6 unit multifamily with 2 retail bays.

[Collin Schwartz]

I am looking at a multifamily property in a good area that produces a 9 cap return. My concern is that a third of gross income is from the retail bays. My quesstion is what are the major challenges with finding and maintaining tenants in a retail bay? The location is Omaha NE.

[Colton Luchsinger]

Good Afternoon Collin,

There are a couple pros and cons to having retail bays mixed with multifamily units. 

Such Pros would be:

1. Retail Tenants usually have lease terms between 3-10 years (sometimes more!)  and can sublease/assign to fill in for minor vacancy rates. This means more longevity of passive income, and brings the value of the property up.

2. They bring the benefits of business clients and tend to keep their spaces in a nicer condition as their they need to maintain a professional image.

3. Usually in the leases, they pay a prorata share of Insurance, Taxes, and CAM's (Common Area Maintenance) with the other retail tenants. This reduces the Landlords Expenses

4. The property gets classified as a flex space and your profit can survive various droughts as your eggs aren't all in one basket - If you experience high vacancy in the apartment units, the retail tenants can anchor the property without devaluing the property - and vise versa.

Some Cons would be:

1. Most likely have a longer period of vacancy if a retail tenant moves out, but this cycle can be shortened - that is why you have listing brokers like myself to find you tenants - because in most cases the fee you pay a broker will out-way the costs of having the space sit unused while you try to network and fill the space on your own. We can advertise to over 500+ agents in town and potential business leads in my brokerage.

2. When leases expire, sometimes the business will hire a broker to renegotiate the terms of a new lease with you. Sometimes it's easier to accept some of their demands just to keep them in the space and keep your income generating. 

3. When you get into the details a lease, you have to figure who's going to be paying for what and how much (utilities, HVAC/property fixture repairs, tenant improvements/build-outs (T.I.'s), common area maintenance,  etc) which your broker can use as leverage in negotiations with the Ten. Rep. Broker. 

This is just off the top of my mind when I think about Tenant Representation and Landlord Representation issues that arise when one party submits a Letter of Intent.