Buying a multipurpose commercial property: what you need to know
Buying commercial real estate is a big decision, but a multipurpose property is its own animal. Rather than mastering a subclass of assets within real estate by focusing exclusively on leasing office, apartment, warehouse or commercial space, a different approach is required.
Here’s what you need to know to make buying and managing a multi-purpose building less taxing.
Appreciate the building class and the risks involved
Commercial buildings come with a classification. Ratings for office buildings generally range from a Class A property to a Class C property. Other types, such as retail stores or industrial buildings, will be referred to differently. Clearly understand how mixed-use buildings are rated to appreciate the level of risk you take on. Although their dexterity in being put to different uses improves their usefulness, it can potentially increase the level of risk.
Look at similar buildings to get an idea of ââthe compositions
Search listings for similar buildings, including past sales, to get a clearer idea of ââthe applicable purchase prices per foot. Compare what they offer, including not only the different sizes of usable space within a multi-purpose structure, but also the support services. Useful extras like parking and other facilities can save employees or visitors money and time finding a place to park.
Consider the local market
Let’s say you are considering a building that can be used as a meeting room, storage space or as a gym, how marketable is that in the area? A mixed-use building will appeal to some organizations more than others. While the flexibility might appeal to a Scout group, it will be less applicable to a business looking for dedicated office facilities. Can you find local examples of fully rented mixed-use buildings? Can you talk to the owners to get their thoughts on how this style of real estate works in their town or town?
Get the right insurance
When it comes to commercial property insurance, you’ll want to make sure you have the right insurance. There are several types of insurance to cover commercial buildings. A mixed-use building is unique and not all insurers will feel comfortable covering it if they don’t fully understand it. Find the right insurer who has a good understanding of how this type of property changes use depending on the tenant’s needs. As a result, there will be no question marks on the coverage due to the use of the building.
Obtain information on current leases
Will the building be acquired with existing tenants on an emphyteutic lease? Or will they need to be replaced soon enough? Can you speak with current tenants to discuss their future plans regarding their stay or move to another location or building? While everyone’s plans are subject to change, it helps to get a basic idea.
Taking over an existing building with satisfied commercial tenants on long-term leases is totally different from one that has been partly vacant for months. While the current owners of the building may have reasonable grounds to justify a persistent vacancy, it doesn’t change the fact that it will affect cash flow and ROI going forward.
Develop a marketing plan
What type of marketing plan do you have for the building? The effectiveness of this and the cost of finding new tenants after each vacancy must be taken into account. When there is a significant gap between the conclusion of a new commercial lease, it is a loss of income. If you can find out what marketing has been done before and how successful it has been, this is useful information. While you can decide on a different approach, it can at least provide some avenue for exploration.
With any commercial building, there will be zoning that applies to it. The zoning confirms the use that can be made of the building and what is also excluded. Therefore, some business activities may be permitted while others are out of the question. Depending on zoning and restrictions, this could make a building less marketable than it would otherwise be. Take a close look at this to avoid any potential roadblocks to getting a reasonable ROI.
Getting a satisfactory ROI from a multi-purpose building is a little different from other types of commercial buildings. Its flexibility is either a blessing or a curse, depending on your perspective. However, be aware that this changes some of the considerations as an investor in commercial real estate.