Property Management - What Sort of Costs/Fees?

It’s a great question – but one which is not simple to answer. In reality, there is no universal management fee structure. Just as commercial properties vary from location to location and market to market, so to do the related costs to manage these properties.

Factors to consider should include:

·        Size of the property and total # of tenants

·        Types of tenants – commercial/medical/retail/office

·        Projected maintenance requirements – based on prior years

·        Projected capital improvements pending (ie. new façade/roof)

·        Type of Financial Management required (ie. proformas/budgets)

·        Vacancy Status (management needs differ w/ high/low vacancy)

·        New Lease Involvement w/ Placements & Marketing

·        Historical Cost to manage the property (minimum 3 years)

Your best fee comparisons are done locally in your own market, making best efforts to find similar type commercial properties. Interviewing a minimum of 3 management companies is a good strategy, ensuring that you establish the same criteria for each proponent  -- comparisons need to be “apples to apples”.

In our local market of Windsor-Essex (Canada), if I had to provide a range for management fees, it would likely fall in the area of 3-5% (commercial properties only, not multifamily) of the total gross revenue.  Again, services offered may differ from company to company and you need to ensure you are making valid comparisons. As well, this would not include any ‘new leasing’ related services, which would be the responsibility of a related real estate brokerage.

As always seek out the advice of experienced commercial realtors within your market, as you look to establish a good management plan.     

Property Management – Do I Need It & What Does It Look Like?

If you acquire a commercial property which requires a certain level of management, what should you expect or look for? It will very much depend on what you specifically require and in most cases, you should be able to find providers who can tailor services to meet your needs.

Typical services would include the following:

• Asset Management – on going communication with the owner, preparation of proformas/budgets, tenant relations coordinator
• Financial Management – collection of rents, manage receivables, accounts payable, operating cost billings, monthly statements, procure bids for insurance
• Physical Maintenance – property inspections, perform regular maintenance, repairs & improvements, 24/7 avail., supervise hired contractors, manage projects
• Leasing Placements – coordinate all new leasing activity (in conjunction with r/e brokerage), screening of prospective tenants/credit investigations, tenant set-up

Most professional management services will tailor a package based on the services you require – in short, a menu driven approach where you select what you need. A lot will depend on where the property is located (relative to where you reside), and what sort of time/resources you can devote to any of the above management categories.

Just a final comment on well managed properties. They usually are occupied by content (dare I say – happy) tenants, which generally makes for a more successful investment property.  Keep this very much in mind, as you structure your management plan.

As always, seek out experienced commercial realtors within your market to assist and guide you on the best management solutions available.

Rental Property Investing - Mixed-Use Properties

Another category that you will encounter in most markets, is the ‘mixed-use’ (MU) variety. By definition, this is a property that has a combination of both residential and commercial units. Typically the commercial are the lower floors (most often the ground level), with the residential component above.

In your own neighbourhoods you may have seen this type of real estate, but never having taken a view of them from an investment perspective. Let’s consider in what the advantages/disadvantages might be:

Advantages:

·    Income is diversified relying on both commercial & residential demand

·    Traditional downtown cores were conceived in this fashion

·    Design suits commercial users wishing to reside in apartments above

·    Built-In Business support for commercial tenants from the residents

(particularly in larger complexes)

Disadvantages:

·   Tenant needs can be different/unique, creating potential conflicts (ie. noise)

·    Mortgaging challenges (many lenders avoid this category)

·    Restricts the type of tenant (for either component), which you can attract

·    Physical issues as they might relate to parking/signage/basement access (being more of an issue in the case of larger complexes)

   

Is it a good or bad potential investment? As always it depends on many factors – but best practice is to do your homework (due diligence) and the answer should become clear.  Beyond looking at the financial details of the properties (ie. lease details/expense summaries), take a hard look at the neighbourhood, taking note of how many other MU properties are within the immediate area. Do they appear successful and well occupied? Are MU properties more or less the building standard on the street(s). How do the comparables look and with what sort of market time?

We are moving on from our review of  ‘ property types’…. next up management issues and considerations in buying commercial properties.  As always, seek out experienced commercial realtors within your market to assist with reviewing potential MU investments.

Press Release - Windsor Star April 4, 2013

FOR IMMEDIATE RELEASE

Local RE/MAX Team Lalovich Ranked #12 in Commercial Real Estate Sector

Mark and Russel Lalovich of RE/MAX Preferred Realty Ltd. have been ranked #12 in the International RE/MAX Network for Top Commercial Teams.  This honour is not one bestowed lightly. It goes to highlight the hard work and dedication to providing quality client service and a clear focus on promoting Windsor Essex as the place to find commercial real estate for expanding businesses from across Canada.

This Father and son team focuses on developing a broad client base that in the past year has included many commercial property seekers from Alberta and Saskatechewan.  Mark Lalovich attributes the success to his expertise in the market and his ability to create win/win situations in commercial negotiations.

“We have definitely benefitted from the out of town clients, including investors and commercial tenants alike  and see this trend continuing as the region continues to improve economically” says Mark.  He and Russel continue to post to their blog Commercial Real Estate 101, which also features videos of commercial properties that are current listings to assist potential clients in understanding available listings as well as get a sense of who Mark & Russel are, and how to work with them.  “Tapping into technology is the beginning of reaching other audiences, helping them to start a relationship with us while establishing us as an expert team in the local market” says Russel.  “The feedback we get on the blog, posts and especially the videos is really great. We know we are developing a following”. 

Glen Muir, Broker of Record of RE/MAX Preferred Realty stated “Team Lalovich continues to be the go-to group in our market, creating the opportunity to be recognized in this way.  They provide the highest level of professional service to investors, tenants and landlords alike in Windsor-Essex.”

RE/MAX has over 89,000 Sales Associates, in more than 6300 offices operating in more than 80 countries around the world.  Both Mark and Russel will be recognized at an awards ceremony later in 2013.

Rental Property Investing - "Non-Performing Properties"

Is buying a ‘Non-Performing Property’ (NPP) as an investment a good idea?  Well that depends on a couple of key factors – primarily what type of re-development plan for the property do you envision – and how do you plan on financing it in the interim? Suffice it to say, this type of investment is higher risk, but potentially with a higher reward/upside.  

Consider the following examples:

·            Plaza with 50% vacancy

·            Vacant Commercial Building

·            Distressed Property Requiring Extensive Rehabilitation

·            Commercial/Industrial Land Site

·            Institution Lands (previous school or church)

·            Bank Sale (Foreclosure/Power of Sale)

In all of these cases, there is either no cash flow, or less than there should be.  Cost to carry properties is a serious consideration, and you need to factor it in for a period of transition – say 6 months to renovate a building for a new user.  In the case of a multi-unit development, you may also face a further holding period - assuming it takes another 6-12 months to find the right tenancies.  Cost to carry is a major part of your Due Diligence, in analyzing NPP opportunities.

If you are owner-occupant/user, looking at this type of real estate may make a lot of sense, given the value they can offer.  Re-purposing of NPP over the past few years, has been a popular theme in challenged markets across Canada.  By definition, this type of property continues to lose money daily for the current owner (Seller), and the Buyer leverage should only be strengthened in any purchase negotiation.

In every market, there are investors who make their living in this category and do so successfully. Take the time to not only examine these properties, but the background  of what was required to make them viable investments.

As always, seek out experienced commercial realtors within your market to assist in reviewing potential NPP investments.  For an example of a current NPP we have listed, please click here.

Rental Property Investing - "Special Purpose Properties"

Is buying a ‘Special Purpose Property’ (SPP) as an investment a good idea.  If the cash flow is sound based on a long term lease, and it generates a good return, as an investment property, this might be the right move. But then again…maybe not.

Let’s first look at what a SPP is defined as – “a limited market property with unique design characteristics that may have been built with specialized construction materials or offers a layout that restricts its utility to the use for which it was originally built”. They often have limited conversion potential as built, without having to incur substantial retro-fit costs.  

Good examples of this type of property might include:

·        Bowling Alley

·        Church

·        Car Wash

·        Daycare (particularly larger centers)

·        Nursing Homes/Elderly Care Facilities

·        Marinas

·        Theaters

Basically – they are what they are. Should the use come to an end at some future point, can the building be re-purposed and at what cost?  For the investor, when the use ends, what are the implications regarding the lease and future cashflow. On the concept of re-purposing, in reality it is very much dependent on the calibre of the marketplace you are in and its future economic outlook.  It’s a clear risk and you do need to account for it, as a major part of your Due Diligence.

On a final note, lenders have their own criteria relative to the category of SPP, and best practice is to get their perspective on what sort terms are available, before proceeding on such an investment. Suffice it to say that the Tenant’s Covenant will be crucial to the Lender – as it should be to you.

As always, seek out experienced commercial realtors within your market to assist in reviewing potential SPP investments.

Rental Property Investing - Medical Properties

An attractive sub-group within the office category, are medical office properties.  Medical office properties can involve ‘single user’ formats, as well as ‘multi-tenant’ developments.  Multi-tenant properties are able to bring a variety of medical practioners under one roof, as well as offer various related services - such as pharmacy, laboratory/diagosotic, and physio/chiropractic, to name a few.  Locationally, they can be in established or growing residential neighbourhoods, busy commercial areas, or near primary care hospitals in a city.

Medical office properties have typically been characterized as being stable from both a tenancy and cash-flow perspective. Physicians do not generally move around, and at minimum can stay in one location for 5-10+ years.  Lease rates on comparable buildings, would likely fall in a narrower and more predictable range within any given market.

All of the same discussion points in evaluating retail and office properties would apply here. Economic performance would consider applicable cap rates for other medical property sales in the area, as well as a diligent review of the tenant summary to assess its overall stability.

Being a landlord of a medical office property presents some different challenges than you might see with other commercial centres. Firstly, parking availability is critical for medical users, and often commands a much higher ratio per square foot, in comparision with retail or business office uses.  A busy medical specialist occupying 1500’, can utilitze 15-20 parking spaces during his normal office hours.  This may be 3-4 times the need of a business office use (ie. insurance office).  Pay particular attention to the area of parking, because it must be adequate for all tenants and their patients/clients.  Best practice here, is to observe the site at busy times and get a good sense of how it functions on a daily basis. In addition, pay close attention to the standards of accessibility for elderly/handicapped, sound proofing needs, and restrictive convenants which preclude competing uses.

The best medical office buyers should be ‘physician-owners’, who are likely setting up practices for the long haul and would effectively pay the building off over a 10-20 year stay.  In today’s market, traditional real estate investors/landlords are drawn to well-tenanted medical properties across North America – and why wouldn’t they be?  With aging populations, health care spending on the rise, and the field of medicine expanding continually, it would seem to be a ‘sweet spot’ for real estate investment.

   

As always, seek out experienced commercial realtors within your market to assist in finding suitable Medical Property investments.