Thursday 12 September 2019

Commercial Investment Series - Purchase Checklist

The following list can act as a guideline when purchasing commercial property investments. It should be taken into consideration with your solicitor and accountant searches.

• Do your due diligence and market research:

• Read as much about the industry, the market and economy as possible

• Research local demographics

• Talk to other landlords and local tenants

• Speak to experienced local agents

• Speak to your bank manager/lender

 

• Invest in prime positions and areas of future growth:

• High demand locations

• High visibility

• Accessible to transport or parking facilities

• Accessible to local amenities

• Accessible to foot traffic

 

• Do your due diligence on the property:

• Air conditioning units and other services have been regularly serviced and are operational – ask to see service history reports

• Check the roof – roof replacements are expensive

• Check the operational budget and expense recovery

• Have a pest control done

• Ask the tenant and surrounding tenancies if they have had any issues

• Is the property in a floodplain

• Are there any development restrictions?

• Is there plenty of parking associated with the property?

• Is it of recent construction – new properties have ongoing appeal as there is less maintenance and more depreciation benefit?

• Ask for construction plans and certification

• Check the asbestos report and management plan if applicable

• Ask who the builder was and when it was built

• Make sure the building complies with local, state and federal regulations

• Make sure the building can adapt to changes in zoning laws

• Ascertain what fittings and fixtures are part of the property

 

• Purchase a leased property (unless you are an owner occupier, have a risk appetite strategy or have a tenant ready). Do your due diligence on your tenant and lease terms. The lease pays an important role in the value of the property. The preference is for a long net lease with annual rent reviews:

• Reference the tenant – the directors, the company. The preference is for a tenant with strong financial history

• Conduct research on the tenant including a basic internet search

• Ensure the sqm rate is not more than the local market rate otherwise you may pay above market value for the property or be paying for the tenant’s incentive package

• Check there are no side agreements, side deeds or hidden incentives

• Check tenants aren’t using areas outside of their designated lease

• Check how much and what type of bond is being held

• Have your solicitor check over the current lease

• Check the length of tenancy – usually the longer the better

• Check the rent review structure – annual set increases are usually preferred over CPI which is currently low

• Check whether the lease is a gross or net lease – a gross lease is where all outgoings are inclusive of the lease, with a net lease the tenant contributes to operating costs (outgoings) including but not exclusive of; management fees, land tax (not retail), rates, building insurance, building maintenance, building services, water, garden maintenance

• Review the general ledger – check rents have been paid regularly and on time

 

• Building design

• Has the property flexible floor plates

• Is the current floor layout efficient?

• Is the lettable space maximised versus non lettable communal space?

 

• Development opportunity

• What DAs are or have been in place for the property and local properties

• Are there any restrictions and zonings in place?

• Consider speaking to a town planner to gauge their thoughts

 

• Opportunities to look out for

• Undercapitalised properties

• Tenant paying below market rent

• Underdeveloped properties

 

At the end of the day this must be a business decision based on a rational review of the property’s previous returns, location and rental yield, not a decision based on your emotions.