First Commercial Deal

[Sandra Holt]

I have 4 residential rentals and have my first commercial property under contract. The commercial property is a suite of 8 offices that I’ll move my law office in to and I’ll have 2 offices to rent out. I start my 45 day study period most likely next week. Are there any suggestions on what specifically I should inspect/look for during the study period? Thank for any and all advice.

[Tyler Kastelberg]

@Sandra Holt

Sandra: Make sure to review all leases and operating costs in depth. Key items to review:

Leases

1) Type of lease (NNN, full service gross, modified gross)

2) Schedule of escalations, renewal options

3) Common area maintenance reimbursement (how is it calculated, etc)

4) Percentage rent (unlikely in office, but best to double check)

Operating Costs

1) Utilities - Get all the utility bills for the past two years and review for abnormalities. Check if utilities are sub-metered for each unit, making NNN leasing easy.

2) Taxes & Insurance - Get statements from the seller and verify they match city/county records

3) Contracted Services - Make sure you review any cleaning/maintenance contracts that will transfer to you at closing

Most importantly, review local comps and market occupancy with a fine tooth comb. You'll want to be sure your underwriting includes accurate market expectations for the vacant units, as well as a stipend for tenant improvements and leasing commissions.