Single Tenant Commercial Properties

[Arshad Hussain]

Hello,
I am planning to buy a single tenant commercial property.I am new in this field. I will appreciate it if experienced members of the forum can give me some pointers as to what to look for and what to avoid.

Thank You

Arshad

[James Storey]

Hello Arshad,

It comes down to what sector you are looking to buy in (retail, medical, office, industrial, etc) as well as the particular tenant corporation you think you might want to deal with. Different corporate tenants have different lease structures and various credit rating to back them up so its hard to give you a lot of pointers without knowing exactly what you are looking for. 

I have managed and helped my clients purchase a ton of these single tenant commercial buildings and its always important to know what you are getting yourself into. In the end, one of the best pointers I can give is that try not to get too sucked up into who the tenant is and more into the actual real estate physical structure and where it is located. If you end up with an awesome location and great layout, then you will always have it leased out weather its an invesmtent grade tenant like Davita Dyalisis or a non investment grade tenant like a local restraunt chain.

Another pointer is that try to truley understand where market rents are. If the tenant rent seems to be way above market, then they may have to TI capitalized into their lease. The problem is that you would buy the building on that cash flow and when the lease comes up for renewal, the tenant is going to push for lower rents to be with market and it could put you upside down on the property.

Also, try to keep in mind when the lease is up to be renewed and if you are responsible for roof and structure of a building (a typicall NN lease structure). Tenants can come back and ask for a rather healthy Tenant Improvement allowance and the landlord to replace a roof if you want them to renew their lease. If you don't have the extra capital to withstand those headaches then it might be best to find a tenant that leases on an absolute NNN basis.

There are a lot of options to look at and its not a one size fits all formula like a lot will lead you to believe. There can be some major value add opportunities and some great hurdles to get over. Its all different on a deal by deal basis.

James Storey, CCIM