6 Ways to Protect Your Commercial Real Estate Development
2017-11-02
Months of planning, millions invested, and one of your biggest assets, your commercial real estate development has become a significant part of your investment portfolio. One thing you want to ensure is that your development is protected from potential elements of destruction, such as tenants, weather, and depreciation. Here are six ways to protect your commercial real estate development.
Insurance can cover a multitude of sins and omissions. While there are several types of insurance available for commercial real estate, many states require minimums in liability insurance and property insurance. Other types of insurance to consider for your development include commercial insurance (based on your business structure), business property insurance (to help with repairs and rent loss), and title insurance (purchased at initial settlement). Title insurance, in particular, can protect against unforeseen loss due to title defects, encroachment issues, public records errors, and more.
Business structure, when structured properly, provides an umbrella protection for both your development and your personal property. The level of protection it provides will be dependent on the type of business structure an owner chooses. As Bigger Pockets warns, “Most investors don’t realize that just as the lack of a contract will leave them unprotected on an investment, the lack of paperwork for their business entities leaves investors even more vulnerable.”
Lease underwriting can make or break a development. Because a lease is binding to both the owner and the tenant, it is essential to be as “right” as possible when entering into a lease agreement with a new tenant. The best way to ensure a right fit for the right tenant in the right industry for the right lease term is to enlist professional support. Tools like (RE)meter’s TIL Score, Industry (RE)port, and Background Check can do within hours the type of real-time, accurate analysis necessary for a successful lease underwriting process. Lease underwriting done well mitigates risk of loss for your investment.
Lease management is another key to protecting against depreciation. Value of commercial properties is primarily dependent on net income—that is, what’s coming in from existing leases minus what’s going out in the form of expenses and vacancy loss. This is what makes lease management so important. Protect your development by preparing for natural lease expirations, renewals, and vacancy loss during unit turnovers.
Capital expenditures to your development will be required at some point to protect your development from depreciation and to make your investment more appealing to tenants. Think HVAC, parking lot resurfacing, green building improvements, and roof replacement. Property Metrics advocates establishing replacement reserves to fund capital improvements, adding that capital expenditures are necessary for maintaining a competitive and fully occupied property.
Maintenance of a development cannot be ignored or delayed in most instances. When left undone, routine maintenance can result in exorbitant expenses that could have been avoided by swift action. For example, when water is discover puddling near a building, check gutters and downspouts and look for any leaks in exterior walls. Having a routine maintenance plan and fixing repairs swiftly will aid in protecting your development as well.
