COMMERCIAL REAL ESTATE: What to look for when buying or leasing commercial space
Purchasing commercial property is “a very complicated process,” states Mike Schmidt, director of business development at Coldwell Banker Commercial, Schmidt Realtors. “It is nothing remotely like buying a home.”
When looking at property, buyers need to look at every angle: zoning, other competition, general market conditions, expandability and demographics. Who is going to patronize your business? What is the make up of the population from which a work force will be drawn?
To learn area needs in regards to supply and demand, you need to know what product is coming in or leaving the area. Another factor is access; are there stop lights, turning lanes, etc.? And look at the variety of features on the building, as well as the space, electrical components, overhead doors, etc.
Marge Buhland, owner of Front Street Realty, LLC, in Mancelona says potential buyers need to examine three factors: the type of commercial property, the type of inventory, and the nature of the business. If you’re buying a business plus its customers, or buying the name of an established business, you need to look at what the impact a change in ownership would make.
Buhland gave as an example the sale of a family-run pizza shop. The buyer needs to consider how busy the shop was, how long it had been established, and the impact a new owner would have. She also recommends soil testing, checking environmental regulations and building codes for items such as accessibility for the disabled. If you’re renovating the building, you’ll need to bring it up to current codes.
Charles McCarthy, owner of McCarthy Management in Traverse City, advises: “When buying commercial property, check the financial history of the property with respect to net operating income.”
He recommends verifying (if applicable) the status and quality of the leases with respect to tenants. “Leases should be reviewed thoroughly as to terms and conditions in each lease, focusing in particular on estimated future income and operating expenses on the property,” he said.
Leasing commercial property
Many of the same points made above apply if you’re going to lease commercial property. The lease, says Buhland, needs to be curtailed to your type of business. For example, if you’re leasing mall space, it may be written in the lease that you give a percentage of your income to mall management. You need to verify how much maintenance the owner will take care of versus how much you’re responsible for, including roof repairs, driveway maintenance and garbage removal.
Variables Schmidt looks at include the lease rate and how it’s quoted. If the property owner quotes “triple net rent,” it means the tenant pays only the rent. If the property owner quotes “gross rent,” it means the tenant must pay the rent plus taxes, insurance, maintenance, etc. An attorney generally drafts the lease.
And check the length of the lease–you don’t want to be stuck in a long-term lease agreement if your business fails.
Given the history of failed businesses in this country, McCarthy points out, you need to be thoroughly schooled in what you’re doing before entering into a long-term lease agreement.
The job of a property manager
Property managers are basically responsible for collecting rent, paying bills, contracting for maintenance services, administering lease agreements and marketing the space, McCarthy said. The owner is usually not in the area and needs someone to manage his/her income-producing assets.
McCarthy Management has been exclusively a property management company in Traverse City since 1985. They are certified property managers and adhere to a very strict code of ethics. Their core responsibility is to treat the property as if it were their own, protect it and work to increase its value, he said.
McCarthy Management can be reached at 941-7630, Front Street Realty at 587-0291 and Coldwell Banker at 922-2350.