Commercial real estate is primarily valued on the amount of Net Operating Income (NOI) it generates. This actually makes it easier to increase the value of a commercial property compared to a residential home. With a residential properties, things like redoing the kitchen or bathrooms or adding a pool rarely increase its value as much as these upgrades cost. In essence, residential properties are handcuffed to the ups and downs of the market they’re stuck in, with little ability to effect their own sale price.
However with commercial property you have much more control over creating real value in the property. Here are some basic things you can do to increase the value of your commercial real estate investment.
- Raise the Rents. If your rents are below market average then you are essentially giving away part of your earnings to your tenants. Do a rent comparable with other similar buildings in your area to see what the average rent per square foot is. Then as your tenants leases expire raise your rents so you are in line with this value and your NOI will go up accordingly.
- Lower your Expenses. This produces the same results as raising rents except you can normally do it immediately and not have to wait for tenant leases to expire. Again, look at your expenses and compare them to the norm for your type of property. You may be paying too much in property insurance or maintenance services or cleaning supplies, etc. Any place you can lower your costs without significantly lowering the quality of the services provided will increase your NOI.
- Upgrade the Property. This may not seem to make much sense as property upgrades cost you money but in the long term upgrades will make you money. They do so by making your property more attractive to future tenants and therefore allowing you to charge these tenants a higher rent. It also can justify rent hikes to current tenants when their leases expire. A tenant who is asked to pay more for the same space may decide to shop around but if the building has been upgrading and the tenant is reaping the benefits of these upgrades then they are more likely to agree to the rent increase without shopping around for a new building and incurring the expenses of moving.
- Change the Use of the Property. In some instances a property can become obsolete for what it was originally built for. If a property was originally build as an apartment complex it may be possible to convert it to office space and be able to collect much higher rents.
- Add more Services. This is different then upgrading the physical structure. If you add services like a cleaning company, conference rooms, fitness center, etc, then you can in turn charge higher rents for the building since it is now more attractive to potential tenants.
- Lower your Property Taxes. Many times the tax assessor’s office uses incorrect data when updating or calculating a properties tax liability. By asking for a reassessment of your tax bill and providing the tax collector documentation as to why you feel the tax bill is to high you may be able to lower your taxes, especially if your building is in an area with declining property values and has not been reassessed for several years. Lowering your property taxes in turn lowers your costs and increases your NOI.
- Make Tenants Pay for Additional Services. If your building currently offers garbage pickup, electricity, water, cable or any other service as part of the tenants rent, you can increase your NOI by making the tenants pay all or part of the cost of these services. This is in essence the same as a rent increase except you are justifying it by making the tenants pay for additional services they are receiving instead of an increase just for the actual space they occupy. This is especially effective when bringing in new tenants who are not used to having these services “for free”.
- Renegotiate Leases. Every time a tenant leaves and a new tenant comes in you incur expenses. Whether it be advertising costs, painting, carpeting, customization of the space, etc. It is in your best interest to keep the same tenant in a space as long as possible, even if it means making slightly less on the rent. See if you can get tenants to sign longer term leases. This gives the tenant rent security to budget their expenses and gives you the security of knowing you do not need to pay to re-lease the space every two years.
- Hire new Management. People tend to get in a rut. A management team that has worked the same building for years may become complacent and not act aggressively to bring in new tenants at higher rents. New management can bring in fresh ideas on increasing income and reducing expenses without lowering the operation efficiency of your property.
- Divide your Vacant Land. If you own a large parcel of vacant land that is zoned for residential use you can add value to that land by having is sub-divided into individual parcel lots suited for single family homes. This is attractive to a developer who wished to buy your land since it saves them the time and expense of getting this done and allows you to charge more for the land, per parcel, then you would have received as a whole.
Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.