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Build-To-Suit Business Needs

REInvestors888

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Hi REINation,

First timer in converting a mix-use 1,500 sqft main level unit currently being used as residential into small offices, and wondering what your thoughts are on the following:
1 - How much rent/sqft/month would you be asking for? Rent in the area range from $1.50/sqft for a converted residential unit to $18/sqft for a building unit, a big gap.
2 - Would you build-in your conversion costs, insurance, taxes, maintenance, etc., to the monthly rent that may result to higher than market rent?
3 - What would be the ideal lease period (i.e. 1, 3, 5 years) to recover conversion costs?
4 - What would be your ideal criteria in pre-screening your potential commercial tenants?
5 - Other suggestions?

Thank you in advance.
 

Thomas Beyer

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Hire a local commercial realtor and find out. They charge about three month rent to find a commercial tenant.

You forgot to mention the city & area, what is nearby, what average current common leases are etc so you cannnot expect a good answer.

Hire a professional with in depth local knowledge e.g. Colliers, JLL, ReMax Commercial etc
 

REInvestors888

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Hire a professional with in depth local knowledge e.g. Colliers, JLL, ReMax Commercial etc
We'll consider hiring a local commercial realtor for sure. But, for now, we'd like to get more info as much as we can.
You forgot to mention the city & area, what is nearby, what average current common leases
The property is located in Waterloo-Kitchener, ON boundary with small to medium establishments nearby. Lease rates widely differ depending on the type/new-old structures. Not sure on common lease period though.
 

Thomas Beyer

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What do similar units in the area rent for ?

Commercial rents are highly sensitive to light, traffic, exposure and as such can differ between $2 and $40 in one block indeed. In depth knowledge of area, traffic, customer desirability, curb appeal, sunshine, competition etc is required and that is what a good commercial realtor will specialize in and get paid for. Talk to the leasing department of commercial real estate firms, as those are different people and skill sets than folks that sell units.
 

REInvestors888

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Commercial rents are highly sensitive to light, traffic, exposure and as such can differ between $2 and $40 in one block indeed. In depth knowledge of area, traffic, customer desirability, curb appeal, sunshine, competition etc
There's a wide swing in rents in the area based on the criteria you mentioned.
Talk to the leasing department of commercial real estate firms,
Will do.
Thanks a lot Thomas.
 

Brad Redekopp

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The longer the least the better, typically 5 & 10 year leases. allot of value in commercial buildings is the quality of tenant occupying & terms of the lease. You would charge a lease rate AND occupancy costs. in a triple net lease you add up all the costs (from snow removal to taxs) which will be forecasted if it's new, divide by 12 months and get monthly payments. At the end of the year you reconcile what was forecast and get payment/pay for the difference. Next year adjust occupancy costs if needed and carry on
 

REInvestors888

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Much appreciated Brad3375.
Just a follow up question: Would you recommend to pass all conversion/renovation costs to your prospective commercial tenants to meet their space requirements? Or, would you rather let them renovate the unit for a lower lease rate?
 

Cory Sperle

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Why are you converting residential to commercial to begin with? Office is the riskiest commercial asset class of all, highly susceptible to changes in the economy (25% + in Calgary right now), and requiring the highest level of sophistication. If you do go this route I would stagger leases so they don't all come due at once, potentially leaving you with a flood of vacancies. I would take Thomas's advice and hire a commercial realtor to do an assessment for you on the feasibility of making such a move. If it makes sense though go for it as your returns will exceed residential if you do it right.
 

REInvestors888

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Tenants improvements are usually funded by the landlord and divided by months on lease and added to the payment. Should have an escalation of lease rent / year to at least cover CPI 2% (appreciation).
Well noted. Will incorporate this in the lease.

Why are you converting residential to commercial to begin with?
To maximize cash flow/ROI.

Office is the riskiest commercial asset class of all, highly susceptible to changes in the economy (25% + in Calgary right now), and requiring the highest level of sophistication.
Excellent point. Hopefully, getting experienced commercial realtor on board will help reduce, if not eliminated, vacancy risk.

If you do go this route I would stagger leases so they don't all come due at once, potentially leaving you with a flood of vacancies.
Well noted. As much as possible we spread out lease expiry dates.

I would take Thomas's advice and hire a commercial realtor to do an assessment for you on the feasibility of making such a move. If it makes sense though go for it as your returns will exceed residential if you do it right.
Will do for sure.

Thank you so much, Thomas, Brad and Cory.
 
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