These essential tips will help you maximize your commercial real estate rewards while minimizing risk.
Like any business venture, the success or failure of your commercial real estate asset or assets depends on careful planning, smart strategies, minimizing risk and maximizing reward.
Mitigating risk while maximizing your rewards requires attention to detail, doing your homework and remaining consistent. It means having a clear plan for managing your property or properties and translating that into a tenant lease agreement that protects your interests while still making the lease attractive to potential tenants.
Ambiguity amplifies risk, for both the landlord and the tenant. Now, not every risk can be identified, laid out clearly and hedged against.
It’s just not possible. Commercial real estate transactions are too complex.
However, if you, the landlord, are armed with some helpful guidelines, it’s possible to improve your risk-reward scenario.
Here are five tips to help you mitigate risk and maximize your rewards.
Vet Your Potential Tenants
We’ve said it before and we’re saying it again: perform extensive due diligence on businesses and the people behind them. Run credit reports. Do background checks. Take the extra steps to understand not only the character and reputation of an organization but also that of the principals that stand behind it. Develop a screening process, stick to it and refine it over time. By applying a tested and consistent screening process you can limit the biggest risk of all: the unpredictability of people.
Limit Silent Lease Issues
Silent lease issues are defined as items not explicitly addressed in a lease agreement. In other words, the lease itself is “silent” on an issue that could impact either the landlord or the tenant.
Developing and refining your lease agreement contract with your lawyer is critical to limiting your liability and vulnerability as a landlord. While no lease can cover every single scenario (as we mentioned earlier, commercial real estate transactions and relationship can be very complex), a well-crafted lease agreement can save you huge headaches down the road.
You’d be amazed at how many commercial real estate owners operate on handshake agreements or fall back on standard lease templates, leaving far too much to the imagination and far too much open for interpretation. For unscrupulous landlords, silent lease items can be used to take advantage of inexperienced tenants.
For you and your lawyer, reducing the number of items your lease does not address will create win-win agreements that will reduce your risks while engendering trust-based relationships with your tenant.
Track All Tenant Infractions and Communications
Don’t rely on your memory when it comes to tenant issues or infractions. Document everything with details and dates. The more you document, the less any legal disagreements can become your word against theirs.
If a tenant misses a payment, note it down. Record the date, time and nature of your communication with them about the missed payment. Keep track of the steps you took to remedy the issue and the outcomes.
While carefully documenting emails, phone calls and face-to-face meetings are essential to protecting your interests, it’s just as important to communicate clearly and regularly with your tenant as issues arise.
Don’t record five infractions, keep your tenant in the dark and then blow up and take legal action. As they happen, communicate in writing with your tenant, whenever possible. Try to solve problems with your tenant and without your lawyer’s involvement. Then, if the issue must be resolved via legal action, you’ve done everything you could to work things out and you are fully prepared to support your claims in court.
Note: If you employ a property manager or property management firm, make your expectations for documenting infractions and issues clear and set up reporting touch points so that you, your property manager and tenant are all on the same page.
Make Timely and Quality Repairs
Staying on top of maintenance and repair work is critical to preserving your property’s value and developing and protecting a great tenant-landlord relationship. Delays or skimping out on necessary repairs is a recipe for lost property value and a damaged reputation. Stay true to your lease agreement and your word and that will go a long way toward reducing your risk and preserving your reputation in the market.
These are just a few basic tips to reducing your commercial real estate risk and capitalizing on the spoils of your hard work.
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Rocky Mackintosh, President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland, has been an active member of the Frederick community for over four decades. He has served as chairman of the board of Frederick Memorial Hospital and as a member of the Frederick County Charter Board from 2010 to 2012. He currently serves as chairman of the board of Frederick Mutual Insurance Company. Established in 1843, it is one of the longest enduring businesses in Frederick County.