Commercial real estate investment properties

Over the years, it is understandable that my clients wanted me to go through all the avenues to sell their property. To do this, I am often asked to list your property as an investment in addition to including it in a particular category of commercial real estate. While this may seem like a good idea in my opinion, unless you actually have a property that can be considered an investment property, it is not particularly useful.

Recently, a client requested that his office building be listed as investment property. Office properties can be an investment, but in my opinion this property does not qualify. It was approximately 50% vacant and all current leases were short-term leases.

Similarly, I have had clients request that land be listed as investment property. Certainly there are people who will buy and hold land for a potential windfall down the road, but unless the land has a lease or some kind of ongoing income potential, I don’t think it’s appropriate to consider it an investment property.

For a true investor, none of these cases would happen at first glance. For something to be an ideal investment property, it must have the following:

• Ongoing Income Streams – Typically this would be the rent. In the past, some people assumed an appreciation of the property over time in their decision process. In my opinion and in light of the tremendous devaluation of the real estate sector in recent years, that is a mistake. When making an investment decision, the best practice is to consider the actual income streams themselves when valuing the asset.
• Long terms on income streams: Ideally, the remaining lease terms should be 10-20 years. When buying an income property, a new owner does not want to pay for a property that may be vacant in 1 or 2 years.
• Single Tenant Users – This is not to say that people will not consider multi-tenant properties; however, as the number of tenants increases, so does the number of potential headaches associated with the property.
• Credit Tenants – Whether you have a single tenant or multiple tenants, the leases associated with the property are only as strong as the tenants.
• Triple Net Leases – Ideally, an investor will simply want to collect the rent and deposit a check. For them, the best leases have the tenant in charge of property taxes, insurance, utilities, and building maintenance.
• Full or Near Full Occupancy – Some properties are listed as income properties that have significant vacancy. These properties often advertise a maximum rate for the property that assumes that the vacant area will be rented at the requested rental rate and the property’s sale price. In my opinion, this is misleading. If a property is not fully rented, it makes no sense to quote a maximum rate this way. An investor making a smart decision would be better off selecting a property that is fully occupied.

For investors to be able to compare apples to apples, they need an investment alternative that is basically as simple as any other investment option. With stocks, bonds, or interest-bearing accounts, you simply invest the money and don’t have to take on the maintenance of the property, the lease, and other tasks and expenses. Of course, these criteria significantly reduce the number of properties I could consider and I realize that not all properties will have all of these characteristics. But I will also tell you that properties like this exist and can be found.

There are definitely properties that will be sold that do not have all of these features and expectations for these features differ somewhat depending on the type of property (i.e. retail vs. office). However, if you are marketing the property as an investment option, the successful seller will try to meet these criteria as closely as possible.