Looking To Invest In Commercial Property? 7 Tips To Close The Deal Without Hassles

Investing in commercial property is a much tougher ball game than buying and renting residential properties. Owning a commercial property with multiple tenants is like getting into a small business. But this investment also brings balance to your portfolio, if you also invest heavily in the residential properties and all for returns.
Here are some points to remember before you invest in a commercial property:

• Value assessment and due diligence: This is a much more complex process than a residential property because the sole aim of this investment is to make money. Study the value of the similar properties in the vicinity and come up with a value before you enter into negotiations. Collect information on the kind of rents that other properties have and make a list of the clients and offices in the area. With all the due diligence in place, approach the seller and negotiate well. Sellers of the commercial real estate are not like the residential property builders. Though negotiation based on numbers is extremely important to make a good commercial deal.
• Assess the rental earnings after tax and insurance: Do not go by the rents that an area is commanding currently. Study the growth in rentals for the last few years and also read reports and make your assessment of how they will grow for the next 10 years at the least. This exercise will help you create a roadmap of how your investment will look like going ahead. Calculate the earnings that you will make after the tax is paid which is higher in case of commercial real estate. You will also have to take up the property and casualty insurance and others, which will also burn a hole in your pocket. See how much you can earn annually after deducting all these costs in the form of a mock balance sheet. Studying the claims history of a particular property using information from the insurer is also a good way of getting an idea of the quality of the building that you are buying into.
• Study the maintenance cost associated: The maintenance costs vary across buildings. Previous owners might have promised some amenities to the tenants, study all these before you buy into a property. Remember that utilities and others cost much higher for a commercial property. Check what kind of parking and other facilities are available and the terms on how you can charge your clients. You might also have to chip in towards building security and others, which might come as surprises, so make sure you keep a check on every penny that you might have to spend on the property.
• Ensure fire and safety standards are met: Bring a property assessment executive to check the plumbing, electricals and other fixtures of the property. This will go a long way in saving time and future costs. Municipalities and other government bodies ensure strict safety standards especially in terms of fire and other disasters. Study the liability of any such event on the owner and get appropriate cover for it. Get experts to study the quality of the building like walls, roofs, air conditioning systems using a third party inspector.
• Check the quality of tenants and their reliability: Peruse each and every tenant agreement and its lease to check the duration. Study all the exit clauses in lease agreements with the help of a property lawyer. Also, keep an eye on the ability of your tenant to pay rent as a few companies which file for bankruptcy leave their landlords high and dry. If necessary ensure that a new set of agreements are made with the tenants before you buy into the property. Calculate the vacancy ratio of the building for ten years. This has to be calculated for a building especially in a multi-tenant set up. This will give an idea of the risk that you are going to be taking.
• Read all the documents: Make sure that every document associated with the building like loan documents, trust deeds, closing statements, deed title both current and past are studied closely. This should also include the bank statements on the property, business licences, payroll registers, engineering and other design plans, environmental reports, advertising contracts, if any. This might require you to hire a number of experts. Though expensive, this activity can pay for itself in the years to come.
• Study the exposure to risk: Investment in commercial property in India is a business which is against many odds, like any other business. So, calculate the risk that you are willing to take before investing in the property. The commercial property loans that are extended towards the purchase of such properties will also follow stricter norms of a business and do not include the advantages of a home loan. So, include the financing costs before you get into an agreement.

(Katya Naidu has been working as a business journalist for the last nine years, and has covered beats across banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities)