When assessing commercial Owner Business real estate, it is necessary to understand the financial factors that the property creates. This is before you price the property or consider it suitable for purchase. In doing this, it is the economic factors today that you need to look at and those that have formulated the property’s history over recent times. In this case, ‘recent time’ is the last three or five years. It is surprising how property owners try to manipulate the building income and expenditure at the time of sale; they cannot easily change the property history, which can uncover many property secrets.
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Once the history and current performance of the property are fully understood, you can relate to the accuracy of the current operating costs budget. All investment properties should operate to a budget that is administered monthly and monitored quarterly. The quarterly monitoring process allows for adjustments to the budget when unusual items of income and expenditure are evident. There is no point continuing with the property budget, which is increasingly out of balance with the actual property performance. Fund managers in complex properties would normally undertake budget adjustments every quarter. The same principle can and should apply to private investors.
So, let’s now look at the main financial analysis issues on which you can focus in your property evaluation: A tenancy schedule should be sourced for the property and checked totally. What you are looking for here is an accurate summary of the current lease occupancy and rentals paid. It is interesting to note that tenancy schedules are notoriously incorrect and not up to date in many instances. This is a common industry problem stemming from the lack of diligence of the property owner or manager to maintain the tenancy schedule records. For this very reason, the accuracy of the tenancy schedule at the time of property sale needs to be carefully checked against the original documentation.
Property documentation reflecting all types of occupancy should be sourced. This documentation is typically leases, occupancy licenses, and side agreements with the tenants. You should expect that some of this documentation will not be registered on the property title. Solicitors are familiar with chasing down all property documentation and will know the correct questions to ask the previous property owner. When in doubt, do extensive due diligence with your solicitor before any settlement is completed.
The rental guarantees and bonds of all lease documentation should be sourced and documented. These matters protect the landlord at the time of default on the part of the tenant. Therefore, they should pass through to the new property owner at the time of property settlement. How this is achieved will be subject to the type of rental guarantee or bond, and it may even mean that the contract needs to be reissued at the time of sale and settlement to a new property owner. Solicitors for the new property owner(s) will normally check this and offer solution methods at the time of sale. Importantly, rental guarantees and bonds must be legally collectible by the new property owner under the terms of any existing lease documentation.