Income and Expenses Help Determine the Value for Most Commercial Properties

Income and expenses help determine the value for most commercial properties. It’s one thing to raise rents when a new tenant signs a lease, but it’s another to keep a lid and control expenses over the long-term.

Since every dollar saved in expenses, to include capital expenses like HVAC or roof replacements, goes right to the bottom line and increases the value of your property, expenses are often a focus.

Here are some basic investment property preventive maintenance items (and two bonus items to review annually) you should ask your property management company to schedule and have performed by licensed contractors as part of its responsibilities. Some of these are mandated by code and others are just smart and can save you big money in repair costs over the life of your investment.

-Roof inspections. We suggest annual inspections and a more in-depth, thermal or “nuclear” water intrusion inspection every 5 years for flat roofs here in the Northwest. The latter option can save you from having to do a major re-roof and can pinpoint issues to exact areas for spot repairs vs. an entire re-cover or re-roof.

-Gutter cleaning. Annual cleanings at least, and depending on your property’s location, maybe twice a year. Generally, after leaves have dropped and/or before major rains begin. Overflowing gutters can easily cause interior leaks or over time, cause fascia or siding damage.

-Building and sidewalk washdown. Ideally, this is done on an annual basis and may include pressure washing. This keeps your building looking good and can reveal dry rot, failing paint, or water intrusion issues.

-Exterior window cleaning. Here in the Northwest, this is best done on a bi-annual basis in the spring and fall. Shows pride of ownership and keeps tenant complaints minimized.

-Fire and life safety testing. This includes all fire safety/suppression systems such as sprinklers and extinguishers and should be completed as required by statute. In Oregon, it’s typically the responsibility of the tenant unless specified in the lease, to ensure extinguishers are tested and employees are familiar with their use (training) and a fire evacuation/escape plan is posted for all to see. (See OAR 437 for more info.)

-Elevator maintenance, upgrades and safety testing. Elevator certificates are to be renewed annually, inspections and maintenance should be done as required by statute and manufacturer.

-HVAC service and inspection. These can be done quarterly, bi-annually or annually depending on the system, age, load and location. Careful attention to your HVAC can buy years of extra service and minimize potentially large capital expenses. A single new roof top unit (RTU) can easily cost $10,000 or more installed. This is one of the most often neglected building systems along with roofs.

-Backflow device testing. Annual testing as required by statute – OAR Chapt 333 Div 61.

-Lighting repairs and upgrades. We’ve recently upgraded several of our commercial properties’ interior and exterior common areas to include parking lots to LED lights from the old and inefficient and oft-replaced, higher-maintenance MH lighting (metal halide). This becomes more affordable when certain utilities offer cash back rebates or incentives. It also improves the overall safety factor for the property, which is key to attracting and retaining satisfied tenants.

-Parking lot maintenance/repair. We recommend an annual inspection of parking lots. Potholes are unpleasant at best. They can be a safety issue and also detract from your property’s value. What’s more, the worse they are, the more expensive they get to fix. Cracks left unfilled and pavement left uncoated, will cause further damage to the paved surface. Depending on the property, sealcoating may well be required every 3 to 5 years. Crackfill and striping might be more often depending on the use and age of the pavement. Given the cost of these repairs, staying on top of this keeps property value up and your capital expenses down.

-Carpet and paint. In a recent conversation with a property owner and also commercial broker, we discussed how important carpet and paint is to a space’s perceived value. This broker liked to see her spaces that she owned and leased out painted and re-carpeted with every 5-year re-tenant, or, if the tenant was more long-term, say 10 years, she’d want to see it done at the mid-way point. Believe it or not, this can affect whether someone stays or leaves.

-Day Porter. This is one of the most valuable services we provide our property owners. Day porters can function in a number of ways: They can be great representatives of your property to the tenants, handle simple maintenance concerns, be a “first responder” when emergencies occur and more. Operating a commercial property management business without a day porter is like driving a car with no brakes. They’re an important part to maintaining an investment property.

And speaking of expenses, here are two other areas many property owners and managers ignore or just aren’t sure how to address them to lower expenses:

-*Property taxes. Many owners don’t realize they can appeal their property’s tax assessment to BOPTA. If you believe your property might be over-valued on the tax roles (Assessed or RMV), having your property management company prepare a tax appeal on your behalf may help. While there is some time and effort expended in researching and structuring an argument, keep this in mind: Every $1,000 in property taxes saved, at a 6% cap rate, theoretically pushes your property value up by $200,000!

-*Property insurance. At least every two years, ask for an insurance audit. Some do this annually and make the insurance companies earn their business. Make sure the rates your property is paying are fair and reasonable. Do this by asking for a property insurance quote. There is some legwork involved, but again, the money saved goes to profit and could increase the value of your property!

Jerry A. Jones is Broker and Commercial Property Manager for Pikes Northwest, LLC in Salem. A serial entrepreneur, Jerry has bought, sold or started 20 companies in a number of sectors. For over two decades, he has been a private investor, lender and owner of a variety of commercial and residential projects. He enjoys all facets of commercial real estate. He moved back to Oregon in 1996 after a stint with US Senator Slade Gorton. Email: JERRY@PIKESNW.COM Or call: 503-588-3586.