Commercial Property

Commercial Property in Eugene and Springfield

Another form of investment is commercial property. These unique properties afford an investor the opportunity to be connected with other businesses in the area depending on who the tenants happen to be. But, there is much to know about commercial property in Lane County.

This is the land of big money and shrewd investors, and isn’t for the faint of heart. Life-times have been spent learning commercial real estate. I’ll add a few things that I think are important.

Finding the right property is more important than getting the right price. In fact, if you’re a long term investor, purchase price becomes nearly irrelevant; you’ll look back in 10 or 20 years in disbelief about how little you paid for a good property. Shop on quality, not price.

Cap Rates
Nearly all income property sells based on a cap rate. The better the property, the lower the cap rate, and the more you’ll pay. Don’t be blinded by great cap rates. It’s easy to distort them, and unscrupulous sellers and realtors have been known to do so. Ways to do this are:

  1. Over-market or sweetheart rents
  2. Improper allowance for reserves
  3. Too small of vacancy factor allowance
  4. Too small, or no, management allowance

Other metrics
Internal rate of return, cash on cash, gross rent multiplier, and cost per unit (in apartments) are sometimes used in describing a deal, and usually by the seller. I’ve never found them that useful and stick with cap rates.

You’ll see several common lease types in commercial properties.

NNN or triple net.In this lease, the tenant pays for taxes, maintenance and insurance. These are sometimes called coupon clippers. The perception is that these properties require no management. While, they probably require the least management of any real estate, it’s not the same as sticking your money in the bank; you should either know something about buildings and real estate, or know someone who does if you’re planning on owning any kind commercial property, including NNN.

One problem with triple net properties is maintenance that is not crystal clear. For instance, if a roof isn’t leaking, then few of us think (or need) to do anything about it. And getting a tenant to do anything other than pour some goo on a leaking roof is going to be a fight. If a tenant stays in a property for a long time and the roof merely wears out, is it really their problem? These types of issues are a bit muddled on NNN leases.

Even taking the above into account, triple net leases are considered to be the best type of lease for the investor.

Modified Gross
In a modified gross lease, the tenant pays rent-only for the first year. This is called the base year. In subsequent years, the tenant pays for increases in taxes, insurance, utilities, etc. when compared to the base year.

Other forms of a modified gross lease may carve out certain items that a tenant or landlord will need to pay for. For instance, the tenant may be responsible for janitorial service. Or, the tenant may be responsible for everything but the roof. The variations are many.

Gross Lease
The landlord pays for taxes, maintenance, insurance, and all operating costs associated with the building. This is the most management intensive form of property to own.