Friday, December 21, 2012

Rental Property Investing - Establishing Objectives

Assuming you are considering rental property investing as a way to make
money, then the next step is to establish a set of objectives. If you know what
you want in terms of investment properties – you should try to focus your efforts on the best options within the market that fit.

Typical investment objectives should include:

Type of Property – residential, commercial/office/retail, vacant land
Types of Tenancies  – single/freestanding building, multi-tenanted
ROI and CAP rate expectations
Growth/Appreciation expectations
Capital Available to be invested  (aka – down payment)
Risk Issues – personal liability/financial guarantees/level of acceptable risk
Locational Preferences – core district, new/growth area, transitional area
Quality of the Buildings – older, newer, potential rehab and improvement costs
Management – self manage vs. professional management
Hold Strategy – buy & hold, buy/renovate/sell, buy&flip

This list should help you paint a pretty good picture of what sort of rental property best ‘fits the bill’. As with everything in the business world, compromises must and will be made. But this will allow you to search the rental property market from the outset, with a defined set of objectives.

Just a final note as you investigate your market of choice - all markets are local and operate based on their own local set of dynamics. Your investment objectives should be based in reality, to the market you are looking to invest in. It never hurts to review recent rental property sales, to see how likely you are to succeed - based on the set of objectives which you’ve established.     

Again, seek out experienced commercial realtors to match your investment objectives to the rental property market in your area.

Wednesday, December 12, 2012

Rental Property Investing - Confirming the Data

When we consider investment property options, doing the math is generally straightforward as we determine  ROI’s, cashflow projections, and the like. It’s how those numbers are arrived at and the ‘legitimacy’ of them, that is the next important exercise.

On the income side, we need to review the current lease agreements in place and confirm the rental amounts, in order to reconcile the gross revenue numbers which are represented.  The lease will contain the balance of the term(s) remaining with the lease - including future increases, balance of time  remaining, renewal details, and deposits which may apply. As a matter of best practice, time should be taken to review all leases in their entirety, to ensure there are not provisions which you may not be aware of (ie. early termination clause, additional rent caps, expiration of personal guarantees - just to name a few).

On the expense data, year end reports are typically provided and are ok for the initial review.  But best practice is to verify the amounts against the owner’s income tax return(s), depending on the corresponding years being considered.  Three years history is probably a reasonable period and again, we are looking for the figures to balance against what has been represented.

Just a further note on the tax return request – this would generally be something that would be incorporated in to the Offer to Purchase and form part of the Due Diligence process. The Seller needs to know that a deal is at hand and that the providing of such confidential details, is ultimately leading towards a sale of the property.  Strict confidentiality provisions may also be required by the Seller.

In any type of rental property investing, as they say -- ‘the devil is in the details’.  Make sure you verify those details, before proceeding to finalize any purchase.

Next up…discussing strategies and objectives with rental properties. Again, seek out experienced commercial realtors within your market to assist in finding the best rental properties available.

Wednesday, December 5, 2012

Rental Property Investing - Return on Investment (ROI)

Return on investment on rental properties, is a calculation which measures the profit a real estate investment will generate. It is then compared to the amount of capital initially invested, to give a percentage yield on an annual basis. As a simple example consider the following -- a fully occupied commercial plaza sells for $500,000 with a net operating income (NOI) of $50,000.  Based on an all cash purchase, the (ROI) is 10%. Not bad in today’s low interest rate environment.

But consider the effect of arranging a 1st mortgage on the purchase of $350,000.  Again for illustration purposes - let’s assume a mortgage rate of 5.5% and an amortization of 20 years. Going back to our plaza purchase above, annual mortgage costs amount to $28,740/year, leaving a net income (after debt service) of $21,260. The yield now on the cash invested, is + 14.2% ($28740/$150,000).  Welcome to the world of LEVERAGE!

In the case of part 2 of our example (after arranging a mortgage for the purchase), we can actually increase the rate of return on our cash invested by 4.2%.  In essence, we are increasing our yield through the use of borrowed money.  With this analysis, we are only looking at the existing cashflow (rental stream), which the property provides. We’ll take a further look at ‘leverage’ in future blogs, as we factor in price appreciation/growth and other strategies. 

Just a further comment on the initial cash investment (beyond the actual downpayment) -  be sure to include closing costs, land transfer tax, immediate capital improvement expenses etc.  Essentially calculate the total estimate of your upfront cash requirement to take on the property.

Next up…sifting through the financial data and ensuring its accurancy & reliability.  Again, seek out experienced commercial realtors within your market to assist in searching out quality rental properties to invest in.

Thursday, November 22, 2012

Rental Property Investing - Due Diligence on Yourself

Investing in rental properties can be a lucrative way to create wealth, by not only providing an income stream, but also by creating an opportunity for capital growth – AKA -- an increase in the property’s value during your period of ownership. Types of properties can include – residential (single unit & multi-family), retail/commercial buildings (single unit & strip centers), office buildings (single unit & multi-complex), mixed use (ground floor commercial & above ground residential), industrial buildings (single unit & multi tenant complexes), and even raw land that generates some level of income.

After assessing the various property categories, determine the type that best fits with your objectives and will best meet your criteria. It isn’t one size fits all in considering rental property investments and you need to do some necessary due diligence on yourself before moving forward – due diligence on the properties/market will follow later. Markets throughout Canada are littered with investment property ventures ‘gone bad’ and the best advice here is to ‘walk before you run’.

Some key questions to ask yourself:

Am I more interested in residential or commercial/industrial properties?
What locations/neighbourhoods are of interest?
Am I hands on, or will I require a property manager?
What are my cash flow/return on investment objectives?
What type of financing is required and what % downpayment can I put up?
What sort of financial implications can I expect due to vacancies?
What sort of maintenance & capital improvement costs am I willing to accept?
Will I incorporate?  How can I best limit any liability?
What sort of market am I comfortable buying in?
Is liquidity an issue if I need to sell (quickly)?

Any investment comes with its share of risk and rental (investment) properties are no different. Good preliminary planning, starts wth a honest self assessment of YOU, your objectives, capabilities, comfort zone and so on.  Once you’ve figured that out, it’s time to move on to the market in whatever direction best suits you.

Next up – will examine return on investment strategies and look at the mathematics of it all.  As always, seek out experienced commercial realtors within your market to assist with acquiring the best rental properties for you.

Wednesday, November 14, 2012

Commercial Building Sales/Acquistions - It's a Wrap!

Over the past 7-8 months, we’ve tried to overview in a ‘soup-to-nuts’ fashion the area of buying/selling commercial properties. Targeted more at the owner-occupant market, we’ve tried to provide some valuable input as you consider your purchase/sale objectives. If you are currently active on a specific deal, there may be a topic that applies directly to your situation and perhaps offers some valuable perspective on it.
Within our blog archive, topics are posted weekly and titled according to the subject – which should make for quick reference. If upon reviewing the assorted topics you cannot find the subject you require, feel free to contact us and we will be more than happy to respond. Again, keeping in mind that we operate out of the Windsor-Essex, Ontario area, and our perspective is somewhat based on our market. But if we cannot help, we will try to put you in touch with someone in your market who can.

Some final thoughts on commercial property sales, whether you are looking to Sell or
Buy, “Know your market” or better yet, make sure your broker does. Real estate has always been viewed as ‘local’ and the commercial property market is no different. It’s most important to have a clear picture of  the current state of your market – and specifically - price/ft. trends, market turnover, listing/sale ratios, availability of financing, and general inventory levels of like-properties. Again, market data may be harder to find and less readily available than with the residential market – but it’s out there and you need to be up on it.
Again, seek out experienced brokers with strong commercial property sales backgrounds to assist in your area – do not go it alone. To see our sales history, click here.

We are moving on – next week we begin a new series on RENTAL PROPERTY INVESTING with a full slate of weekly topics to keep things interesting.

Tuesday, November 6, 2012

Pricing to Sell...(Sellers Only)

Once the decision’s been made to put your commercial building on the market, the Million Dollar question that arises is – what sort of asking price do we set? In early blogs we’ve discussed valuation techniques, made suggestions relative to interviewing brokers, and even covered the topic of formal appraisals. All of this should have put you in a position of understanding the value of the property.  Now the moment of truth is here and its time to establish a price to market the property at.

Before you do set the price, some final questions worth considering:

Market Turnover – what sort of commercial property turnover rate is your area exhibiting?  How long has it taken to sell similar buildings in your market – on average 2 months, 6 months, 2 years...?

Commercial Financing – is it available through conventional means and at what sort of rates/terms?  Financing a commercial property is generally necessary, and we need to understand all of the options available.

Buyers Market vs. Sellers Market – what sort of market is your area experiencing?  In short, more sellers or buyers, price growth or decline, and general market activity/traffic?

Local Economy – is it expanding or contracting, is unemployment rate lower or higher (vs. national average), new housing starts up or down, and is there population growth? Call this Economics 101 – but you need to be in step with your economic (market) realities.

Competitive Positioning – do you have a competitive advantage relative to competing properties in the market?  Better location, superior building quality, discernable site advantages … giving you the ability to promote better value for your property?

Finally, ‘Serious Buyers’ tend to prefer ‘Serious Sellers’, and vice versa. Your asking price should reflect the fact that you are serious, and that you have priced your property accordingly. Give your asking price careful consideration, in order to put yourself in the best position to successfully sell your property.

As always, consult with experienced commercial brokers within your area in order to determine a ‘Pricing to Sell’ strategy.

Friday, October 26, 2012

Part 2 - VTB 2nds & Risks/Rewards

Generally 2nd mortgages have more risk than a 1st mortgage. For a Seller, the major risk is in the event of default. In a default situation, the equity position of the 2nd mortgage is behind the equity position of the 1st.  At the time of liquidation (either through a Power of Sale or Foreclosure proceeding), any equity would only be realized after the 1st lender is repaid in full (inlcuding any associated costs).  You may also be behind any unpaid property taxes, which have priority and can serve to squeeze your equity position even further.

Enough said on the negative risk side.  There may be a legitimate case to consider holding a 2nd - consider the following:

i) Adequate equity exists in the property to hold a 2nd and at the outset appears 'secure' position wise
ii) For the return it provides - often 2-3-4% higher than a 1st
iii) Property cannot be readily financed any other way - due to its condition, unavailable bank lending, poor market conditions, etc.
iv) Familiarity with the property and comfortable with its value overall
v) Confidence with the Buyer to be able to meet the total mortgaging obligations (both 1st & 2nd)
vi) Possible tax benefits on Capital Gains (see your accountant) and for the cash flow the mortgage provides

VTB 2nds are not the solution for every seller, but there may be sound reasons to consider them in certain situations. Most importantly, do your due diligence with respect to the Buyer - meaning are they a good credit risk, capable of servicing the total debt obligations of the property, have good intentions and the right plan for the property?...

As always, consult with
experienced commercial brokers in your area to learn more about the opportunities for VTBs.

Wednesday, October 17, 2012

Vendor Take Back Financing - Good Idea on Commercial Properties?

Lots of points to discuss on this subject -- but let’s begin by saying a VTB mortgage maybe a good idea for both Buyers and Sellers. In some cases, it may infact be the only way to finance a sale, given the lack of commercial funding available through institutional lending. 

The mechanics of negotiating a VTB are basically outlined in the Agreement of Purchase and Sale.  Meaning all terms are set out – including downpayment, mortgage term/amortization, interest rate, open/closed status, prepayment rights/penalties to discharge (if any) etc.  Other items may include – personal guarantee of mortgage, provisions to renew at the expiration of the 1st term, and any other special term(s) which may apply.

Why a VTB may benefit the Buyer:
i)                    Typically reduce the soft costs/fees associated with conventional financing
ii)                  Appraisal/Environmental expenses may be avoided
iii)                Terms (interest rate/term/downpayment) negotiated with the Seller
iv)                Ability to improve leverage or allowing to buy a higher priced property
v)                  Easier to finance ‘non-traditional’ or ‘distressed properties’
vi)                Avoid time involved in obtaining institutional approvals (several weeks to months)
vii)              If Open Mortgage (involves no penalties for early pay out)

Why a VTB may benefit the Seller:
i)         Provides a cashflow based on a set rate of return
ii)        Viewed as an investment option for your capital
iii)       Mortgage is held on a property which you have a vested interest in
iv)       May assist in achieving a higher sale price
v)        Can help in deferring capital gains tax in certain cases
vi)       Can help sell properties in a slow market, by built-in financing
vii)      Terms (interest rate/term/downpayment) negotiated with the Buyer

More on VTB mortgages in our next blog - including VTB 2nd  mortgages , other risk factors for Buyers and Sellers, and remedies for default.

Again, seek out experienced commercial brokers within your market, to best review the prospects for VTB mortgaging options within your market.   To learn more about our experience and background, click here.

Friday, October 5, 2012

Property Survey - Why do you need one?

Seems like any requirement that adds cost to a real estate purchase, is often met with reluctance. Survey costs generally fall into this category - but there importance on the Buy-Side should never be overlooked.  Outside of the actual deed, an ‘up-to-date’ survey is probably the 2nd most important document a Buyer needs when closing a deal.

Surveys are best described as ‘an overhead drawing of the subject lands' - in this case the property being purchased.  It should show not only the exact property boundaries, but any easements/encroachments/public right-of ways, which may affect the land. In addition, it identifies the exact location of all buildings/improvements on the property, revealing clearly the set-backs from the various lot lines. Other items which often appear include overhead lines, closed alleys, pools, fencing, porches and yard sheds.

Can we rely on an existing or original survey as provided by the Seller?  It all depends on how current the survey is today, and if no significant changes have occurred on the property. If an out-building has been built, fencing altered, building addition, etc, best practice is to order a new survey. Up to date surveys will and should reveal problem issues, which are always best rectified prior to closing any sale. 

Can we opt for Title Insurance vs. a Survey?  Best to ask your lawyer on this one – but in our view, better to have a current survey. Bear in mind that title insurance will be dealing with any problems ‘after the fact’, whereas a survey would have revealed any such problems prior to any sale.  This is only sound due diligence when buying a commercial property and should be viewed as such.

Again, seek out experienced commercial brokers commercial brokers within your market, to best represent your interests in acquiring any property.  To learn more about our experience and background, click here.

Wednesday, September 26, 2012

Special Guest Blog Post by Joe Kireta: Appraisal Institute of Canada

As experienced commercial brokers, we work in conjunction with appraisers on many of our deals.  Naturally, we feel it appropriate to introduce our readers to this area of the real estate business.  Today, Joe Kireta AACI with Ray Bower Appraisal Services Inc, will provide us a guest blog post on the Appraisal Institute of Canada:

When the market's changing, who can you trust? Call the real estate experts, Appraisal Institute of Canada (AIC).  We are Canada's leading authority in real property valuation. Make wiser  choices with in-depth analysis, market insights and practical solutions - from acquisition and development to management and disposal.

Founded in 1938, AIC is the premier real property valuation association in Canada. As a self-regulating professional organization, AIC grants the distinguished Accredited Appraiser Canadian Institute (AACI) and Canadian Residential Appraiser (CRA) designations to individuals across Canada and around the world.

AIC members are highly qualified valuation professionals who undertake a rigorous program of professional studies, examination and experience before being granted a designation. The Institute also supports the principles of lifelong learning through a mandatory continuing professional development program and requirements to complete our professional practice seminar on a regular basis. These ensure that members have the most up-to-date education and skills to offer their clients.

The education, experience and life long learning requirements that  AIC has put in place ensure that the real value expert you hire will provide you with the most professional valuation expertise and opinions in the marketplace. Put your trust in the most highly regarded designations in the real property marketplace.  Get real property experts working for you; consult an AIC professional.

For further information on how a real estate appraiser can be of assistance to you, you can visit the Appraisal Institute of Canada website (AIC)

Thanks to Joe for his contribution today.  To find out more about his appraisal services, call 519-981-8896 or email

Monday, September 17, 2012

For Sellers Only – Interviewing Brokers

Commercial property sellers need to review their options - AKA, interviewing the most qualified commercial brokers in your area.  Beyond having the right credentials and background in your market, their services should include much of the following.

Check list of services:

1)      A current analysis of market conditions/trends within the area
2)      Supporting data based on price/ft. and income analysis comparisons
3)      A marketing plan which targets the property to right users/investors
4)      Aggressive promotional plans – including website marketing, signage, flyers, video tours
5)      Financing options – including both institutional, private, and VTB
6)      Negotiation strategies utilized
7)      Working arrangement with the local broker community
8)      Ability to service premises tours/viewings
9)      Transactional/contract expertise (documentation prep)
10)  References that can be reviewed and called upon

Beyond the services, a discussion of brokerage fees involved is certainly appropriate.
Typically this will be % fee structure based on the selling price of the property.  It could also be flat fee based, depending on your area and based on what you are able to negotiate. Fees will and do vary from broker to broker, even within the same area. Best advice here - is interview a few of the best qualified brokers in your area and make your selection based on your specific needs. But as a caution, remember that old saying – 'you get what you pay for' - which certainly applies in the world of commercial real estate.

All of the above, although not necessarily a complete list of services you need to consider, gives you a solid basis to interview candidates. Bottom-line - a Seller must be confident in the ability of the broker to 'GET THE JOB DONE'.

Again, seek out experienced commercial brokers within your market, to best market your property.

Wednesday, September 5, 2012

Zoning - Permitted Uses

In purchasing a commercial building, you need to pay particular attention to the zoning bylaw, and how it applies to your use. Often times, assumptions are made regarding the zoning on a property – perhaps it is even zoned commercial – but at some later stage, you discover the applicable zoning bylaw does not permit your specific use. After the fact this can become very problematic and often costly to correct.

Best practice here is to confirm with the local municipality, that your USE IS PERMITTED WITHIN THE APPLICABLE BYLAW. If there is any doubt, second opinions are good. Best options then are with your solicitor or officials within the municipality itself.  Municipalities will typically want any requests for a zoning confirmation (or interpretation on a use) in writing – but will likewise respond in writing, which is obviously preferred.

Other factors which you may need to consider:

i)                    Does the existing bylaw allow for a change(s) in the business?
ii)                   Are there parts of the bylaw you cannot comply with (ie. parking)?
iii)                 Is the bylaw consistent with the neighbouring district?
iv)                 Is the bylaw marketable for purposes of re-sale?
v)                  Are there any pending changes (municipally) to the bylaw?
vi)                 Costs associated with obtaining a re-zoning should it be needed?

On the final point above, this assumes that the site does not allow for the use which you propose. Bear in mind that in order to amend the zoning, you are likely looking at months, not weeks, to go through the municipal process.  This in turn adds a further ‘major condition’ to the Offer to Purchase, which obviously has implications with both the Seller and likely your negotiation strategy. If it then becomes a reality with your deal - make sure you are clear on the costs, the process, and any other municipal requirements which apply.

Again, seek out an experienced commercial broker with strong local backgrounds, to assist you in the area of zoning compliance with respect to your purchase.

Monday, August 13, 2012

Deposits - Issues and Insights to Consider

Most offers on commercial transactions are accompanied by a 'good faith' deposit.
Typically they are viewed as ‘tangible consideration’ for the offer contract attached to it, thereby confirming the Buyer’s commitment to the transaction.  Upon receipt of it, the funds are normally held in a trust account – most often with the Listing Broker.

The amount of deposit varies from deal to deal, often times based on the parties involved or the type of market condition that exists.  There are no set standards, other than those as set by either the Buyer or Seller. But it is most important to note, that once the deal is struck (agreement signed) – the deposit belongs to the deal and jointly to the parties.

For the Buyer, issues to be considered may include:
i)                    Making the deposit sufficient, so as to appear as legitmate to the Seller
ii)                   In highly competitive markets, larger deposits can strengthen the offer
iii)                 Deposits are returned to the Buyer, if conditions are not met
iv)                 1st & 2nd deposit strategy ( 1st - with offer, 2nd  - @ condition  waiver)
v)                  Large Deposits can require placement in an ‘interest bearing’ account

For the Seller, issues to be considered may include:
i)                    Specify a requirement for deposits (ie. 5% - 10% of purchase price)
ii)                   Small deposits often indicate a less than serious commitment
iii)                 Term of sale can include a forfeiture of deposit in some cases
iv)                 Larger Deposits tend to create urgency with the Buyer to close on time
v)                  ‘Interest Bearing' can help the Seller negotiate the larger deposit

Upon a successful closing, the deposit simply forms part of the purchase price and is credited to the transaction.  However, if the deal does not close, the parties must agree
on the release of the deposit by written consent.  In the Province of Ontario, this is done through a Mutual Release document, and both parties must sign off on the deposit, which includes where it is to be directed/payable to.  Keep this in mind as you provide deposits, as any deposit will not be released to either party without a Mutual Release being signed by both parties.

As with every other term on a real estate transaction, deposits are something to be negotiated, to ensure that your interests are best served within the proposed deal . As always, consult an experienced commercial broker in your area to protect your interests in the area of deposits.

Tuesday, July 31, 2012

Special Guest Blog by Robert Iseppi: Intro to Commercial Property Inspections

Today we have another guest blog post.  Robert Iseppi, Civil Engineering Technologist and Certified Insepctor with Amerispec, servicing the Windsor, Chatham and Sarnia (Ontario) markets, will provide us with an intro to commercial property inspections:

Buyers and users of just about any commercial property can benefit from an inspection conducted by a qualified Inspection Company.  Even new construction can have physical deficiencies that could eventually require costly repairs.  Buildings targeted for renovation or reuse – such as office to residential or warehouse to retail—can also benefit from a review to determine if these facilities and systems function properly.

The goal of a Commercial Property Inspection is to identify and communicate observable, physical deficiencies of the material systems, components, and equipment within a commercial property.

A baseline commercial property inspection relies on a walk-through survey, to determine the property’s condition.  The report includes information about the property as well as opinions on probable cost for suggested remedies.
This information is valuable in helping owners and buyers understand operating and maintenance costs and helps to provide confidence to prospective purchasers that the transaction is solid.  Our professionals work together with clients to determine the scope of inspection services needed, and are committed to providing outstanding client service and satisfaction with the technical experience and knowledge to meet our client’s most specific needs
AmeriSpec’s professionals are experienced in inspecting a variety of commercial properties including:
·        Office Buildings
·        Industrial Buildings
·        Retail Stores and Shopping Centers
·        Apartment Building and Hotels
·        Hospitals, Research Centers
·        Warehouse Buildings
·        Condominiums
The scope of the inspection needed and the specific areas to be inspected are based on various factors.  Age, occupancy and type of construction are considered when determining how the property will be inspected and the performance criteria needed to complete the inspection.  Inspections can vary from a visual examination of the property to a comprehensive inspection of all technical components of the building.
A baseline commercial property inspection includes:
·        Site Characteristics (Paving, Landscaping and Utilities)
·        Structural Frame and Building Envelope
·        Roof Surface Areas
·        Mechanical and Electrical Systems
·        Plumbing Systems
·        Heating Systems
·        Air Conditioning and Ventilation Systems
·        Vertical Transportation
·        Life Safety/Fire Protection
·        Interior Elements
·        Opinions of Probable Costs
·        Recommendations
Additional services that may be available include:
·        Elevator Inspections
·        Fenestration Inspections
·        Fire Safety Inspections
·        Lead-Based Paint Inspections
·        Wood-Destroying Organism Inspections
·        Phase I Environmental Site Assessments
·        Sewage and Treatment Systems Inspections
·        Asbestos Inspections
·        Indoor Air Quality (IAQ) Assessments
·        Radon Inspections
Depending on the type of property and the needs of the client, inspections may require specialists, consultants or a TEAM (Technical Experts and Management) approach.
The TEAM approach allows specialists or consultants to assist in the commercial inspection by providing their expertise in areas where it is required.
The specialists or consultants that can assist in a property inspection include:
·        Structural Engineers
·        Environmental Specialists
·        HVAC (Heating, Ventilation and Air Conditioning) Specialists
·        Electrical Specialists
·        Fire Protection Specialists
·        Elevator Specialists
·        Roof Specialists
·        Paving Specialists
·        Wood-Destroying Organism Specialists
Special thanks to Robert for his contribution.  To learn more about his services or to book your next commercial property inspection, email or call (519)739-1010.

Monday, July 23, 2012

Operating Cost Review (Owner-Occupant or Landlord)

Whether you are the prospective Owner-Occupant or Landlord of a commercial property, a review of the operating cost/ft to run the property, is an important analysis to consider.  First to understand the concept, let’s look at the terms which exist within the industry - COMMON AREA MAINTENANCE (CAM), COMMON COSTS (CC), TAX MAINTENANCE INSURANCE (TMI) – all of which commonly are referred to as ‘Additional Rent’ within a typical lease document (to view our related post, from a leasing perspective, click here).

Regardless of how they are labelled, they consist of the cost/ft to operate the property in a given year. Typical costs include – property taxes, building/property insurance, maintenance/repair/management costs etc. They will vary from year to year, as the input costs (ie. taxes) will change on an annual basis.

In the case of an owner occupying a property for his own commercial purposes, this
review will reveal his cost/ft to operate out of this location. Beyond your mortgage
payments and equity contribution (downpayment), this represents the additional cost in operating your business at this property.  You almost look at it from the perspective of a tenant – as in lease terms, this would be viewed as ‘additional rent'.

In the case of a landlord (investor owner), this review will indicate how competitive
this property is against the overall market. Using an example of a typical retail plaza
center with an operating cost/ft of $8.50 – it is easy to see where you might be at a disadvantage in marketing space, when competitive sites reflect operating costs/ft at $7. A word of caution here though, as the “the devil is always in the details” – and more specifically, look closely at the budgets (line by line) provided, overall condition of the plaza, areas of deferred maintenance etc.

Remember that the costs for operating a plaza or business premises are either covered
by the tenants or the owner-occupant of the business. These are real dollar items that
need to be factored in as you analyze any transaction, and a sound per/ft analysis of
operating costs is simply good due diligence.

As always, consult with an experienced commercial broker in your market, to assist
in evaluating the operating costs on commercial properties which you are considering.