Office space? Let's just go play and eat candy!

Greetings from ‘the border town” of El Paso, TX!  Last day in the “sun city” then off to the mountains of New Mexico for a few days….where I make my way to the CIY conference in California.  I am taking my youth group to LA for a week-long conference which I know will be a blast. Looking forward to my travels.  I will be connecting with some of the crew that went to Sucre, Boliva with Food For The Hungry….so I am really excited to go.

Anyway….

I visited almost most of my assets in the El Paso, TX area and I have a mixed bag of thoughts.  Although, overall, occupancy is over 95% in my retail centers.  I have one shopping center that is experiencing higher than normal vacancy.  Which seems to be impacting the area as a whole.  In the same area, I have a smaller center where the existing tenant is doing very well and I have a new restaurant moving in.  The TIs (Tenant Improvements) are being done and the restaurant should be open for business in a couple months.  But I digress.

Today’s post is about office buildings.  Office space as an investment is an odd bird.  Actually it is a straight forward investment when it comes to commercial real estate.  Everything is done in “square feet” which is simple enough BUT office buildings tend to react to market cycles much more strongly than other assets.  That is not to say that they are a higher risk category such as industrial.  Office space, in my experience, is more of a “knee-jerk reaction” segment when the economy slows. Disagree?  Let me know your opinion.  If it is a good comment, I will post it.

Investing in Office Buildings

This is the next post in a series that will highlight the different types of properties available to investors. The posts are an overview of general information. As with all investments, you should properly research the opportunities to determine whether they fit your portfolio.

What are Office Buildings?
Office buildings are properties that lease spaces in which companies or individuals conduct business. Office buildings may be anywhere from 500 square feet to multi-floored skyscrapers. Some spaces lease only to one tenant and others to many.

What Do I Need to Know About Investing In Office Buildings?
Office buildings can be a very efficient way to build your wealth, but you need to do your research to find the right opportunity for you.

Office buildings are divided into three categories: Class A, Class B and Class C. Class A properties are superior to Class B and C; Class B properties are superior to Class C. Class A properties attract the best tenants, are in the most desirable locations and offer the best amenities to tenants. Class B properties offer lower rents but still provide aesthetically pleasing spaces. Class C buildings are more functional than pretty and often are older.

According to real estate lawyer, Joseph Velez, “in the eyes of commercial lenders, office properties are seen as having less risk than other types of investment properties. For this reason lenders have more leeway in terms of Loan To Value and down payments. Loan to Value may be as high as 97% accompanying only 3% down and strong qualifications.”

Like most commercial real estate, valuation stems from actual and potential income. This means that the property’s value is directly related to the amount of income it can generate. If you have high quality tenants and profitable lease terms, the value of the property will be greater.

What Is Different About an Office Space Lease Versus a Multifamily Lease?
Office space leases offer more creativity. Most office spaces provide either triple net leases “NNN”, gross leases or a modified gross lease. According to investorwords.com, the leases are defined as:
• NNN Lease: A property lease that requires the tenant to pay rent, taxes, insurance and maintenance expenses.
• Modified Gross Lease: A property lease that requires the tenant to pay rent and requires the landlord to pay all expenses relating to property operations.
• Gross Lease: A property lease where the landlord pays all expenses normally associated with ownership including utilities, repairs, insurance and taxes.

Obviously, an investor will make more money from NNN leases. Please see our earlier posts about leases for more information. Depending on state laws, landlords may be forbidden from offering NNN or modified gross leases.

In Conclusion
Office Buildings are a common addition to many investment portfolios. If you are considering investing in an office building, take the time to tour other properties in the market and look at each building’s performance. And, as always, if you have questions, contact the experts at The Real Wealth Company.

Until next time…..rob