First Commercial Property - How Different from Residential???

Question

Team,

I purchased my first commercial property. It is actually a trip-plex with one unit as a storefront. It is currently vacant and requires little cleanup to get ready for rent. I have a sign on the window but have yet to list it on the market as I want to be sure that I understand how to manage this differently than my residential rentals. For example:

• For a commercial lease, can I use my standard lease agreement with just a few changes?
• I have read that the tenant is typically more responsible for the general upkeep on the commercial property, is that true?
• The unit is basically open finished space if a tenant wanted to create a salon or make other major modifications, who would be expected to pay for the modifications.

Thanks in advance for the thought leadership.

Eddie

Eddie Sorrell · Answer

@John Mocker thanks! Yes I am renting the units out separately 2 residential and 1 commercial.

John Mocker · Answer

Eddie,

Are you leasing the storefront and the apts together or each unit separate?  If separate, you will have different leases for commercial and residential units most likely.  It would be important to make sure the leases work together on issues like parking, snow removal, upkeep, etc.

From an Insurance standpoint, you are looking to insure a mixed use property.  I would start shopping for a good Independent agent and get preliminary quotes.   What type of business goes in to the commercial unit may impact the cost of the insurance.  Some companies do not want to write habitational buildings with certain business exposures (restaurants, Liquor stores, ...).  A good agent in your area should be able to help with what types they would have a problem with.

I would also review with the agent what types of safeguards the companies will expect (Hard wired smoke detectors, Central station alarms, extinguishers, etc.) as some of that will be cheaper to do during your rehab rather than later

If you lease the commercial space out to certain businesses you may have to comply with additional codes.  Day Care businesses may require additional fire/safety upgrades to meet code.   ADA may also require access changes for the commercial space.

Eddie Sorrell · Answer

@Nathan G.@Ronald Rohde@James Rey - thanks for the feedback and suggestions. I have an opportunity and some work to do!

Eddie

James Rey · Answer

@Eddie Sorrell. You say you are going to list it soon.  If so, get with the commercial real estate broker and ask for some help.  Or if you are going to list it yourself ask someone at a local REIA that does commercial.  I do multiunit and not retail but residential and multiunit are completely different animals in pricing them and evaluating them so I suspect residential and retail are different as well.  I’d hate to get stuck with a tenant in a commercial space that I can’t evict quickly because I didn’t use a commercial lease.

Ronald Rohde · Answer

I would use a commercial lease, decide if you are going NNN, NN or gross. You'll probably be some form of Net.

Tenant can be responsible for whatever you and he agree to. In general, yes you can make them responsible for indoor plumbing, electrical, fixtures, appliances, etc. You are providing 4 walls and a roof, not a livable home.

LL pays for TI usually reimbursement schedule $/sq ft again, depends on length and strength of lease as to how much you're willing to pay.

A broker or attorney can walk you through all this. Worth the money IMO.

Nathan Gesner · Answer

@Eddie Sorrell commercial property is no different than residential...unless you make it so.

I know some commercial investors that run their commercial property using a residential lease. That could work, but it's not common, advisable, or best.

I highly recommend you start digging into a book or two about commercial investments because they can absolutely be different, and to your benefit. For example, a commercial lease may be 3-5 years or even 20 years. Commercial leases can be "triple net" which means the tenant is responsible for all maintenance, taxes, and insurance! Commercial property usually allows the tenant to make improvements suitable for their business but you need to set limits, establish an approval process, and decide what happens to the improvements when the tenant leaves.

You can get by treating it like a residential but I highly recommend you learn how to run a commercial property and get all the benefits of that investment.