What Should You Consider When Purchasing Commercial Property?

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If you are thinking about buying commercial property for the first time, the landscape can be daunting. Even if you already own several commercial properties, you may encounter new challenges. So then, what should you consider before making your next commercial property investment?

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Investopedia defines commercial real estate (CRE) as “property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space.” The main categories of commercial properties are office, industrial, multi-family, and retail. Because commercial real estate typically requires more capital than residential real estate, investing in it can be more difficult for individuals.

We have all heard the cliché, “Location! Location! Location!” applied to home buying, and the same is true of commercial real estate. In fact, it is the very first point the U.S. Chamber of Commerce recommends investors consider when looking to make a real estate purchase. However, location can be a bit more complicated for an investment property. The infrastructure surrounding your location can make a significant impact on your investment, too. If you buy a warehouse with the intent to lease it to an industrial tenant, you need to make sure the infrastructure is there for this type of user. For example, proximity to interstates or highways can be beneficial.

After you have determined the classification of a property, it is important to really get to know the building. As the U.S. Chamber of Commerce points out, you want to know what the building was previously, how much wear and tear has been done to the property, and what potential repairs are going to be necessary now and in the future. Major expenses often include repairing or replacing items like the roof, the parking lot, or the HVAC system. Our commercial appraisals can help with this kind of insight, but you should do your own research as well.

Once you have gotten to know the property, there are four types of commercial leases you as the owner can offer for investment purposes, according to MasterClass. We would also add a fifth type of commercial lease to their list.

  • Single-net lease: Single-net leases make the tenant responsible for paying all property taxes for the duration of their lease.
  • Double-net lease: Double-net leases make the tenant responsible for paying insurance and property taxes for the duration of their lease.
  • Triple-net lease: Triple-net leases make the tenant responsible for paying insurance, maintenance, and property taxes for the duration of their lease.
  • Gross lease: In a gross lease, the tenant only pays the rent, and the property owner pays all other related fees for the property.
  • Full-service lease: An all-inclusive lease where the owner pays for in unit services (cleaning). These are often government leases.

If you have any questions about our commercial services, please contact us.

 

Translating complex commercial property language

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Sometimes looking at commercial real estate language feels like learning the language of quantum physics. At first glance, the language seems overly and unnecessarily complex. But just like quantum physics, or any other profession, the language is there for a reason, to ensure accuracy and specificity.

Cap Rate

According to Investopedia, Cap Rate, short for Capitalization Rate, is the expected rate of generated return on an investment property. While it’s not exactly quantum mechanics, it does involve some simple math. Basically, Cap Rate is a percentage calculated by dividing the net operating income by the property asset value. It’s not meant to be the only measure used to estimate the profitability of a property, but is a useful tool to get a rough idea of an investor’s potential return on a commercial real estate investment.

Capitalization Rate = Net Operating Income / Current Market Value

There are other ways to measure Cap Rate, but this Chalk board with equations method is the most common and a good place to start understanding the subject.

Net Operating Income

Since we use Net Operating Income in our formula, we should go ahead and explain what that means in commercial real estate. Bungalow defines Net Operating Income (NOI) as “a real estate term representing a property’s gross operating income, minus its operating expenses. Calculated annually, it is useful for estimating the revenue potential of an investment property. NOI is not affected by how you finance a property—whether you get a mortgage or buy with all cash.”

Net Operating Income = Gross Operating Income – Operating Expenses

Current Market Value

This one is more complex than we have time for in a blog, but it’s worth reading Investopedia’s summary of Current Market Value as it relates to commercial real estate. In fact, this site is a good resource for many terms you’ll encounter in commercial real estate. But as with any online resources, it’s often worth finding more than one source if you’re looking to truly understand a topic.

You can also always reach out to us with questions about complex property language. We’re here to help and we would rather take the time to fully explain a topic than leave you confused. We’re certainly not experts in our clients’ businesses, and don’t expect you to be an expert in ours. We’re here to help every step of the way. Never hesitate to get in touch.

Scott County Property Tax Assessments

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It’s time to think about property taxes. Real estate prices surged in 2020 and again in 2021. This is great if you’re selling a property, but not so great if you’re buying or facing an assessment that is going to raise your property taxes.

According to the Scott County Assessor, a combination of historically low interest rates, reduced property inventory in the county and throughout the Quad Cities, and increased local demand all sent property values to never-before-seen highs, despite the COVID-19 pandemic. The Scott County Assessor is required by law to adjust assessed property values every two years, and 2021 is that year. This means assessments will rise for most properties in line with the local real estate market.

The Quad City Times has reported that  the average residential property increased by decorative tax incentive image about 8.5% in Scott County last year. Fortunately for commercial clients, those numbers were not as high for commercial properties. Commercial and industrial properties increased by about 6.5% in the county. Unfortunately, if your commercial real estate portfolio includes apartments and other multi-family dwellings, those values increased by about 13%. Unless you’re planning to sell and take in the profits in a hot real estate market, you’re going to be looking at a higher tax assessment.

There is a bit of good news for those commercial property owners who also own homes in Scott County. Homeowners in the county can now sign up for Homestead, Military, and BPTC property tax credits online. This is a new service provided by Scott County that should make life just a little bit easier for property owners. To qualify, the property owner must be a resident of Iowa, pay Iowa income tax, and occupy the property on July 1, and for at least six months of every year.

At this point in the year, there’s not much recourse for property owners who feel their assessments are too high. The deadline to appeal was in April. 

While no one enjoys paying higher taxes, it’s worth remembering that these higher tax assessments mean your commercial property is worth more than ever before. If you’ve been thinking about selling properties, now may be the time to lock in and take those profits. If you want to hold onto those properties, it’s worth looking ahead to 2023 when the next assessments will go into effect.

For more information, contact the Scott County Assessor’s Office at 563-326-8635, email assessor@scottcountyiowa.gov, or contact us.