What Makes Commercial Real Estate Click in Today’s Market
- Mar 07, 2012
By Ben Price,
First Vice President, Regents Bank
According to my client, Gary Hartman, senior commercial insurance broker and partner with Snapp and Associates Inc., as well as several of his high-net-worth property owner/investor clients, success in property ownership in today’s market revolves around long-term strategies and relationships that help maximize return on investment. Lending and insurance strategies, when structured correctly, become important tools in this approach.
Cash Flow: Cash flow is a critical component for any real estate owner and can be maximized by implementing certain management tactics, including addressing leases, loans and the insurance platform through a long-term perspective. Taking the long-term approach and building long-term relationships has consistently improved investors’ bottom lines over time.
Leases: Leases are typically formatted seven to 10 years to minimize rollover, and negotiating the leases personally can give an owner more control over the property and a better relationship and bond with the tenant. Tenant selection is paramount and being very selective is important toward long-term prosperity.
Loans: To minimize loan roll-over in an investment portfolio, the owner ideally negotiates with the lending institutions to structure a 10-year fixed-rate loan, instead of a five- or seven-year loan, to avoid having to extend the loan or obtain a new loan, likely at a higher rate. Forming strong relationships with the bankers and using lenders that “portfolio” their own loans, instead of moving loans from lender to lender, helps maintain consistency and efficiency.
Insurance: Building owners and investors benefit from careful analysis of insurance placement options. In today’s economic environment, Hartman reports that insurance companies provide more coverage than previously, along with inexpensive rates and terms. Insurance endorsements — additions to an insurance policy contained in most commercial insurance lessor risk contracts — must be carefully analyzed on behalf of the broker and owner/investor as pitfalls may exist that could prohibit an owner from capturing reimbursements in the event a claim.
Environmental: Owners/investors should negotiate leases with attention to the type of contents being stored in the building as opposed to the type of business. This protocol helps ensure that tenants do not store flammable, toxic or other materials that may cause harm to asset or the adjoining tenants. When an owner allows potentially hazardous materials into the owned building, an annual audit is allowable, as per the insurance policy, which allows building owners to perform annual inspections. This arrangement minimizes the likelihood of lawsuits for all parties involved.