We outline a few of the strategies that commercial property owners can use to mitigate risks and ensure their investment's profitability.
Commercial rental property can be a complex investment. There is more that can go wrong and more that needs to be managed as the property owner and landlord than with a residential property. However, with these associated challenges also come increased rewards.
Some of the biggest risks for commercial properties are vacancies and liabilities. With commercial property, you often have multiple occupants, as well as the potential for the business’s customers on the property which increases the potential for injuries to third parties or third party property. As such commercial landlords need to consider how to mitigate these risks while streamlining workflows so that they can maximize the returns for their investments.
In this article, we outline a few of the strategies that commercial rental property owners can use to mitigate risks, as well as ensure the investment’s integrity and financial profitability.
Commercial landlords need to maintain their properties to ensure that they are in a pristine and rentable condition at all times. This means investing in high-quality upkeep and responding to maintenance requests quickly.
Your tenants are reliant on the building to operate their business and so maintaining the building to high quality is essential if they and their customers are to have a quality experience when they’re on site. Not doing this could result in high vacancy rates and potential liability issues as we’ve already mentioned.
Other important considerations are location, the business type you rent to, and setting a fair rental price.
As a commercial landlord, just like your tenants, you have rights and responsibilities. Fundamentally, you should expect to be able to collect rent of the agreed-upon amount on time. On top of this, you should expect your tenants to keep the property in a high-quality condition. For these, it’s important that you find the right tenants for your property. In turn, your tenants will expect a high quality of management and maintenance for the property itself.
For commercial property tenants are expected to adhere to lease conditions that have been agreed upon beforehand and signed in the commercial lease agreement.
“One of the most important aspects of a commercial lease is apportioning the maintenance and repair responsibilities for the leased premises. Maintenance and repair responsibilities vary greatly based on the type of lease, design of the leased premises, and negotiating power of the landlord and tenant.” – Source
In order to minimize risks with your commercial property, you need to clearly stipulate a number of things upfront in a lease agreement document. This document needs to be legally binding, and it’s a good idea to get it reviewed or updated on a regular basis by industry lawyers.
A few of the risks that you can mitigate with a quality commercial lease agreement:
For commercial leases, it is the responsibility of the tenant to maintain the integrity of the building and the grounds around the building, if applicable.
Both the landlord and the tenant should have relevant insurance policies to protect them from liability issues and unexpected occurrences.
The landlord is responsible for the insurance of the property itself, as mentioned earlier in this piece. However, the tenant is responsible for their own business insurance as well as maintaining the best health and safety business practices whilst occupying the property.
Once a tenant occupies a building, they are legally liable for the happenings on the premises they’re leasing. However, there are scenarios and or cases where the landlord may end up being liable if they neglect the duties in regards to the maintenance of the property itself.
As a mitigating factor, you should stipulate in your lease agreement, the amount of deposit you expect to collect upfront. This can be higher than for residential properties. However, you are best to check your local state laws for deposit limits on commercial property.
One of the principal risks of any rental property is the nonpayment of rent. In your lease agreement, you must stipulate not only the deposit that you’ll be collecting and when you’ll be collecting it, but also the rent amount, the rent payment dates, and importantly, the lease length. For commercial properties often the lease length is longer than residential properties which is a good way to keep vacancies down. You may stipulate that the rent should be paid monthly, quarterly, or even yearly depending on the preferred method of payment from the occupying business
Just like on a residential property you have a responsibility for maintaining the property itself. You should organize and arrange regular expected inspections of the property to ensure that it is properly maintained and that the leased space remains in a good state.
The commercial rental space should contain all the appropriate and required fire and safety as required by law. Additionally, the responsibilities of each party in regard to fire and safety equipment and practices should be stipulated in your lease agreement.
There are a few things that you should expect your commercial property insurance to covered and these include:
This will cover costs associated with repairing or replacing assets that are damaged during fire, flood, storms or by the tenant.
Many commercial rental insurance policies will have a loss of rent clause which will allow you to reclaim lost rent under various circumstances.
This covers things such as fixtures, fittings, or furnishings, which are part of the property and can be stolen.
Commercial property glass is an expensive asset to replace. However, unfortunately, it does get damaged either accidentally or deliberately and so is an important piece of coverage for the property owner to obtain.
There are potential legal liability issues that you take on as the owner of the property. For example, injury to a third party on the property or damage to property owned by a third party.
This would cover the loss of rent if a property cannot be rented out for a particular reason such as a fire, storm, or natural disaster which makes the property temporarily unrentable.
There are a few tools available that can be used to streamline your workflow and increase your commercial rental profitability. The first tool to look at is a quality rent collection tool. Due to the high rent rates and the increased liability that comes with processing large online transactions not every online payment platform supports commercial properties. Additionally, many of the platforms that do support commercial properties charge a percentage of the rent as a fee which can quickly become an unscalable cost.
One solution that does support online rent collection for commercial landlords is Landlord Studio. Landlord Studio has a set transaction fee depending on the plan you choose starting from $1.75. To use it, simply set up your property and invite your tenant. Your tenant then needs to create an account on the tenant portal where they can log in at any time to view upcoming and historical transactions as well as set up automatic recurring payments which will be transferred directly from their bank account into yours.
Other important aspects of commercial property management which can be improved through the use of technology include, income and expense tracking, managing tenant communications, lease management, reminders for important things such as inspections, and more.
Landlord Studio allows you to manage both your residential and commercial properties all from one place on a property by property and unit by unit basis. You can use our online rent collection system to process large transactions, connect your bank accounts to view and reconcile transactions quickly and easily from inside the software, digitize receipts using the app at the point of sale, and instantly generate over 15 professional accountant approved reports at any time, from any device.
Learn how you can streamline your rental accounting and management with Landlord Studio →