For commercial property investing, the goal is to secure profitable tenant leases. With the proper research, foresight and financial backing, renovating commercial property for lease can be a win-win scenario: it increases your investment’s capital value and attracts qualified, long-term tenants ensuring long-term, steady income from an increased yield.
So how do you attract those coveted leases? You need to offer prospective tenants a property that meets their needs - location, layout, services and, of course, appeal should not be underestimated.
A new building will alleviate unforeseen expenses for repairs and maintenance and is, therefore, highly sought after. But there are a lot of investment opportunities available for those who have the financing and foresight to take an old project and make it new again. A well-functioning, well-maintained space with the latest in technological infrastructure in a newly renovated space will attract high-quality tenants, too.
Learning from Residential Trends
In the commercial property climate, like the residential market, certain properties have more appeal than others, and what appeals to one, does not necessarily appeal to all. Since commercial property varies vastly, it’s important that you consider who it is that you want to appeal to - you cannot appeal to everyone. The type of building, its location, and the demographics of the area will dictate the type of amenities that will draw the most attention. And a savvy commercial investor is always aware of the shifting demographics that determine the next up-and-coming area.
When investing in property - whether it’s residential or commercial - location is a primary factor in determining an investment’s earning potential. Most neighbourhoods go through cycles - what was once shiny and new, gradually ages and becomes outdated as newer neighbourhoods take root and draw the crowds.
This is the beginning of the opportunity cycle. Eventually, those older neighbourhoods start to attract new investors and, oftentimes, entire suburbs go through a gentrification process - making the old new again. The smart investor is forever watchful for neighbourhoods just entering into this phase, and they’re ready to move on opportunities while the pricing-cycle is low. The experts at Acumen Finance can help you prepare for the next wave.
Renovating commercial property also has its tax advantages. The cost of major improvements, such as remodelling a kitchen, structural reinforcements or replacing the roofing will count toward your cost basis, so you can use these costs to offset capital gains taxes when you sell the property. Further, you can take capital works deductions and depreciation allowances over the amortisation period of the loan. Depreciation deductions are key to managing inflated income taxes.
Whether you’re in the business of buying to sell (flipping) or leasing your commercial investment property, buyer appeal is king.
Most major metropolises have an old town or a suburb that has passed its pioneering days. If the tenant demographics are there, these are great locations to invest in older structures, especially those with an architectural flare. Old office buildings are ideal for attracting professional firms, such as lawyers, architects, financial or other customer-facing services where appearances are important.
Presence and privacy appeal to these tenants. Roomy offices with stately doors, plush carpeting or hardwood floors, and good lighting will speak to them. Aside from these cosmetic upgrades, updated, spacious and sparkling clean bathrooms are a must for this discerning crowd. Common areas, such as kitchens are important, too, so tasteful and modern appliances may be the detail that tips a tenant in your favour.
Another key feature that attracts top-quality tenants, leading businesses, and will likely line your pockets with dollar bills is recently constructed or renovated commercial property. The more recent the construction, the less likely the tenant will have to do any work to upgrade or maintain the property during their leasing period. The appeal is understandable and understated - it saves money and hassle.
On top of that, you will be able to generate some cash savings through depreciation deductions which are higher on newer builds. Investors benefit from tax rules that allow the depreciation of commercial property to be used as a tax deduction against their per annum taxable income - a handsome benefit if you have lots of rental income.
On the other end of the scale, you could look to invest in undercapitalised properties which are a little lacklustre in quality but command a lower rental return than average. Get hold of one of these commercial properties and you can change it up with some renovation-work, increasing the value of the property while driving up rental rates.
Large industrial spaces are ideal for new start-ups as well as long-established corporations. If the lease-holders you want to attract have a large workforce, consider a multipurpose layout with a combination of open spaces and workspaces. Also, think about employee perks - parking, gyms, open spaces, cafeteria-style kitchens, even child care centres are all enticing benefits for the multitudes.
The bottom line here is that you’ll want to build - or renovate - to your desired tenant’s requirements. What you can offer will be determined by your location and the bones of the building from which you are starting.
In Every Space
Regardless of whether your commercial property is a large warehouse or a high-street store-front, keep in mind that there are other upgrades that will put your property in its best light.
To attract quality leaseholders, every property should have:
That said, finding the funding to renovate may prove to be the trickiest part. When you start getting into development and construction loans, already-stingy banks want more substantive information demonstrating that your project is viable. A traditional bank, and possibly even a Credit Union or Building Society, will want to see a detailed feasibility study that shows the best as well as the worst-case contingencies.
Further, they’ll want to know that the people (you) behind the project have the experience and expertise to perform the renovations. Be prepared to submit a business plan with all the numbers and resumes of any contractors working on the project, all covered with an executive summary that details design features and project viability.
If your renovation involves major construction and you need a construction loan, you should note that the bank will only release funds in accordance with certain milestones, and those may need to be verified by a quantity surveyor. (We’ll dive further into construction finance in a future instalment, so be sure to check back.)
Does it sound like a big task? The experts at Acumen Finance can help. They can model the transaction and create comprehensive credit papers worthy of the most discriminating loan officer. Better yet, to attract a private lender. Acumen has the experience and knowledge to take into account upcoming future land rezoning changes to write a credit paper that will influence lenders (private or otherwise) so they understand the merits of the deal and the demographics of the location.
Through established partnerships, Acumen Finance can connect you with private investors, where there are no loan caps, and where investors lend on the merits of the project. Acumen has secured project development loans backed by mortgages in the hundreds-of-thousands to millions of dollars, with loan-to-value ratios up to 100% of construction costs. Our pool of investors includes property developers who can assess the value of a project based on experience. They understand, first-hand, the implications of zoning regulations and processes for changing them. Contact us today and let us use our extensive pool of knowledge, resources and experience to help you get started on your revitalisation project.