In this article we provide you with 5 top tips to consider if you are looking to invest in commercial property.
Tip 1: The Location
You need to have a good understanding of the area in which the property is located as you need to consider the types of tenants that you might attract or want to retain. Is it in a well-established area where there is already good leasing stock? Perhaps it is an up-and-coming area where you could attract solid tenants in the future with the rise in popularity of the area. What are the surrounding buildings like and who leases them? You will need to consider the zoning of the area and how accessible it is from a roading and traffic point of view. What are future plans for this area and how will they impact your investment?
Tip 2: The Building Itself
An inspection by a suitably qualified professional of the building, fixtures and fittings and chattels is essential. With commercial property, you will also need to consider the following:
Structural Integrity/Strength of the Building
You need to either commission your own Detailed Engineering Evaluation (DEE) report or have the vendors assigned to you on settlement indicating what % New Building Standards (NBS) the building is. This is important so that you are aware of the requirements and timeframe imposed by the relevant Council to upgrade the building to 67% NBS if applicable but also so that you can provide this information to tenants looking to lease the premises, an increasingly more common enquiry. Many older buildings will be below 67% the new minimum required for buildings. In addition, your lender may need to approve the DEE before an offer of finance will be made. You should also be aware that it is becoming more difficult to source commercial property finance from Banks these days, especially for buildings that are less than 67% of NBS.
A further issue to consider with commercial buildings is whether there is asbestos present in the building, it was commonly used in roofing. Current Health and Safety regulations now require property owners where asbestos is present to have an Asbestos Management Plan, so you will need to be fully aware of the extent of asbestos and consider the costs associated with ongoing compliance with these health and safety requirements. The presence of asbestos can also be off-putting for Tenants.
If the property is located in Canterbury or the Upper South
Island/Wellington areas enquiries should be made as to whether
there has been any damage caused by the earthquake sequences. If
so, have the repairs been carried out to a good standard? You will
need to request a copy of the scope, all sign-offs and transfer of
warranties. Unlike residential properties, EQC does not cover
commercial buildings and insurance claims are not usually able to
be assigned to a new owner.
Tip 3: How Will You Use The Building?
Will you be an owner-occupier of all or some part of the property? If so will the building meet the future as well as current needs of your business? Will you need to carry out work to the building to meet your needs? Will you need consent and what are the cost implications?
If the building is leased currently, what are the quality of tenants? You will need to fully research each tenant and consider the current rent and term left on each lease. Valuation advice is key in considering if the rental currently being earned is below, above or at market level. A key way in which commercial buildings appreciate in value is through rental growth. If the current rent is above market you may not see any rental growth for some time. Are the leases currently guaranteed and if so by whom and how strong is the guarantee? What are the current outgoings, are they likely to increase in the short term? Are these paid by the Landlord, or the tenant under the Lease? It is important to have your lawyer check the lease, so you know what you are getting into.
Tip 4: The Title
Commercial properties can come in many forms, the most common being freehold or unit titles. Unit title developments are considered the most complex in that there will be rules to be adhered to by both tenants and the landlord and ongoing costs incurred on behalf of all owners over which you have limited control. If you are considering purchasing in a unit title development additional research needs to be carried out to understand fully the body corporate structure, particularly how the voting system works. Minutes from body corporate meetings going back as far as possible should be requested to ascertain if there are any ongoing issues with the building or the people involved in the unit title development.
Tip 5: Managing Your Investment
If you are looking at commercial property as an investment will you manage it yourself or employ a property manager? Multi-tenanted commercial properties in particular can require lots of time and experience to manage properly. If you employ a property manager what will it cost and does the lease as currently drafted allow you to pass on those costs?
The Importance of Good Advice
As with any investment, the more homework you do prior to making the decision to invest, the more likely you are not going to encounter any nasty surprises. Please do not hesitate to contact our team of commercial property experts for advice specific to your situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.