By A. Yoni Miller
Cash Reserves –
Being a commercial real estate owner is an easy job when the economy is booming, there’s a line of tenants out of the door and your property is in immaculate condition. But when the economy starts to flounder, tenants are no longer able to afford their rent and your property is in need of repairs and improvements, the true colors of being a commercial real estate owner arise. Planning for the worst and hoping for the best should be the motto of all real estate investors.
In order to keep your commercial property thriving in the good times and surviving in the bad, it is essential to build up a large cash reserve. During the recent recession, we saw firsthand how easily commercial real estate owners could lose their property and life savings if they are not properly prepared for the economic downturns. Cash reserves are not just crucial for economic recessions, but for every day events that occur to commercial properties.
Having a lack of cash reserves puts you in a weakened position and can force you to do second-rate repairs, obtain less then suitable tenants and bend over backwards to tenant demands out of fear of vacancy.
Even if a property owner currently has cash reserves, they should ask themselves if their reserves allows them to sleep easily at night. If life presents one of its many twists and turns, will their reserves allow them to survive in the bad times or do they currently have their entire investment property at risk?
Fortifying Your Leases –
The time to negotiate is when you are in a position of strength. As a commercial property owner, your job is not just to keep your property occupied, but also to increase the dependence of your tenants on the property. The more your tenants want to stay in their current location, the stronger your position of strength is to fortify your leases to limit liability and maximize profits.
When it’s time to renew your tenants’ leases, you’ll want to take a look at every clause and find ways to remove the ones that add liability and give the tenant leverage, while adding clauses that strengthen your position as a landlord. For non-credit tenants, negotiating a personal guarantee in the lease provides you with the extra comfort of having the business owner liable for the rent, even if their business shuts down.
Lease renewals should also act as a time to verify your tenant’s financial strength. You’ll want to request audited financial documents to review if they are a thriving or floundering company and if they can even afford their rent payments. If the last lease was signed five years ago, their financial strength can be very different than when you had originally leased the property to them.
You’ll also want to take a look at the co-tenancy clause in your lease, which would allow tenants to get out of their lease if a major anchor tenant in the property was to leave. Think about the dive your cash flow would take if your anchor tenant left your investment property. Now think about the even greater dive your cash flow would endure if your anchor tenant left and that triggered multiple other tenants to leave as well.
Establishing Relationship with Limited Partners –
Limited partnerships are like marriages. While the couple is walking down the aisle, they are deeply in love. Over time though, diversion of interests can occur and the marriage can turn sour, leaving one or both individuals wishing to end the marriage. Real estate partnerships are not immune from diversions of interests between investors. Unlike marriages, limited partners will have a difficult time divorcing their illiquid assets. That is why establishing a relationship with limited partners is vital in having a pleasant investing experience.
Through open and honest communication with your limited partners from day one, you can maintain a constructive relationship. Ensure your limited partners that you are there to address any problems or concerns that they may have regarding their investment.
—A. Yoni Miller is Chief Marketing Officer at QuickLiquidity, a direct buyer of partnership interest in commercial real estate on the secondary market.Visit QuickLiquidity at www.quickliquidity.com and contact Yoni at YMiller@QuickLiquidity.com.