Avoid these commercial ownership mistakes to protect yourself and your property's value.
Whether you're a new commercial property owner or have been in the landlord trenches for decades, properly managing your building and its occupants is an ongoing, complex challenge. From navigating tenant issues and keeping up with changing laws to maintenance and safety, it's important to remain educated and proactive in order to protect your property and avoid lawsuits.
Complacency allows risk to fester. To help you stay on top of your commercial ownership game, let's take a quick look at 4 Commercial Ownership Mistakes to avoid at all costs:
Failure to Protect Your Personal Assets. It's best practice to form a business entity under which a property is purchased. In many cases, investors and commerical property owners form a Limited Liability Corporation, or LLC, for the transaction; the creation of an LLC limits personal liability should issues arise with investment partners or lawsuits. According to Westwood Net Lease Advisors, there are two LLC types for commercial investors: "The first type is a regular LLC, and involves putting all of your properties under one LLC. The second type is relatively new, having been clarified by the IRS in 2012. In this type, there is a master LLC and individual LLC’s. The individual LLC’s hold separate properties in what is essentially an entirely different entity, termed 'series' LLC’s."
Failing to protect your personal assets creates enormous personal risk. If you have not created an LLC, do so right way before the risk becomes real.
Insurance Oversights. You have insurance, but have you taken a look at how your current policy aligns with the evolution of your property and tenants? In many cases, insurance becomes a "set it and forget it" operation. In reality, this can create a big risk for your investment.
A lesser known but major risk is failing to maintain adequate coverage for your property. A key item to be aware of is whether your insurance covers fair market value or replacement costs. Depending on the age of your building, replacement costs could far exceed fair market value.
What's more, tenant funded improvements also need to be considered. While your tenant might have paid for improvements, these changes inherently increase the value of your property, and your insurance policy needs to cover the true value or actual replacement costs of your building.
Maintenance Lapses. As the building's owner, it's your responsibility as per your lease agreement with tenants to maintain the property, both proactively and reactively. Repairs must be made promptly, if not caused by the tenant. In short, failing to maintain your property and being less than responsive to non-tenant caused issues creates risk on multiple fronts: (1) A deteriorating property will hurt your building's market value; (2) It will impact your per square foot rent; (3) It will damage your reputation, making it difficult to find replacement tenants; (4) and finally, it could open the door for tenant lawsuits.
Hiring a property management company can help reduce maintenance risks; if you like to do things yourself, creating a repeatable maintenance schedule that's proactice and responsive can keep your building in top shape and your existing tenants happy.
Safety Risks. Similar to maintenance lapses-these are, in fact, related issues-failure to actively maintain a safe building enviroment creates significant risk for tenant lawsuits and possible insurance policy violations. From lighting and electrical code violations to security and fire precautions there are a host of dangers for a commercial property owner that's overwhelmed by landlord responsibilities.
According to the Expert Institute, "Attorneys who litigate cases involving commercial landlords should be aware of the fact that there is a direct correlation between proper maintenance and risk management procedures and the risk of physical injury. In other words, poor maintenance practices increase the likelihood that someone will be injured on a property. Good maintenance practices reduce that risk."
It's logical, for sure, but not always easy when you don't know what you don't know and are strapped for time.
Bottom line, maintenance and safety lapses make your asset vulnerable to lawsuits and might leave you in violation of your insurance policies and not fully covered by them.
MacRo Commerical Real Estate has decades of experience helping commercial real estate owners and investors protect their property assets. If you're looking to invest, or are struggling to mitagate any of the risks listed above, we can help. Become a MacRo Insider and email Rocky@macroltd.com today and let's start the conversation.
Thoughts? Comments? We’d love to hear from you.