The term “retail property” describes the type of commercial property that is zoned or designated to be a service business, shopping center, or store. It is very important to understand the issue of zoning as this can limit how and when you can use the property that you are interested in. Effectively, zoning describes the ordinance that a local government has put in place to determine how a property in a certain area is allowed to be used. Retail property is one such classification, but there is also residential, for instance. Some places allow for mixed-use zoning, meaning commercial and residential properties overlap by instating zoning overlays.
Location, Location, Location: Importance of Zoning
If you are interested in finding retail real estate for sale or lease, for whatever reason, zoning is also important because it tells you the value of the different properties. Private and public sector surveyors alike use zoning for this. It was first used to determine what the value of a property is, either in terms of purchase price or in terms of rent, in the 1950s.
Understanding Retail Properties
Once you have an understanding of this, you need to start learning about what retail property actually is. Basically, it is a property that can be used for organizations who sell services or goods. It is possible to ask for a property to be rezoned so that it becomes a retail property. This is done by putting in an application, which is reviewed by the relevant agencies. This is a complex and expensive process, and it is often not successful. As a result, anyone looking at investing in retail property should first determine whether the zone is right.
There are different types of retail stores. Some, for instance, sell furniture, others sell clothing, others still sell groceries. Usually, if the company sells convenience goods, then the retail spaces will be fairly close to retail zones. Such spaces include drug stores and grocery stores. There are also various service businesses, and they tend to be located in certain places. For instance, insurance companies are found on business parks, car repair companies are found on industrial estates, and beauty salons are found near residential areas.
Retail Real Estate for Sale or Lease – What Makes It a Solid Investment
Our economy is dominated by consumer spending. Because of this, investing in retail estate for sale or lease is a good option. Some statistics further prove this:
- In our country, leasable retail area exceeds 6 billion square feet.
- 70% of our GDP was made up by consumer spending in 2013.
- Online shopping has replaced stores in some areas, but there are other businesses, like Home Depot, that have expanded their operations.
- The return on commercial real estate (CRE) investment has been around 9.5% every year, which is higher than that of the S&P 500.
It is believed that CRE will continue to be driven by retail. It is a huge sector, ranging from cellphone carriers to pharmacies, and from restaurants to mega-malls. This means it is attractive to consumers of all types of backgrounds as well. Retail properties are so varied, including famous chains and small mom-and-pop stores, that there is something interesting for everybody.
Kinds of Lease Arrangements
- Triple Net Lease. Any investment comes with a certain degree of risk. However, there are special economic factors, including tenants and landlords, that shift this risk to a certain degree. For instance, many retail properties use triple net lease, which means the tenant in the property pays insurance, common area maintenance (CAM), and real estate taxes. They can do this in full or on a pro-rata basis. Investing in small units inside a large mall also provides an anchor. If, for example, a huge chain store, like Target, Home Depot, Walgreens, or Nordstrom, anchors a mall, then smaller businesses are more likely to rent in their vicinity, often for higher rents, because they know they will get a lot more traffic to their store.
- Percentage Rent. Others prefer a rent arrangement different from the triple net lease, which is the percentage rent. Here, the store pays a low baseline rent, as well as a percentage of their profits. So, if you have these stores as tenants, the more they earn, the more you earn as well. This brings the interest of the lessee and lessor together. There are no laws stating that the percentage has to be capped, which means the benefits for an investor can be tremendous.
- Long Lease. Most new chains and stores will sign up for lengthy leases. This is due to the fact that they often want to renovate the space first, decorating and customizing it to suit their needs. This comes with a significant cost, which the tenant pays for, and will therefore want to make sure to be able to earn profit to offset the renovation cost, which takes time. Hence, long leases are usually signed, and these are obviously also beneficial for investors. It means that they have less time during which their property stands empty, and they are assured of cash flow for the relatively long duration of the lease.
Incentives of Investing in Real Property for Lease
- Cyclicality. Generally speaking, the CRE market is growing and, usually, a real estate boom keeps repeating in a 15 year cycle, although some of these cycles are longer. This means that you need to get into the cycle now, so that it will be easier to find a good return on investment.
- Diversification. Investment portfolios that are diverse are believed to have less risk, even if you choose to invest only in real estate. If you have a single investment in a shopping center or mall, there are many tenants who support a range of income streams. Even if some stores go out of business, the effect on your portfolio is only to a certain extent. Furthermore, you can diversify in a range of different industries as well. In so doing, if there is a dip in one industry, you still have many other income streams to depend on.
- Passive income opportunities. Buying part of a retail property means that you have a passive investment, which is why most people do that rather than purchasing a full property outright. If you only own a part of the property, you won’t have to deal with the landlord responsibilities. Rather, this is done by managing agents.
- Ability to select an area. It is likely that you know the area that you want to invest in yourself, but even if you don’t, you can go and see the property. Most of us go to the mall every once in a while, and next time you do, you should take a look at things such as which stores are there, how much traffic they get, how easy it is to go around the mall, and so on.
- Tangibility. A lot of people like to invest in something that they can touch and see for themselves. This is perhaps subjective, but it is important for many. When you invest in stocks and bonds, for instance, you cannot go to a physical location and think “I own this”. Investing in real estate, however, means that you can do that.
Meanwhile, there are those who simply want to run a store or a business. In this case, it may be more beneficial for them to rent the property, rather than buying it.
Retail Property for Rent – Things to Consider
The vast majority of businesses rent their properties rather than purchasing them. It is much easier to find a rental property, it is a lot cheaper in terms of out of pocket expenses, and it is more flexible. Usually, landlords will provide tenants with a binding lease contract, which means they, as lessors, are protected as well. Overall, the important issue for the business owner is that less capital is tied up, which can then be spent on improving the business itself.
That said, when leasing a property, there are quite a few things to take into consideration as well. You may, for instance, have to pay a premium, or you may have to have responsibility for the repairs and maintenance of the building. You also need to check the length of your lease, as it may be too long for your needs. Usually, a lease contract is between three and 25 years, which is a substantial difference. You need to consider whether there are any break clauses and whether you can sublet. You must also check out the license agreements, hidden costs, and hidden clauses.
Things to consider include:
- Whether you can change the use of the building
- Whether you need planning consent
- Who has to pay for the building insurance
- Whether you can make changes and alterations to the building
- How you have to return the property once your lease is up
- What the deposit on the property is, and what sort of taxes you have to pay
- Who will maintain and repair the property
- How often your rent will be reviewed
- Whether your rent increase is linked to inflation, or whether it is fixed in advance
There are also a few other responsibilities that you have to consider, such as:
- Electric safety
- Gas safety
- Workplace requirements
- Health and safety at work
And then there are some added costs to think about as well, including:
- Moving costs
- Vehicles
- Stationary
- Telecom
- IT
- New equipment
You also need to consider the professional support that you will require. You need a good lawyer to comb through the lease to make sure it is as favorable to you as it possibly can be. The legal professional can go through the different terms and conditions in the contract with you, so that you fully understand it. Do also consider working with someone like a chartered surveyor, who can negotiate the terms of your lease as well. You will also require the services of a business estate agent for professional advice. This professional will be able to ensure your needs are properly met for the properties you are considering.
Retail Building for Sale – Things to Consider
But then there is buying a retail property as well. The main thing to consider with buying is affordability. You have to ask yourself whether you have the financial capabilities to buy that retail building for sale outright, or whether you will require a commercial mortgage and, if so, whether you are eligible for that. So, your finances have to be the first thing to think about. Consider your starting offer on a property, but also what the maximum price is that you could pay for it. Do make sure you are aware of any other associated costs as well. These include the costs of setting up a mortgage, maintenance, lawyer fees, repairs, taxes, building surveys, and so on.
Generally speaking, in order to get a commercial mortgage, you will have to put down a deposit of at least 15% in order to be considered. This is capital that you have to have, and that will then be tied up. You also need to make sure that you will be able to afford the mortgage payments on the property, particularly if you are going through a slow month.
There are a few things you have to consider before deciding on making a purchase, including:
- Whether you need to apply for rezoning
- Whether you will need some form of planning permission
- Whether you can afford building and content insurance
There are also a lot of additional costs that you have to factor in if you want to buy, such as:
- Taxes
- Cost of fitting the store
- IT costs
- Mortgage payments
- Lawyer fees
- Surveys
- Insurance
- Utilities
That being said, there are a number of key benefits to buying your own property, including:
- Having the flexibility to do with it as you please in terms of decor and layout
- The possibility that the value of the building will increase, allowing you to sell the building at a profit
So how do you decide whether to lease or purchase, when both have significant drawbacks and advantages? You need to ask yourself a few questions:
- What are the core needs of your business?
- What is your current budget? Can you afford a hike in rent or mortgage payments if the market changes?
- Can you do any of your duties from home, or is there really a need for retail space?
- What features do you consider to be essential, and which ones are desirable?
- What issues are there with the location, including access for both staff and customers? Consider parking, local transport, and so on.
- What is the layout and the size that you need in order for your business to function?
- Is there any opportunity for your business to grow or contract?
- What is the relationship between location and affordability, and is that fair?
Getting the Right Team on Board
When you want to buy a retail building for sale, you will need to search for what is best for your needs. In all likelihood, you are not a CRE expert yourself. Hence, you need to get a team of specialists on board to make sure that you know when to buy, when to sell, and what the most favorable terms and conditions are. This is also true if you are looking to purchase as an investment. Some of the people you need to get on your team include:
- An accountant, who can help you determine affordability, budget, and taxes.
- A lawyer, who will make sure the transaction is completely legal, but who can also enter negotiations between you, the lessor or the seller.
- A commercial broker, who will help you to find properties that are suitable to your particular needs.
- A mortgage broker, if you decide to purchase, to help you figure out the different financing options. This professional will also be able to determine whether you are eligible for things such as the CDC (Certified Development Company) 504 Program, or the U.S. Small Business Administration guarantee.
Once you have a property in mind, take the time to consider various things. This is where you need to reconsider what your personal objectives are, and whether the property you are looking at truly meets those objectives. This is where your team of specialists will play a vital role as well. For instance, you can turn to your broker to be signposted to environmental analysts, appraisers, engineers, and other third parties. They can make sure the condition of the property is as stated, how it was used in the past, and whether there may be any liability issues with things such as asbestos or electrical wiring.
You also need to investigate the adjacent properties and how they will impact your business. If they leave, or make significant changes, this could have an effect on your operations as well, either positive or negative. Do also look into other developments, such as roadworks, construction work, infrastructure changes, and so on.