What major costs can come with buying a commercial building

I get asked a lot about “good deals” or a new property that is on the market and it just seems like a must have.  Many times it can be and I am a huge advocate of finding a great deal on real estate, but its not always a financially smart idea when you take into account the costs of owning commercial real estate.  Yes being an added value buyer or having the ability to fix these problems internally can put you ahead of the game and makes them more attractive but generally speaking there are many things that should make most buyers think twice about jumping into a commercial property that may have unknown expenses.

  1.  Mechanicals – The heat and air conditioning systems in commercial buildings are build to keep a large space comfortable when hot and cold and are sometimes very large.  When these operate well they make a building very attractive and also help keep the moisture levels correct and the building health in good condition.  But when they break they can be very costly and time consuming.  New HVAC systems in commercial buildings can run $10,000 a unit and there can be 3 units in a 10,000 sqft building easily.  This is a general example but its true.  You can quickly spend $30-50,000 on replacement units and that can really put a dent in building cash flow
  2. Roofs – This is the most underwhelming repair in any commercial building but can make or break the usability of your new space.  Leaky roofs cause a lot more damage then stained ceiling tiles and ruined paperwork on a desk.  Water moves as far as it can travel and does damage all along the way.  Water can drip down walls for months without you noticing the damage.  Buying a building with an older roof  can be asking for trouble unless you account in advance for this expense.  On a 10,000 sqft building roofs can start at $25,000 and quickly climb depending on materials and structure but this is not a quick fix.  Think about tearing off 10,000 sqft of roofing over head, hauling it away, prepping the bare surface and reapplying the new roof.  This can cause business interruption and just an overall pain in the tail for owners and tenants.  At a minimum have someone visit that roof monthly to ensure there is no pending major damage to surprise you.
  3. Low Taxes – In the downturn and even still today there are distressed properties coming to market and there are also properties build a couple decades ago being sold as baby boomers retire and enjoy the fruits of their labor.  With that you can sometime get excited about the low taxes on a property or the low assessed value still recorded.  This is great in year one but as the property sells or the property is reassessed to come current with todays assessment values, those taxes can sky rocket.  For instance in a hot market where everyone wants to suddenly be, they are willing to pay a premium for location so a properties valuation may jump 30-50% for example and the current taxes do not reflect that.  Be sure to sit down and figure out the potential tax increases to be sure you will not be hit with a $10-20,000 tax bill that you had not planned on.
  4. History – We have no idea what happens inside most buildings and drive by them daily without any knowledge of who or what is going on inside.  Just like homes, buildings can have a bad reputation that can be carried on to new owners and tenants.  For instance a building that was part of a major drug bust in our market was hard to find online because every time you googled the address the first 2 pages were about the drug bust and its jailed owners.  Can you imagine starting a business at that location and as your new customers google you and your address they find this information?  While it may not be the end of the relationship, its just one more uphill battle in a tough business environment.  Google the address and visit the neighbor buildings to ask the history on a property and keep in mind that many of your future employees, vendors and customers may become aware of these issues.

Owning a commercial building is not easy and its not cheap but with good planning and smart cash reserves you can own for much less then renting and create a nice revenue stream for generations to come.  For more information please contact Curt at curt@wkrpindy.com or 317.698.2700.

 

Curt Whitesell owns WKRP Indy Real Estate and has been in the Indianapolis Real Estate business for over 10 years, spent his first years learning all aspects of commercial management and brokerage.  He has had great success in managing existing commercial projects and new retail and office developments.  Curt specializes in building owner representation and purchases in the Westfield Indiana market as well throughout the Indianapolis Metro area.  Curt is passionate about growing the local Westfield community and in his free time  volunteers with Westfield Youth Assistance and raising 2 children with his wife Jennifer.

 

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