Renovating A Commercial Property : Commercial real estate investing, just like residential real estate investing, has a strong renovate and sell component to the overall calculus of profit and loss. Many commercial real estate investors see properties they hold solely in the context of the revenue stream generated every month, rather than as an asset that can be improved over time. In the current competitive commercial real estate marketplace, this could have you falling behind the curve on getting your maximum return on investment.
There are several good reasons to renovate commercial real estate. Renovate your current property to greatly improve the re-sale value. Buy another cheap property in a good area. Then renovate it for future resale. Consider subdividing your property into smaller offices and retail spaces to increase the number of tenants and therefore, the amount of rent collected. Or, simply command higher rents for premium facilities. All of this is about improving the attractiveness of the property for tenants and potential buyers, making it easy to get a solid return on your investment.
As with all real estate investing, you need to determine if your strategy is to buy-and-flip or to buy-hold-and-lease. In particular, if you’re planning on hosting your own office in the facilities, buying and leasing makes a fair amount of sense; on top of this, there are tax incentives available for commercial real estate held for seven years or more, to help fund and encourage renovation work. This is all part of the process of encouraging businesses to remain in communities, and foster a good employment market.
Once you’ve chosen to renovate, for any, or several, of the reasons above, the question becomes “what sort of renovations will return the best value for the money invested.” If your property under renovation has tenants, they’re the first people to ask. If it’s just been vacated by a tenant, it’s also a good time to ask what sort of renovations and remodeling would be desired. Typical renovations that are worth doing include checking the plumbing, adding conferencing space and making the foyer more open and airy. All of these renovations will help you qualify for the tax relief programs being offered for long term commercial real estate holders.
If you don’t have any tenants, the renovations possible are much more extensive – you aren’t disrupting someone’s business workflow while you undergo the renovation process. Consider green renovations first. These can be as simple as replacing the windows with triple glazed thermal protection windows to a panoply of more extensive changes, like elevators that capture electricity when they descend, using regenerative breaking. If you’re looking to sell the building, using recycled materials in a renovation can greatly improve your ability to sell it, particularly to younger business owners who consider green buildings to be a mark of prestige, or a moral obligation.
While it’s possible to sink more money into green renovations than the property is worth, there are several things to seriously consider. The three most common include solar collectors on the roof, rainwater collectors that can be used for the toilets and other gray water facilities, and using a solar wall with black piping to let the sunlight do part of the hot water heating for the building. Regrettably, much of the furor about making green housing pay for itself in reduced utility bills boils down to poor math. Most businesses will spend more on green features than they’ll earn back over the expected time they’ll remain in the business at foreseeable energy prices. What you’re doing when you do these sorts of capital investments in your property is staking a fiscal position that the price of energy is going to rise in the near future, and that you’re improving the resale value of your facility. This isn’t to say they aren’t worthwhile – a lot of the green innovations in building construction make the building more habitable, and they do reduce the costs of operation. The unquantifiable benefit is the price value of reduced environmental impact.
The hazards of renovation include the usual hazards involved in any sort of construction endeavor. Contractors can run late, or run over budget, or both. You can have renovations that result in disasters. When looking to do renovations, take the time to interview your contractors carefully. Work through the entire process with them, and set up metrics for what needs to be done as well as when it needs to be done. Work with your contractors as closely as you can afford to, without joggling their elbows or “backseat driving” the job.
Above all else, make plans and stick with them – renovations are big projects and big projects more than anything have a tendency to take longer and go over budget, as the final specification becomes more and more of a moving target.
If you’re going to be building a new facility on a lot, you’re likely going beyond the bounds of renovation. That being said, there are several options that are easier to facilitate into a new building, than into an existing one. Among them are baseline water heaters (which heat and cool rooms by running water through pipes under the floor), energy capture facilities like solar arrays integrated into south facing walls, a property designed heating and cooling system with an energy star compliant ventilation system, and proper insulation.
Make your renovation budget work in your favor to increase the value of your property. The capital outlay now will give a substantial return on the investment, either as a flip, or through increased leasing revenues.