Buying a commercial property with multiple tenants.

2 Replies

I am looking at buying a large commercial property 20k sqft building with 2 retail spots attached and a studio apartment attached as well.

My question is for taxes and insurance. If I buy the property and rent out each space what insurance and taxes am I looking at as the owner. This is my first investment property.

Does each tenant pay their own insurance? Do my taxes depend on the revenue created by the rent I collect or by the revenue the tenants make?

Again I know this is common knowledge for most. Thanks for the help!

Thomas, these answers are all property and location specific.  Are the retail spots already leased?  If so, the answers to whether the landlord or the tenant pays property taxes (or utilities or other expenses) should be in the leases.  Your property tax bill (if it is not passed through to the tenants by the written leases), will not really depend upon the revenue collected by the tenants nor by how much you charge in rent, at least not directly.  The property tax bill will be based upon the value of the property according to your tax assessor, which is typically a county-level department.  Many of these assessors have online databases, so you may be able to look up the current tax bill online.  But as you analyze the deal, you will need to know if the landlord or the tenant pay the property tax.  

As for insurance, you should discuss with an agent who routinely does commercial property insurance.  You will definitely want to have insurance on the building and the agent can walk through how much is a good idea based upon the type of property/tenants and risks to you as the owner.  The tenants will have their own insurance (or at least they should) to protect their own business and interests.  It is also common for your leases to stipulate that the businesses carry certain minimum insurance levels and name the landlord as Additionally Insured on the tenant's policies.   Discuss that with your trusted real estate attorney who should be reviewing your leases or preparing a template for your leases. 

As new tenants come on board, you can change your leases to suit how you want the property expenses paid for, and your lease rates will adjust accordingly. 

Thomas,

Bob is correct, the answers to your questions will be within the existing lease agreements. If the retail is vacant, generally speaking, retail is run on a Triple Net (NNN) basis where the landlord is reimbursed monthly by the tenant for their prorata share of property Tax, Insurance and Common Area Maintenance.  This is also referred to as TICAM reimbursements...Retail tenants also pay their own utilities.  Thus the deal is 100% net to the landlord.

So, hypothetically, if the retail takes up 2/3 of the total building, it would be possible, upon full stabilization of the property, to be reimbursed for 2/3 of the property's TICAM.  The studio apartment- you'll foot the bill for their portion of property tax and insurance, general maintenance and common area maintenance....which in our hypothetical example is 1/3.

If the retail is not currently run on a Triple Net (NNN) basis you "might" have a hidden opportunity to increase your NOI by converting existing tenants to NNN. I say "might" b/c as Bob said above a lot of this depends on your market's given conditions AND the exact location of the property....I say exact location as retailers can be very persnickety about the location of their business, traffic counts, visibility, ect.

Hope this helps! :-)

Scott

@scott_mcelhaney