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If you would like to talk property, please contact us:
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12 December 2007

Buying Commercial Property

Fail to use the right criteria to buy commercial property and you run the risk of making the wrong investment choice. Morpheus property use the following objective investment criteria to assess commercial property.

1. Quality Tenants & Stable Leases

As any experienced Landlord knows the quality of tenant can strongly influence the quality of your investment. Look for stable well known companies, Government Agencies or Business with a good track record. 3 or 5 year lease terms are good ensuring that yearly rent reviews take place with market reviews occurring at the beginning of each lease period.

2. New or near new Construction, recent refurbishment & flexible design

New or near new construction or refurbishment will maintain strong Tenant interest and reduce any periods of vacancy. It will also mean a generally happy tenant that pays in full and on time.

This will also give you greater depreciation for tax purposes.
A building with flexible design means that when a tenant does leave it will have greater wider appeal when it comes to rent it out the next time. Whilst refurbishment will lead to greater tax benefits you still don't want to be dipping into cash reserves and cashflow too often or too much.

3. Lease Terms and Conditions & Absence of Competition

You should ensure that the lease provides for yearly CPI rises and for a "market" review at the beginning of each new lease option. Outgoings are most commonly covered by the tenant which is why commercial property is often a more attractive ROI proposition than residential investment. The lease should also provide for the tenant to be responsible for the building maintenance.

When you search for an commercial or industrial area to invest in, ensure that their isn't a glut of the same type of property in that area or it could be difficult to find tenants when one Tenant moves out. A saturation of one type of property could mean long vacancy periods or lower than expected yields.

4. Good Position & Emerging Trends

All other things being equal … as the old real estate adage says ... position, position, position. Most businesses (tenants) will look for premises that is well positioned to traffic flows and required infrastructure and customers. How to determine a good position could be guided by a number of factors including the type of tenant the building attracts and what works well in a particular area. Position should never be the single driving force of your decision.

Other factors may include construction, design, energy conservation, security and automation for example. The other opportunity is to look for property that lacks something and manufacture your gain through purchasing an under-performing, under-priced property that can be refurbished or redeveloped without major expense.

5. Lease yield and zoning opportunities

You should always ensure that the rent on a property is at fair market value or you could be acquiring a property that is performing below market and will continue to perform below market because the rent is tied to fixed increments or raises in with CPI, thus locking yourself in for the duration of the lease into an under-performing return on investment.

Zoning relates to a property’s present and future uses. It pays to keep an eye on what has or is happening in and around a potential commercial investment. If others have been able to look to rezoning and change of use on properties located in the area then a property may be able to be purchased and a gain manufactured from a rezoning or change of use application to a local council. It is an opportunity to be aware of, as there are rezoning, density and change of use changes occurring on a regular basis. Large manufactured gains can be there for the taking if you are astute.

6. Strata Titling, subdivision and Vendor Motivation

If after the sums have been done and add up, you are able to subdivide or strata title a parcel of land, or an entire building, you may be able to significantly enhance your property’s value and marketability.

After strata titling and/or subdivision you may still choose to sell the property as a whole or one at a time. It is more likely that you will be able to obtain more for the parts if sold separately.

A new purchaser will find the flexibility of selling off portions very attractive because it will most likely make them more money. People will pay a premium for that opportunity and flexibility - well in excess of the cost of creating it.

Vendor Motivation is important; but ought not be your principal reason for buying a specific property. It is sometimes very difficult to know if you are being told the truth about vendor motivation, in order to create the illusion of opportunity or it may be that the agent is attempting to hide the true motivation of the vendor in order to protect the sales appeal.

Assess all the fundamentals and a motivated negotiable vendor will be the icing on the investment cake. The other opportunity with a motivated vendor is not only price but also greater flexibility on structuring attractive contract terms and conditions.

Yours in property

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