Commercial property includes offices, shopping malls, and storefronts. Some stores have apartments in the same building. Since the demand for apartment property is relentless while the demand for commercial property fluctuates with the state of the economy, such properties can be desirable as they reduce your risk. Income from the property will always cover some of your costs.

Office buildings have appeal because rents can be raised regularly. Office buildings are in relatively short supply. Because the economy is so service oriented, it's reasonable to expect a continuing demand for office space. In some locations, overbuilding has created a glut, forcing landlords to make rent concessions. Most small- and medium-sized retail and service businesses operate from rented premises. Office buildings fall somewhere between shopping centers and apartments. They will give you more headaches than the latter and fewer than the former. Free-standing office space is essential for such businesses as accounting, insurance, advertising, law, medicine, employment, and engineering.

A modest profit can be boosted by deductions for interest, taxes, and maintenance. You can also take a depreciation deduction. If you renovate a commercial structure that is at least 20 years old, you're allowed a tax credit. Finally, if your building is in a district designated for historic preservation, you can write off renovation costs over 5 years even though the building's useful life is longer.

Commercial property is easier to manage than residential property. Maintenance duties are fewer. Business tenants are more apt to keep up their own premises. They will often improve them. For the most part, they are responsible for the interior of their building. Tenants usually stay longer. They

often do their own janitorial work. Tenants also pay more for rent, give a bigger security deposit, and accept tax escalation clauses in their leases.

Leases can run for as long as 20 years. For a small property, a 3-year lease with an annual escalator is typical. Some store leases call for a minimum rent. Higher rents are payable depending on a certain volume of business, with percentages of gross sales above the minimum payable to the landlord. Commercial property leases are complicated. Before you buy a building with leases in effect, have an accountant examine the leases and, if possible, the tenant's income statements. Ask your lawyer to review the leases. Make sure the building is not fully rented to tenants who have long-term leases that restrict rent increases. Long-term leases are like rent control. They keep cash flow down and reduce resale values. Recently negotiated long-term leases can spell trouble for the new owner. It's often better if some of the leases are about to expire. Bad tenants are easier to evict. Local landlord and tenant ordinances are often stacked against residential landlords but in favor of commercial landlords. Many investors prefer doing business with businesspeople. They assume that those who run a business will always pay their rent because they want to keep the location. However, many who run businesses have had lots of practice stiff-arming creditors, and a landlord doesn't intimidate them at all. A business is just as subject to eviction as an apartment dweller, but it's not necessarily easy to accomplish.

However, commercial landlords take bigger risks. When a vacancy does occur, you are hit with substantial renovating costs to suit a new tenant, and the vacancy remains longer than an apartment vacancy. Professional tenants can drive up utility and maintenance costs. Parking requirements are greater than for apartment tenants.

Although new buildings are generally too expensive for small investors, there are existing business properties for many checkbooks. Commercial properties don't always require hefty down payments. A shortage of mortgage money has made bank financing elusive for most small-scale business property investing. In a tight mortgage market, the seller will often finance the purchase, accepting 10 percent in cash or less. Bank financing, if you can get it, generally involves putting up as much as half of the purchase price in cash. A property you like may not even be listed for sale. Don't let that stop you from inquiring about it. The owner may consider an offer for personal reasons. Perhaps it will help him retire earlier than he had intended.

 

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