therefore you at minimum need a local building engineer that the tenants can contact when needed and check on the property on a regular basis. Even if you have contractors in place to do the landscaping, janitorial, etc. you still need someone local to keep tabs on them. In my experience, if they know no one is watching them then the quality of their services start to lack severely. The same goes for employees, you have to make sure they communicate with you regularly (several times a week) what is going on at the property, otherwise they are probably sitting at home collecting a paycheck and letting your property get run down.

Tim Pears · Answer

I am not sure if you are trying to avoide the cost or the work in these acquaintance issues.  Bottom line it is your building, I would not depend on someone else to take care of it unless I had hired them to do it.  If you are not local to the building, hire a management company.  If the building will not support one, then find another building.

Trying to do things on the cheap will always get you what you pay for.  I think you are asking for trouble if you leave it to your tenants, but then it is only an opinion.  It is worth what you paid for it.  But my buildings will always have management hired to take care of them because investing in property is not meant to be a job in my opinion.  That s what property managers are for.

Ashan D · Answer

Thanks, I had no idea NNN was so common.

Honestly the only one of those responsibilities that is significant is making sure the property is in good condition. I'm sure an annual inspection can cover that.

IMO reit's are an inferior investment to real estate. If I wanted to go that route (and I had a long timeframe) I might as well put my money in an index fund. I want the benefits of real estate. I know going out of state will make things harder, but I think I'll be able to work things out.

Richard F. · Answer

I certainly do not have extensive experience with commercial, but more than 90% of commercial that I have dealt with was on a triple net lease- multiple tenants per building or not. The "triple net" part refers only to who ultimately PAYS for the expense. In the case of a multi-tenant building, the tenant will usually make repairs happen within their space, while the property owner takes care of capital improvements, routine common area maintenance, and emergency repairs that may affect multiple tenants. All of these COSTS, however, will get passed back to the tenants in the form of a CAM (Common Area Maintenance) charge that is typically calculated based on the square footage of each tenant's space, according to underlying terms of their lease, and charged, in addition to base rent, monthly. It is customary to estimate the annual charges, and bill accordingly each month. Actual expenses are reconciled annually, and the CAM charge adjusted or a lump sum amount is billed, per lease terms. Of course, repairs or improvements entirely within a particular tenant's unit will be entirely allocated to that tenant, so a tenant may prefer to hire their own contractor.

NNN leases are NOT exclusive to the big national tenants, in fact only a very few, very small, rundown commercial spaces that I have been involved with were rented on a straight monthly rent, with the owner paying for repairs and generally running them like a residential unit. I have managed many commercial spaces with base rents of $500 - $1000 per month, with CAM's an additional $150 on average and up, NNN. Offices, retail, warehouse, restaurants, you name it...

There are some excellent sample commercial forms here:
http://www.airea.com/HOME/Home.aspx

Bottom line for the OP, real estate is real estate. YOU need to obtain and pay for proper insurance; YOU need to pay and/or appeal your Real Estate taxes; YOU are ultimately responsible for law and code violations; YOU need to provide oversight to ensure the property does not deteriorate; If you want a "hand's off" Real Estate investment, then look at REIT's!

Ashan D · Answer

But as far as a  more standard type of lease is it necessary to be around? Phrased another way, what exactly to commercial tenants see the owner of the complex for besides negotiating the lease? (because I think tenants covering repairs is standard in commercial leases, tell me if this is not right)

I want to avoid NNN for now. I'm trying to figure out if I can still avoid property management on a more standard type of lease since I won't be around the property (I live in CA and am looking out of state) FYI I am most interested in multi-tenant office buildings or shopping centers