Tips to Choose a commercial property with financial advantages

It is important to fully understand the financial implications of commercial real estate when evaluating it. Before you price the property, or decide whether it is suitable for purchase, this information is important. This is why you should not just look at the current financial situation, but also the historical data that has been compiled about the property in recent years.

In this instance, “recent time” is defined as the last three to five years. It’s amazing how property owners attempt to manipulate building income and expenditure at the sale. However, they can’t change the property history easily and this is where many property secrets are revealed.

Once you have a complete understanding of the property’s history and performance, it is possible to calculate the operating costs budget accurately. Investment property should be managed according to a budget that is monitored and administered each month.

When unusual income or expenditures are apparent, the quarterly monitoring process allows adjustments to be made to the budget. It is not a good idea to continue with a property budget that is becoming more out of balance than the actual property performance. Budget adjustment would be done on a quarterly basis by fund managers with complex properties. Private investors can and should follow the same principles.

According to David Goodnight from Austin Let’s now examine the key issues of financial analysis that you should focus on when evaluating your property.

1. It is important to obtain a tenancy schedule for the property. You are seeking a summary of current lease occupancy and rental payments. It’s interesting to see that many tenancy plans are inaccurate and out of date. This is a common problem in the industry. It stems from the failure of property owners or property managers to keep the tenancy schedule records. It is important to verify the accuracy of the tenancy calendar at the time of property sale against original documentation.
2. You should source property documentation that covers all types of occupancy. These documents include leases, occupancy licenses, and agreements with tenants. It is possible that some of the documentation won’t be recorded on the property title. Solicitors have a lot of experience in chasing down property documentation and will be able to tell you the right questions to ask the previous owner. Before you settle, make sure to do extensive due diligence with your solicitor.
3. All lease documentation must be documented and sourced for rental guarantees and bonds. These documents protect the landlord in the event of default by the tenant. These matters should be transferred to the new property owner at property settlement. The type of rental bond or guarantee will determine how this happens. It may also mean that the guarantee must be reissued at settlement to a new property owners. The new property owner’s solicitors will usually check this and suggest solutions at the time of sale. Important: The new property owner must legally collect rental guarantees and bonds according to any lease documentation.
4. It is crucial to understand the types of rent charged throughout the property in order to improve the property’s performance. It is not uncommon for multiple renters to charge different types of rental on a property that has multiple tenants. It is possible for net and gross leases to be visible in the same property, but have different impacts on the landlord’s outgoings. To fully understand and analyze the entire rental situation, you must read every lease in detail.
5. Next, you should look for any outstanding charges related to the property. These charges would usually be imposed by the local council and their rating process. This could mean that the property has been subject to a Special Levy.
6. It is crucial to understand the outgoings costs for properties in your local area. You should compare the outgoings charges for similar properties in the local area to the property you are interested in. You need to see a parity or similarity among properties belonging to the same category. Before any property sale or property adjustment, it is necessary to identify any property that has significantly higher outgoings. A property buyer does not want to buy a property that is more expensive than the industry average.
7. It is important to keep the property’s depreciation schedule up-to-date each year so that it can be used in any property sale strategy. Depreciation allows for lower income and therefore less tax to the landlord. The accountant of the property owner will compile the annual depreciation schedule at tax time.
8. It is important to understand and identify the rates and taxes that are paid on the property. These taxes are closely linked to the property valuation done by the local council. The council valuation occurs approximately every two to three years. This will have a significant impact on the rate and tax that is paid for that year. Property owners can expect reasonable rating escalations during years when a property valuation will be done. It is worth checking when the next property appraisal in the area will be done by the local council.
9. A survey of the property and the tenancy areas should be done. This process can often reveal discrepancies. Also, you should be looking for surplus space within the building common area that can be used as tenancy space in any new lease. When you renovate or expand the property, this surplus space can be a strategic advantage.
10. When analysing historical cash flow, it is important to consider the impact of rental reduction incentives and vacant properties. As a rental incentive, it is common for rental reductions to occur at the beginning of tenancy leases. Once you have found this, it is important to verify the documentation supporting the incentive and review it for accuracy and the ongoing impact on the cash flow. It is not a good idea to buy a property and then find that your cash flow decreases each year due to existing incentive agreements. It is important to negotiate with the current property owner to adjust or discharge the incentive. The new owner of the property should be compensated for any discomfort caused by the incentive in the future.
11. It is important to compare the current rental rates of the property with the local market rentals. The property rent may be out of balance with the area’s market rentals. It is important to know the impact of this on leasing vacant areas and negotiating leases with existing tenants.
12. In a slower market, the possibility of market rental falling during rent review can pose a serious problem. The leases should be reviewed if there are upcoming market rent review provisions. This will allow you to determine if the rental could fall during that market review. Some leases have special terms that prevent rent from falling even though the surrounding rent has. These clauses are called ‘ratchet clauses’. They prevent lower market rents from happening. This is because some property and retail legislation may prevent the use of or implementation the ‘ratchet’ clause. A good property solicitor can help you if you are unsure.

These are the key financial factors to consider when evaluating a commercial Investment Property. David Goodnight from Austin suggests before you make any final decisions about the price or acquisition of the property, take the time to analyze both the income as well as the expenditure.