What position do you want to be in when you exit your commercial real estate investments? If you put these 7 income and value boosting strategies to work, you’ll be on your way to a profitable project conclusion. The essential avenues to improve value include increasing demand, boosting income, lowering expenses, and reducing risk. The following approaches make sense in nearly any market and will improve the exit results of any commercial property investment.
Lowering Operating Expenses
This is the number one play in improving and supporting strong valuations in commercial real estate investments. It’s also the most direct, efficient, and fastest way to increase the net operating income (NOI). While other strategies can take relatively longer to see results from, expenses can be optimized in the near term to begin showing improvements in cash flow each period. Some of the key expenses to target are maintenance costs, energy consumption, water usage, labor, and administrative overhead.
Ensure individual metering of utilities to properly allocate costs to tenants and elect a NNN lease to assign responsibility for operating expenses to tenants. Lower operating costs improve the risk profile of the subject and make for a more attractive investment (and favorable exit).
Improving Property Condition
Although commercial real estate is generally valued based on the income produced, condition has a direct impact on value in the way it affects income and desirability. Improving look, appeal, and functionality contribute to tenant and user satisfaction, increase market demand, and provide leverage for lease-rate increases. Making improvements decreases the investment risk associated with the property, leading to a lower capitalization rate and a greater property value. While this will incur a short-term increase in maintenance expenses, the long-term potential for reduced capital expenditures and increased demand more than offset the cost.
Auxiliary Income Streams
The possibilities are endless. How many ways can you envision (while still maintaining the visual integrity of your property) to add some dollars to the monthly or annual cash flow?
Think outside the box here. Look at new technologies and ways to partner with other firms in the real estate (and broader) industry to offer greater value to tenants. If what you offer is valuable to occupants in terms of cost savings, utility, or convenience, there may be an excellent opportunity to quickly scale-up revenues and turn around a less-than-stellar valuation.
Some examples to get you on the right track to auxiliary revenue generation include vending, paid on-site/off-site parking, gym memberships, communications services, janitorial support, and rental kiosks.
Physical advertising space on the property can provide significant revenue generation potential (see building sides in any urban downtown). This is an area where you can get creative: billboards and banners are old favorites, but you can go much further in our digital tech-enabled environment. Leverage any communication with tenants, whether through emails, newsletters, or online property management platforms to tastefully monetize.
Leases that Protect Against Economic Risk in Commercial Real Estate Investments
You need a high-quality lease that protects from economic risk. Consider a triple-net (NNN) lease that will pass periodic increases in operating expenses on to the tenant. Hire an attorney to help draft your lease agreement and incorporate the ideal terms. Some important things to consider are lease length, indexed rate increases, expense allocation, responsibility for taxes, usage restrictions, and re-leasing (renovation, vacancy, and leasing costs). To protect the condition and ensure the compliance of the property with local zoning, specify clearly how the property may be utilized and the remedies available to correct to an inconsistent usage, including lease termination and injunctive relief.
Increasing Lease Rates
Tried but true, nonetheless stellar. If no lease is in place or it is due to expire soon, do the right thing and bring the rate up to at least market rate. In addition to a high-quality lease that protects you in all eventualities, maximizing the return through an equilibrium rent rate will make the property and opportunity most appealing. Charging more than market rate for the class, location, and condition diminishes demand and can lead to a greater chance of a lease break and extended vacancy. Conversely, underpricing the lease restricts income growth and may lock the property into an economic disadvantage as appreciation and lease rates rise.
Going Green – Reducing Operational Risk and Energy Expenses
We already mentioned reducing expenses in general but consider specifically how implementing sustainable strategies in your investments can reduce risk and the power bill. This is a strategy that sympathetically increases value by stimulating demand from an environmentally-conscious tenant base (becoming the norm). Sustainable strategies improve indoor air and environmental quality and reduce the potential for litigation and poor public sentiment due to sick building syndrome (SBS).
Employing Accurate and Credible Appraisals for Commercial Real Estate Investments
Lenders, investors, and stakeholders will endlessly scrutinize any appraisal report that supports the valuation of a commercial real estate investment. Experienced investors will question every assumption made by the appraiser in preparing the report. When the appraisal doesn’t meet the exacting standards of the commercial real estate industry and accredited investors, it damages the perceived value of the property and indicates a potential risk. Errors or poorly-supported reconciliations invariably hinder negotiations and delay closings.
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