Word of Caution For Those New to Commercial

[Joshua Leite]

While there are many great facets to commercial real estate there are also many differences compared to residential (SFR or multifamily). Before you consider getting into the commercial side, I urge you to research and make sure you know what goes into the following:

Leasing – Tenant Improvement allowances (what is the current market offering) are a major difference from residential. A landlord may end up needing to put in $2 per square foot of leased space in improvements to get a space leased. This takes a bit of free cash.
Leasing – Broker Commissions – Commercial leases (office, retail, industrial) many times have multiyear terms (3-5, even 10 years) which commercial brokers typically get paid a percentage of total value on. This adds up when leases are valued at $500k+ in total.
Commercial loan escrows – commercial loan servicers often require escrow accounts for taxes and insurance costs. This can reduce your monthly cash flow if you don’t take this into account going into a project.
Management – commercial leases are more complex than residential. You have a breakdown of maintenance obligations, cost recoveries, annual reconciliations. A good management company can stay on top of these items as well as the day to day operations. Make sure you know the leases inside out so you are not leaving cost recoveries on the table.

[Robert T.]

All very good points. T.I. allowance is usually much higher than you mentioned. Also, vacancies tend to be longer than residential Higher risk for single tenant than multi tenant. BUT, when the assets are stabilized, it is a great income stream with few hassles.