Quality of tenants . . . and other commercial basics

Location is a must in both residential and commercial real estate.

However, much like the way a lender now scrutinizes a potential home buyer, a commercial investor must take the time to research the quality of tenants already in place in a commercial property.

“In-place income” is critical when making a decision to purchase any building, along with the quality of the tenants and their staying power, according to Charlie Foushee, development manager and mixed-use specialist for Seattle-based Terragon.

“Not only is the term of the existing lease important, but so is the possibility of that tenant extending the lease,” said Brian Kelly, who focuses on tenant position and placement for Washington Partners. “Some new companies have a lot of money in their pocket and look good for the short term, but is their business plan going to work? Will they be in the building you want to buy, three of five years from now?”

Location, lease term and tenant quality are three components that make up a sound commercial real estate purchase. Other basics to consider:

Be realistic about market timing – Everybody wants to buy low and sell high. Whether markets are moving up or down isn’t really the issue. The central question should be if value can be added or created in the investment being considered. A savvy investor considers how to add value even if the market is not moving in his favor. Can you improve value to an asset through refinancing, improvements, changing tenants, or restructuring the lease?

Invest in opportunities not asset classes – Sure, there are definite synergies by developing a niche focus, but the most successful investors are flexible in their approach. They look for opportunity in change. Are you a retail investor, or an office specialist? Are you a multifamily player or is your focus in industrial properties? The same characteristics that make an investment attractive in one asset class are often the same in others. Construction risk and quality, supply and demand and age are relevant regardless of whether you’re investing in industrial or office assets.

Be flexible in structuring your investment opportunities. As long as you understand the risk and possible rewards, it shouldn’t matter whether you are a principal in entirety, or have a limited ownership interest. You either like the opportunity or you don’t. The rest of the issues are just details to be worked out. When opportunity knocks, answer the door. Rarely are ALL the stars aligned, so don’t expect them to be.

Build a team you trust – The smartest commercial real estate investors surround themselves with professional advisors and brokers who extend their strengths, find an answer for their weaknesses, improve their access to market data, and provide more visibility and broader access to investment opportunities. Ask for help from dependable, loyal sources.