Many of our clients are multi-generational property owners; sometimes the junior family members are involved in the business and are ready to step into ownership of the commercial real estate. Other times, those who inherit the property have never owned the particular property or commercial properties before. In this 3-part blog series, we will review some key factors and options relating to owning commercial properties. Some of these factors will apply to first time buyers as well. Part 1 will cover briefly the steps needed to understand what you’ve obtained; Part 2 will cover issues relating to retaining the property; and Part 3 will cover issues relating to selling the property. For all purposes, these posts are intended to apply to commercial properties in all forms, but some of the options may relate to owning residential property for income purposes as well.
UNDERSTANDING WHAT YOU OWN
The first step is to understand what you own. This may include seeking services of several outside parties: accountant, appraiser, lender, attorney, and a real estate broker/agent.
Accountant: The financial viability of the property is a key to determining the value of what you have and making your decision as to what to do with the property. An accountant or CPA can assist you in reviewing financial statements you’ve received for the property or reconstructing financial statements if no statements are available. The value of the property will be dependent upon the income, expenses and maintenance/repair requirements of the property. Most importantly, an accountant/CPA can review with you the financial implications of keeping the property as a source of rental income versus selling the property.
Appraiser: Once you have some financial records for the property in place, an appraiser can evaluate the property in its current use and potential alternative uses. If the property has vacancies or below market leases in place, then there is the potential to add value by leasing the property or turning over the existing leases to higher paying tenants (subject to that availability).
Lender: Whether purchasing or inheriting property, you may need to develop a relationship with a lender. A lender may be needed to pay off existing debt that needs to be refinanced or if the property is free and clear, then a lender can provide a “cash-out” refi option to allow you to retain the property but take out cash (equity). Again, speak with your CPA to understand the tax implications of these options.
Attorney: An attorney can assist in many ways. The most obvious is reviewing the existing leases to determine what obligations or options you have under the leases, what maintenance requirements the tenants are obligated to take care of versus you as the landlord, or to determine the turn over periods for the existing tenants. Attorneys can also provide insight into the underlying zoning and legal compliance with the local ordinances. Simply because a property has been used in a particular way for some time, does not mean that the use is legally permitted. Zoning, parking requirements, permit requirements and access issues should be evaluated to mitigate your risks and evaluate the types of businesses that you want to bring into the space over time.
Brokers/Agents: Real estate professionals such as brokers and agents provide insight into the potential sale interest of buyers, going leasing rates and terms, and the viability of the property compared to the overall market area. Brokers are also able to evaluate existing leases to determine if they are below market rents, to negotiate new lease terms with existing tenants and market the property for sale or lease.
Once you have a full understanding of the property, its financial status, the legal issues relating to the property and your potential options, you can evaluate retaining the property for rental income or selling the commerial real estate. We will discuss both of these options in the next two blogs.