Commercial Property Investing: A Team Sport?

Sometimes adults act just like little kids. The pathetic part is occasionally that time is when we are investing in real estate. Maybe we feel we have read enough books and know exactly how to do it. Maybe, you heard how your neighbor had a great purchase on a small residential purchase. Maybe, we are convinced that Donald Trump is really not that smart… maybe he was just at the right place at the right time. Or, maybe, just maybe guys are absolutely positive about how to do it and they tell their wives or friends and then refuse to back off when they should.

I was one of those guys, I knew everything and if I didn’t I could hire someone who could. Yep, I was an absolute genius, with a full wallet. I told my wife and my friends how I had it all figured out. My wife just nodded like she does when I’m driving and refuse to use the GPS or ask someone for directions, even when I’m completely lost. My close friends were polite but strongly suggested I rethink what I was doing.

However, even an absolute genius, with a full wallet, a plan and pride the size of Texas was not going to back off and lose face. I knew how easy it was, buy a small rental house, fix it up and lease option it. A piece of cake.

I will leave out all the horrible details that follow as life seems better without dredging them up too often, besides the headaches and nightmares have finally gone away. Let’s just say that I lost my shirt when the market tanked, when the tenant got angry and trashed the house and fled in the night and when month after month of maintenance, utilities and taxes were eating away at that pride of ownership while sucking into my savings. That was real Genius.

Coincidentally, I was receiving checks twice a year from the group investment on a medical office building that I got into a few years before the crash. I was and still do earn a tidy 12% cash on cash return per annum. Due to slowly rising rents built into the leases from day one, strong tenants, premium location and amortization of the underlying mortgage the value of the building has gone up over time. So, simply put my principal is safe, I earn actual real dollars every year and the overall investment has gone up in value.

The office building purchase was a group of physicians who got together and built a building. We all became tenants and brought a few more non owners in to increase the cash flow. We all considered the risks as a group and the group was committed to the success of the building.

Now, if you have the cash on hand you could go and buy a nice class A office building or medical office building yourself. Since, YOU are a genius and have a full wallet. However, my advice from the trenches is to STOP right now! It takes some work and effort to manage the building and real expertise when things go wrong. If you have a group behind you those decisions are not solely yours and some of your partners might actually have good ways to solve those problems. In addition, by putting less into the investment you have reduced your risk and allowed the group to buy perhaps a bigger and better property.

Obviously, things can go wrong with group investing on real estate. I am not saying they can’t. But, with a group your risk is mitigated, you have people you can turn to when there is a problem and you can as a group buy a piece of real estate of substantial quality and value that you could never accomplish alone. Remember, one of the icons of American real estate The Empire State Building was built by a group of investors, not one man who refused to ask for directions when lost. That is real genius.

Texas Real Property Law for Commercial Landlords

I have found that landlords generally face the same set of issues and have the same set of questions pertaining to their rights, duties and obligations as landlords under Texas law. The answers to these questions depend on whether residential tenants or commercial tenants are involved. Although commercial and residential property ownership and operation have some similarities, the differences are numerous and diverse enough to justify separate treatment for each area. This article is intended to discuss issues related to commercial property with commercial tenants only. This article is my attempt to create a quick and very general reference guide on the rights, duties and obligations of commercial landlords and operators under the Texas Property Code. It is by no means complete, but hopefully is informative enough to assist the reader in asking informed questions of legal counsel and thus be more efficient and economical while consulting legal counsel.

You should not take this article as legal advice, and I strongly urge you to seek competent legal advice for your specific situation. The Texas legislature updates and passes new laws relating to landlord/tenant issues on a regular basis. In addition, Texas courts regularly interpret these laws. Thus, the laws discussed in this article are in effect as of December 2005. I have not assumed any duty or obligation to update this article beyond this date.

I. Duty to Mitigate

If a tenant abandons the leased premises in breach of the lease, the landlord has the duty to mitigate (lessen) the damages that the landlord would experience as a result of the abandonment. Thus, the landlord should not let the premises lie vacant in hopes of being able to recover lost rents from the tenant. This duty to mitigate damages may not be waived by the tenant, so any provision in the lease that tries to waive this duty or exempt the landlord from liability is void.

II. Security Deposit

A security deposit is any advance of money, other than a rental application deposit or an advance payment of rent, that is intended primarily to secure performance under a lease.

III. Retention of Security Deposit

Before returning the security deposit, the landlord may deduct from the deposit damages or charges for which the tenant is obligated under the lease or resulting from a breach of the lease. However, normal wear and tear (does not include deterioration that results from negligence, carelessness, accident or abuse) may not be withheld from the security deposit.

If the landlord retains any portion of the security deposit, the landlord must refund the balance of the security deposit and give the tenant a written description and itemized list of all deductions. However, this description and itemized list is not required if the tenant owes rent and no controversy exists concerning the amount of rent owed. The refund and written description and itemized list of all deductions is not required until the tenant gives the landlord a written statement of the tenant’s forwarding address for the purpose of refunding the security deposit. However, failure to provide a forwarding address does not cause the tenant to forfeit its right to receive a refund or a description of deductions.

IV. Refund of Security Deposit

A landlord must refund the security deposit not later than the 60th day after the date the tenant surrenders the premises and provides notice of the tenant’s forwarding address.

V. Change of Landlord/Owner and the Security Deposit

The new owner or landlord of the leased premises is liable for the return of the security deposit starting from the date title to the leased premises is acquired, except where the new owner acquired the premises by foreclosure through a real estate mortgage. However, the former landlord or owner remains liable for the security deposit received while the person was the owner or landlord until the new owner delivers to the tenant a signed statement acknowledging that the new owner has received and is responsible for the tenant’s security deposit and specifying the exact dollar amount of the deposit.

VI. Liability of Landlord for Security Deposit

A landlord who in bad faith retains a security deposit is liable for an amount equal to the sum of $100, three times the portion of the security deposit wrongfully withheld, and the tenant’s reasonable attorneys fees incurred in a suit to recover the deposit. It is presumed that a landlord who fails to return a security deposit or to provide a written description and itemized list of deductions on or before the 60th day after the date the tenant surrenders possession is acting in bad faith.

VII. Preventing Access to Leased Premises

A landlord may not intentionally prevent a tenant from entering the leased premises except with permission of the court unless such prevention results from (i) bona fide repairs, construction or an emergency, (ii) removing the contents of the leased premises abandoned by a tenant or (iii) changing the door locks of a tenant who is delinquent in paying at least a part of the rent. The lease may alter this provision.

VIII. Changing Lock Due to Delinquent Payments

If a landlord changes the door lock due to delinquent rent payments, the landlord must place a written notice on the tenant’s front door stating the name and address or telephone number of the individual or company from which the new key may be obtained. The new key is only required to be provided during the tenant’s regular business hours and only if the tenant pays the delinquent rent. The lease may alter this provision.

IX. Landlord’s Removal of Property After Abandonment by the Tenant

A landlord may remove and store any property of a tenant that remains after the premises has been abandoned. The landlord may also dispose of the stored property if the tenant does not claim the property within 60 days after the date the property is stored. The landlord must deliver by certified mail to the tenant at the tenant’s last known address a notice stating that the landlord may dispose of the tenant’s property if the tenant does not claim the property within 60 days after the date the property is stored. A lease may alter this provision.

X. Abandonment by the Tenant

A tenant is presumed to have abandoned the premises if goods, equipment or other property, in a substantial enough amount to indicate a probable intent to abandon the premises, is being or has been removed from the premises and the removal is not within the normal course of the tenant’s business. The lease may alter this provision.

XI. Interruption of Utilities

If the tenant pays for utility services directly to the utilities companies, the landlord may not interrupt or cause the interruption of such services unless the interruption results from bona fide repairs, construction or an emergency. A lease may alter this provision.

XII. Removal of Doors, Windows, Locks, Hinges, Etc.

A landlord may not remove a door, window, attic hatchway, lock, hinge, hinge pin, doorknob or other mechanism connected to a door, window or attic hatchway cover from the leased premises. Additionally, a landlord may not remove furniture, fixtures or appliances furnished by the landlord from the leased premises. However, the landlord may remove these items for a bona fide repair or replacement, which must be promptly performed. A lease may alter this provision.

XIII. Landlord May Terminate Lease Due to Public Indecency Conviction of Tenant

A landlord may terminate a lease signed or renewed after June 15, 1981 if the tenant or occupant uses the property for an activity for which the tenant, occupant or any of their agent or employee is convicted of public indecency (prostitution, promotion of prostitution, display or distribution of obscene materials, sexual acts with persons under the age of 18, etc.) and such person has exhausted or abandoned all avenues of direct appeal from the conviction. Notice of termination must be by written notice within six months after the right to terminate arises. The landlord obtains the right to possess the property on the 10th day after the date of notice is given.

XIV. Notice Requirement Prior to Eviction

The landlord must give a tenant who defaults or holds over beyond the end of the term at least three day’s written notice to vacate the premises before the landlord files a forcible detainer suit, unless the parties contracted for a shorter or longer period of time in a written lease or agreement.

The notice to vacate must be given in person or by mail at the premises in question. If notice is delivered in person, it may be by personal delivery to the tenant or any person residing at the premises who is 16 years of age or older or personal delivery to the premises and affixing the notice to the inside of the main entry door. Notice by mail may be by regular mail, by registered mail or by certified mail, return receipt requested, to the premises in question. The notice period starts from the day on which the notice is delivered.

Copyright 2005, Tri Nguyen

Invest Money In Commercial Property for Best Returns

Investing money in commercial property is nowadays catching up. Those people who are already invested in residential property are now looking at this kind of opportunity. It is happening quite frequently in the case of the people who made good money in the residential property. They would like to explore the opportunity of investing in this kind of properties also. The advantage of investing in business properties you need to spend less time over the maintenance of the property. Even you can lend it out for someone to take care of the development and finally can make good money over the long-term. You are having the great advantage of finding someone who can take the property for a lease for a long time. Once if they are committed to pay the rent as per your expectations with regular rise on each year, it is definitely going to give you even good returns in terms of rent. If the person who has taken the lease is an organized a person, it is going to stay there in the property for the long-term and you need not such for a tenant each year.

The good advantage of business properties you need to invest high amount of money only once and that’s it. You need not invest money regularly for updating it and renovating it. In many cases that is being taken care by the company who has taken it for commercial lease. Does maintenance cost over the long-term is going to be much less in a business property when compared with the residential property.

You can find a tenant who can give you the property back in the same condition that you have given to him after a certain period of end of the lease. Does the tenant is even going to pay the maintenance cost after vacating the property. This is going to save you a lot of money and hence if you are having a chance to invest you can invest money in commercial property. The other advantage of commercial properties it is bit easy to predict the success of a commercial property. As you are already being in a heart area you need not wait for the time so that it will develop. Finding a tenant and getting a proper rent of the expected level is quite easy in the case of commercial property when compared with the region shall property.

Because of the change in the policies of the lenders and bankers now a days it becomes bit easy to get the money for investing in commercial properties. You can find a suitable mortgage even if you are a small level invest your to invest in commercial properties. The main reason because of which we are not entered into the commercial properties we don’t understand the advantages and disadvantages of investing in that kind of property. Being we are very much well aware of the home that we are staying, we are just more comfortable investing in flats and homes. We feel like this is a kind of investment even though the basic aim is not investing in property. If investment is the only reason because of which we are buying something it is always better to buy a commercial property rather than a recession flat. It is just because the value of the house may decrease over the time but the Valley of the commercial property will definitely rise with respect to time.

We shall not fall into a rotation that commercial property means we shall buy a very big one and you need to invest a lot of money. Even we can buy a small commercial property in a small value. We can just by even a small place for a retail shop or a coffee shop. These kind of small ventures are definitely very much affordable even for the middle class people.

Commercial Property Leasing Activity Report – Your Complete and Foolproof Guide

When you manage or lease a commercial, industrial, or retail building you have to track the leasing issues, not only for the landlord, but also for the tenant. The performance of an investment property is impacted by rental and lease documentation in a variety of ways; you do not normally want a vacant property.

The Property Manager or Leasing Manager for the property has to keep things under control and on track to the property strategy, business plan, and tenancy mix.

To solve the problem it is best to run a leasing activity reporting process and update it at least monthly. Within each month the report becomes a moving tool to support the property investment for the landlord. It is a document that tracks:

  • Current lease activity
  • Forward lease changes
  • Vacancies

What you are normally looking to avoid here with the report is disruption to cash flow or something that disturbs the function of the property outside of any plans you may have. Accuracy in the report is paramount as it is likely to be the main document that keeps you abreast of critical lease issues. If there is an error in the report then you will likely miss a critical date on a lease, and that can be significant in the function of the property over the longer term for the landlord.

The leasing activity report is a forward looking report usually covering the next 12 months and everything that can happen to leases and licences therein. Special attention has to be given to anchor tenants, and tenancy mix strategies that are already in place; these strategies are already active and should be continued.

In a multi-tenant occupancy, the number of leases in the building can become daunting and diverse. When the landlord owns and operates a number of properties at the same time, the matter of lease stability is also complex. The leasing activity report keeps you on track.

A leasing activity report should include the following issues:

  1. A tenancy schedule of current leases including upcoming predicted or known changes such as rent reviews by type and timing, options for a further term, and expiry dates.
  2. Status of any current negotiations with tenants both new and established.
  3. Signed leases report (that is for existing leases for occupying tenants)
  4. Submitted leases report for documents that are outstanding for any reason
  5. Proposals for new leases pending a decision by the landlord or tenant
  6. Vacancy report of areas that are soon to be or are already vacant
  7. Marketing strategy and inspection feedback for vacant areas currently
  8. Prospects currently looking at the property and status
  9. List of vacant areas in competing properties nearby
  10. Changes to tenancy mix recommended
  11. Schedule of rentals in the current surrounding market to which you compete
  12. Overview of the types and level of incentive that exists in the surrounding market
  13. Target rentals and target lease terms
  14. Summary of recent leasing decisions made by the landlord in the last month that impact the property or any vacancy.

When you use these topics for your leasing report, it is clear for you to see that most things are covered and under control. In addition to the items above it is best to provide a time line graph of events both current and foreseen to help track events before they happen.

The Golden Rules in Managing Commercial Property

Managing commercial property with multiple tenants can be very demanding. Ultimately it is the skills of the property manager in controlling their day and the property that is critical to success.

The landlord of a property needs stability of rent, tenant mix, and outgoings. That is why a good and experienced property manager is required to keep things on track. Any property manager will not do when it comes to commercial or retail property; inexperience in that regard can impact the property performance very quickly.

Here are some of the golden rules of property management in commercial and retail premises:

  • Lease occupancy should be monitored. A good lease document is the key here. Generic leases are a waste of time as they do not fully cover most of the unique property issues that can come from a special property. Landlords are better protected in a solicitor prepared lease.
  • Terms of tenancy usage should always be watched so the tenant does not step outside the terms of the lease. When the tenant bends the rules or does something wrong it pays to handle it quickly and always using the terms of the lease as a backstop.
  • Payment of rental should be in accordance with the lease documentation at all times. When late payment occurs then steps are taken quickly to serve the appropriate notices and demands under the lease. Collection of arrears is always important. Left unchecked it is very easy for arrears to get well out of control. Time is critical when it comes to arrears follow-up. When in doubt always look at the lease first to see what responses are required when rent default occurs.
  • Control of building maintenance is both a budgetary issue and also a safety issue. When maintenance threatens the safety of the tenants or members of the public, it has to be responded to immediately. Liability and negligence claims are most common in property management.
  • Payment of accounts should be undertaken in accordance with the approved accounts in the property budget. It is wise to get the landlord to approve a budget prior to the beginning of each financial year. In that way the property expenses can be planned.
  • Budget performance has to be monitored so the expenditure does not get beyond control and outside of industry averages. Any property with high outgoings will be hard to lease.
  • Landlord reporting and communication is a key to property management success. Regular accurate reports are essential to keep the building momentum pointing in the right direction. When the landlord gets the right reports they can give accurate decisions.

The list can go on and the details are always broad and complex. A landlord should choose their property manager based on skills and experience. Low management fees or leasing fees are the wrong reasons to be changing property manager. Experience is the key every time. A good property manager will offset their fee cost many times over through appropriate building strategies in leasing and maintenance, good financial controls and reports, and excellent tenant relations.