The Key principle to Maximize the value of your commercial Real Estate lies in how you think about your property. Commercial real estate is an investment and needs to be managed as a financial asset. Optimizing return on a commercial real estate investment is achieved by optimizing Net Operating Income. The Key word here is MANAGE.
If Optimizing Net Operating Income is the most important aspect of maximizing the value of your commercial real estate asset, the second most important contribution to its value is stability, stability of income and stability of expenses. Both income and expense are components of Net Operating Income, the building blocks of Net Operating income.
Stable income is achieved by managing tenants in your property and the leases with those tenants. Choosing tenants with great business plans and strong financial performance is key to maintaining stable income. The best tool for managing a good relationship with a strong tenant is a modern and updated lease agreement. A thorough lease document includes provisions for rent escalations and passing proper building expenses through to tenants. Rent escalations are critical to keep pace with market rents. Best practice for Landlords is to use a NNN Lease that specifically defines the building expenses and those that can be passed through to the tenant.
Stable expenses are achieved by aggressively managing the maintenance your commercial real estate asset, which speaks to the importance of vetting an experienced asset management company that specializes in commercial real estate. An experienced commercial management company should have expertise in NNN leases and be able to employ the NNN lease. This allows proper expenses to be passed through to the tenant. Proper maintenance of the physical aspects of your commercial real estate asset stabilizes expenses and over the long run and keeps expenses at their lowest proper level. Spending money on proper maintenance is essential to preserving and maximizing value of your commercial real estate asset. For the purposes of discussing NNN leases, multi-family residential properties are not included.
The common thread that ties these best practices for achieving maximum value in your commercial real estate asset is active management. If a Landlord chooses to manage their commercial real estate investment themselves, they must be active and involved. Many commercial landlords see professional commercial asset management as best practice. Good news for commercial property owners is that the cost of professional management is defined in NNN leases and may be passed through to tenants. In order to maximize the value of your commercial real estate asset, the NNN expenses should include the cost of professional management.
Written by, Ken Reinschmidt
ken@saratogacom.com