I'm currently evaluating a 3 unit multi use building. Two apartments and one retail space on the main floor (barber shop) all units currently rented. It's in a very nice area of town where there are very few closed businesses. The retail portion of the building still makes me nervous. Any thoughts?
Hi @Chris Connery , the biggest difference you'll be seeing between apartment rentals and commercial space rentals are going to be in the leases. Something I'd encourage you to do is read every line of the lease agreement in place with the barber shop because the strength and structure of the lease is going to determine whether you're making a good investment or not. Unlike residential leases, which while do have some flexibility, are fairly heavily regulated in what you can and cannot require a tenant to do, commercial leases tend to be very freeform and are minimal on the regulations.
Look for the following items in the lease:
- Length of tenancy (how long they've been there and how many times they've re-signed a lease)
- Length of lease (how many years are left on the lease)
- Who pays what utility
- What maintenance is the landlord responsible for versus the tenant
- Are there any rent escalator clauses for the tenant
The benefit to commercial tenants is typically their willingness to stay in the same location for longer and that they, usually, aren't as time intensive as a residential tenant. With that being said, on a dollar for dollar comparison of the same square footage, you might be able to charge slightly more for an apartment than a retail space. All depends on the area. In short, don't be scared so long as you know what you're looking for and that you have an established business in your property.
Thank you for the in depth response matt, very helpful.
Generally you will have for the commercial part a full NNN leases where the tenant pays for everything, a NN lease where you or the tenant pays for certain items depending on what is in the lease, or a gross lease where you pay for everything.
Look at if this barber is a single unit or multi unit operator. Look for the leases if they have to provide updated personal and business financials each quarter or year. Each business has a certain rent to sales ratio based on their business type. You do not want to pay a price for the building based on an amount that is not sustainable for that business. What happens then is the seller sells at a premium price but the business is barely hanging on. They then come to you down the line owning it and ask for a rent reduction or they move to somewhere else paying cheaper rent. You want rent to not put too much pressure on their business model to succeed and thrive.
Since there are apartments upstairs the commercial tenant likely only pays a percentage if any of ongoing repairs and the apartment tenants generally pay nothing.
It is therefore key to scope the sewer to the street, see when the parking lot was last re-coated and re-striped, check how many layers on the roof,etc.
If to many layers insurance will not write a policy on the building. Then you have to tear down to decking most likely and can have an enormous cost to replace. These are things you want to get as a credit from the seller at closing so you are not spending the money nor asking your tenants for it. Even if they are obligated per the leases these items tenants can not usually pay at once so the repairs are stretched out many years but the landlord bears the upfront cost today.
This happens when an owner wants to unload their whole portfolio in chucks. As a buyer I am not a fan of this. I know mfh but don’t really know much about retail. I just can’t see too many people knowing much about both of them either.
Insuring a multi-use building can be tricky if the Mercantile use is a restaurant, wood working shop, etc. that are deemed to be a more hazardous exposure. The Insurance company thought is, in a fire, the owner may also face Liability if the proper safety protections are not in place. There are also retail businesses that present a pollution exposure. Dry cleaners use chemicals that may need special cleanup after a loss for example.
If the non-apartment exposure is smaller than the apartment exposure (usually judged by square footage), it may result in a lower cost than just apartments for Insurance. Generally the rates for non-apartment building are less than apartments.
I recommend seeking an independent agent who handles commercial insurance and speak to them for quotes on this property. Good luck and feel free to PM me if you want more info on how the mixed use properties are looked at for Insurance.
Thank you John