Four ways to boost value in commercial property

March 19, 2015

 

joe muratore

Joe Muratore

I was impressed recently with a local commercial property owner’s plan for improving the tired multi-tenant retail strip center he bought. The property had been on the market for quite a while, but through creativity, discipline and some hard work, he converted the worn-down strip center into an investment quality asset.

First he updated the outside of the building with new paint and landscaping. Then he converted the existing tenants from month-to-month leases to triple-net leases that now have at least a one-year term.  After that he chose not to renew a lease with a long-term tenant that had a lower rental rate and was able to bring in a nationally branded franchise with a significant lease term.  The result was that he dramatically increased the value of the property.

Property owners have several tools they can use to raise the value of their properties but many overlook some of the options they have.  Buildings must be positioned so that occupancy can be increased and rents can be raised to market or above rental rates.  Here are four strategies for increasing the value of your commercial property.

Cosmetic changes

Among the lowest cost and highest impact ways of improving a property is to upgrade the landscaping and add a fresh coat of paint with an up-to-date color scheme.  Modern façade changes are more expensive but will also significantly change the look and feel of a building.

Another approach is to update a building’s signage.  This can have a dramatic effect on the property as tenants are more visible to their customers and therefore have a greater sense of pride in their location.  Also, naming a building and featuring that name appropriately in your signage gives the building character and a personal quality.  It can contribute to a building’s sense of history or its purpose in serving its current tenants.

Update leases

Building improvements set the stage for asset value improvement, but it is of no use unless leases get signed and, especially on class B and C quality office buildings, this can be a major challenge.  Sometimes, getting deals done requires creativity and a greater sensitivity to a tenant’s needs and goals.

To achieve that, consider including using shorter lease periods, introductory or tiered rental rates and more substantial free rent periods.  It also often makes sense to offer incentives to current tenants to encourage them to recruit other tenants.  In some cases, where high vacancy has persisted, the old adage that some money is better than no money applies, and the rental rates a landlord may have once achieved are not in line with the current market.

Getting new tenants into the building, even at a lower cost, can bring new energy and momentum to the building and further attract other tenants.  Often this means that landlords must “incubate” tenants by starting them at lower rates and on smaller spaces and providing room for them to grow.

Re-evaluate rents

Landlords must make sure that building rents are at or above market rates.  Long-term tenants often have below market, month-to-month rates based on their historical occupancy.  By allowing this to continue property owners give up part of their earnings and depress the property’s value by keeping the net operating income lower.  Often this occurs because a landlord has developed a relationship with a tenant and is not willing to have a difficult conversation.

When lease terms are up it is important that landlords work for small improvements each time.  A property that has a bunch of back-of-the-napkin, month-to-month leases will be penalized in value.  Cleaning up the leases takes time and effort but has a significant impact on value.

Manage and share costs

Expenses tend to grow over time, and it is very important that landlords regularly get new bids on their insurance, maintenance, management and security costs to make sure they are the best they can be.  A great tip for adding value to a building is to insist on a triple-net structure, in which the tenant becomes responsible for costs beyond rent, such as insurance, taxes and maintenance.  A property owner may need to reduce his base rental rate to accomplish this.  This is attractive to a future buyer of the property because it limits their risk to changing property costs.

Above all else, you must have a current plan and strategy for your property.  Landlords and property professionals tend to get complacent over time.  Buildings have all sorts of challenges, but every building can be improved, and it is important that owners keep applying fresh ideas and put in the hard work to maximize their investment.  Otherwise, when they or their heirs eventually sell, a new investor will do the work and achieve the value that the former owner didn’t have the time, capital or vision to achieve.

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