When investing in commercial real estate, most buyers focus on the purchase price or lease terms. However, there are often hidden costs that can catch even experienced investors by surprise. These expenses can add up quickly and significantly impact the profitability of your investment or the affordability of a lease.
In this post, we’ll uncover the most common hidden costs in commercial real estate and explain how you can avoid them.
1. Maintenance and Repairs
One of the most overlooked costs in commercial real estate is maintenance and repair expenses. Whether you’re leasing or owning the property, maintaining it in good condition is essential for preserving its value and ensuring it remains attractive to tenants or customers. However, maintenance costs can vary significantly based on the age and condition of the property.
For tenants, it’s important to understand whether you’re responsible for any repairs under your lease agreement. Triple net leases, for example, often require tenants to cover maintenance, repairs, and other operating expenses in addition to rent. As an owner, you’ll need to account for regular maintenance costs and unexpected repairs, such as HVAC system breakdowns or roof damage.
2. Property Taxes
While most investors are aware of property taxes, they may not fully anticipate how much these taxes can increase over time. Commercial property taxes can vary significantly depending on the property’s location and market value. Furthermore, tax assessments often increase after a property is purchased or undergoes significant improvements, resulting in higher-than-expected tax bills.
Before acquiring a commercial property, research the property tax history and check whether the area is prone to tax increases. This information can help you estimate future tax liabilities and better understand how taxes may affect your investment returns.
3. Insurance Costs
Insurance is another essential expense that investors and tenants need to factor into their budget. Commercial property insurance premiums can be higher than anticipated, especially for properties located in areas prone to natural disasters or crime. Additionally, if you make significant improvements to the property or add high-value equipment, you may need to adjust your coverage accordingly, which could increase your premiums.
Ensure you fully understand the types of insurance required for your commercial property, including property insurance, liability insurance, and any additional coverage specific to your industry or location.
4. Utilities and Operating Expenses
For tenants, utilities and operating expenses can be a hidden cost if they’re not explicitly detailed in the lease agreement. Some landlords pass these expenses on to tenants, while others include them in the rental rate. It’s essential to clarify what expenses you’re responsible for and whether they include utilities, janitorial services, landscaping, or other operating costs.
As an owner, you’ll need to account for operating expenses like utilities, maintenance, and building management. These costs can vary seasonally, so it’s important to budget accordingly to avoid cash flow issues.
5. Renovations and Build-Outs
If you’re planning to renovate or customize a commercial property to meet your business’s needs, it’s essential to factor in the costs of build-outs and improvements. These expenses can quickly escalate, especially if unexpected issues arise during construction. In addition, be sure to account for any delays that could lead to higher costs, including lost revenue or additional rental payments.
Before signing a lease or purchase agreement, determine whether the landlord will cover any portion of the build-out costs or provide allowances for improvements. As an owner, work with a contractor to get accurate estimates of renovation costs before proceeding with a purchase.
Call to Action: Avoid Hidden Costs with Jack’s Expertise
Navigating the hidden costs of commercial real estate requires careful planning and expert guidance. At Jack’s Commercial Real Estate, we help investors and tenants anticipate and manage these expenses to ensure a smooth and successful transaction. Contact us today to learn how we can assist you in making informed decisions about your commercial property.