Commercial office building

14 Replies

Hello BP Gurus

I have experience in Residential properties but Zero experience in Commercial properties.

I’m intrested to Buy office building 

“Total 3,900 sq foot 2 story building. main floor has a foyer, reception area, 4 private offices, large open area work space, kitchen, and two restrooms. Acoustical drop ceiling titles, fluorescent lighting, upgraded carpets, wood cove base molding, and glazed interior doors. The second floor has two access staircases. This level has two large open work areas, 3 private offices, and a bathroom with shower. Interior pine ceilings and pine/painted gypsum board walls. Basement has storage and mechanical systems. 2 sump pumps in basement, Bosch fires alarm with pull stations, skylights, 4 Rheam 3 ton gas forced heaters, 120/240 volt single phase electrical panels. 13 parking spots.”

Taxes $15K

How do I get run the Rental and maintenance expenses etc. 

You should really hire a local attorney or commercial broker. The seller may provide that information but you can also do your own estimate based on market rates.

@Sai T. It's not completely different than residential but does have some subtlety you'll need to become familiar with. Great advice above about talking to local commercial brokers to see what they think. Here's a few things to think about as well.

1) Commercial space takes a lot longer to rent generally, be prepared for it to sit vacant 6-18 months depending on the vacancy rate in your area. Speaking of that,  what is the vacancy rate in your area? For smaller properties like that you'll just need to drive around/check loopnet and see what's out there because that's too small for costar to track. Local connections are important.

2) Who are the ideal users for your space? What kind of tenant was there before? What kind of office users are in the general area? Is it close to a hospital where it could be a medical use? Close to the courthouse where it could be legal? Also think through financial uses like insurers, financial planners, accountants, realtors. I've got several non-profits which are a use I would not have thought of myself.

Be aware that a lot of office users are working from home now. They did it out of necessity during the great recession and just realized because of technology they don't need it anymore. I see a lot of vacant office space that used to be people like contractors, home inspectors, architects and engineers that are in the field a lot anyway so they just skip the office and meet clients at he job site or a starbucks. If they absolutely need space they use wework or other temporary solutions.

3) While you're looking into local vacancy rates and office use, see if you can find out what kind of rent people are paying. Not always easy to find but you can get some people to talk about it and find info from brokers. One weird thing is they always talk about commercial space in $/square foot and that is an annual number. So for instance 1000 square foot office is $12/sq foot or $12k/year $1000/month.

4) Expenses tend to be less than residential but it's not as good as the Net Net Net thing you hear about with like say a Walgreens. With office you usually negotiate in the lease what repairs you will pay for and what they will pay for. You're generally paying taxes and insurance. When you get a new tenant there will usually be a lot of upfront cost for Tenant Improvements (TI) but less cost during the term of the lease. Lease terms are usually longer than residential like 3-5 years.

Are you will want to familiarize yourself with the concepts of net operating income and capitalization rate. There’s a lot of good information on this website about valuing commercial properties.

Sai,

I am in Western PA, but am a licensed broker.  I could run a Costar survey to give you a sense of what the market conditions are for lease and for sale.  Let's discuss.

Cory

It sounds like this is a vacant building and the current Owner flipped it or never rented it. I did commercial property management in CO and sometimes we would get new buildings and have to guess base on nearby similar properties advertised NNN costs per SF. Costar and Loopnet should have some info to help you but any lease would basically state that the NNN's listed are an estimate and will be reconciled annually. But no Tenant likes a huge reconciliation bill. We would do quarterly reconciliations and if it was off by more than 5% do an adjustment so no one was hit with crazy big bills. Sound like @Cory Hoffman could help you with that.  

My only other suggestion is talk to a local commercial builder about any code issues with no elevator.  Around here any larger TI can trigger certain code changes from when the building was initially built.  You don't want to get stuck with installing an elevator or meeting an expensive lighting, or efficiency requirement.  

Last year in Boulder County all properties had to be "Dark sky compliant" by a certain date.  It had been on the books a long time, but if you spent a certain amount of money prior it would trigger it sooner.  They have other items to for landscaping etc. . so talking to a knowledgeable local Contractor or Management Company could be helpful.  Boulder is known to be especially difficult though, so it may not be an issue where you are.  

I am not a fan of regular office. Retail fills up much faster in my market.

Office economy goes down they down size to warehouse space, move to office in house, or renegotiate the lease to take less space and do more commute work for themselves and employees,etc.

I like retail because certain types of businesses NEED the storefront to drive sales on a daily basis mainly experiential type tenants and more internet resistant where consumers cannot conduct business online.

Example a karate school where you go workout versus a vitamin shop where you can find a cheaper company online to order from and ship to your house or business.

Office for medical can be strong. TI's are heavy but doctor's tend to stay longer and do not like to move much once established in a space and location. With office building pay heavy attention to the roof, elevator, mechanicals,etc. Most are on gross leases or modified so the landlord eats bill for repairs not like NNN with base plus cam.

A new elevator can cost a few hundred k alone. Roof on 4k building can exceeds tens of thousands in some cases.

@Sai T. TI is Tenant Improvements.  If you have a new Tenant move in and as part of the deal you spend 15k on renovating the space for them and get longer term/larger personal guarantee.  Its all negotiable, some Tenants pay for it themselves, sometimes Owners pay for it or split it.  Totally depends on each deal.  

Jessica makes a good point regarding tenant improvements. TI is often a critical aspect to understanding the investment and generating a reliable pro-forma. Every market is different in terms of tenant expectations for TI dollars which a landlord will front on behalf of a new tenant. Further, a good landlord will evaluate whether a tenant has the credit and lease term necessary to justify a meaningful tenant improvement investment. If a tenant goes belly up and vacates a year into their lease, the landlord can get stuck having invested to improve the space only to find they no longer have a tenant. I would recommend talking to a local broker to understand what sort of TI package will allow for the building to be leased up and how that package might impact quoted base rent.

I am in the same position as Sai T. - new to commercial. One thing I haven't been able to figure out is what the difference is for renovations on commercial buildings vs SFH. I would like to improve the commercial building that i am considering buying and would like to do a lot of the work myself. I am handy but not licensed. Could I do a lot of the work myself or would it all have to be done by licensed contractors?