According to Vanessa Rader, head of research at Ray White Commercial, the long-term plan of an investment is paramount in deciding the viability of a commercial investment, not least because it can be easy to get caught up in leases. term that obscure the reality of an asset’s value beyond that time frame.
“Many buyers have been blinded by the stream of fixed income they are buying; but what happens at the end of their mandate? Yes, five or 10 years seems a long way off, but what are your options when that time comes? said Ms. Rader.
She advised buyers to have a strategy in place for the very real possibility of tenant loss and to consider what the optimal holding period might be based on the specifics of the property.
“For specialty uses, tenant loss is a significant expense and for some assets their use may be obsolete when the lease expires,” she warned.
But there are also a number of steps a homeowner can take proactively to plan a path through this scenario.
Ms Rader encouraged investors to think: “What can you do now to identify what can be done to your property if and when your tenant leaves? Is there any other use permitted under the zoning? Can it be developed?
“Begin investigation and discussions with council early so you have a solid plan to ensure your commercial property continues to bring you good returns in the future.”
For her, this type of planning is among the top three considerations to consider before settling on a business investment.
Another big issue is basically the foundation of the industry at large: location, location, location.
“Depending on the asset, there may be different location considerations. For industry this may be egress and access to major road networks, retail you may want to consider foot or vehicular traffic, local demographics and parking. Childcare and medical care will depend on the local population, while for offices you might consider transport, market size and future developments,” Ms Rader noted.
In addition, understanding the lease terms that a buyer might take over in a commercial acquisition is critical to assessing the asset’s financial condition.
“It’s not just about understanding the rental term and rate, but what the options are, repairs and rent increases,” she said.
For multi-tenant assets, in particular, she noted that investors should ask themselves, “What is the weighted average lease expiration (WALE) and how much does it cost to lease, manage the asset with an expert sales agent and what can I expect regarding legal fees, expenses, capital expenditures, etc. in the future ? »
An investment is an asset or item purchased with the expectation that it will generate income or increase in value in the future.