Birmingham is booming and investors are moving in to cash in on the demand for premium commercial property in the city. The Government business growth programme is no doubt helping to drive this demand, read more here: https://www.gov.uk/business-finance-support/business-growth-programme-birmingham
Here we have a look at the considerations needed when buying and refurbishing a commercial building.
What to consider
When looking at the costs of purchasing an existing building, you should include the purchase price as well as the costs of refurbishing and repairing the structure to ensure that it is suitable and attractive to new tenants. An important aspect of commercial property is the ability to attract long term rent paying tenants. When you have prospective tenants who are interested in leasing the space, finding financing for the purchase and refurbishment of the building will be much easier. A simple way of looking at this would be to know that location attracts tenants, the tenants pay rent and the rent paying tenants will attract financing. Of course, you will need to know how to correctly analyze and assess the costs of purchasing existing commercial properties and refurbishing them.
The 3 Major Costs Of Refurbishing An Existing Building
When assessing the total potential investment needed for a project, a property developer must look at three major cost areas. These costs are the:
- asking price of the seller
- the costs of repair and refurbishment
- the cost of making the property suitable for the intended tenants
When you understand these costs you will be able to evaluate any major issues with the project and if the investment will make good financial sense. The overall investment must make good economic sense by creating competitive lease terms for the potential tenants and an attractive return for the developer and investors.
Refurb And Repair Costs
The seller’s asking price is generally known upfront so you need to focus on the estimated costs of repair and refurbishing the building. To adequately evaluate these costs, the developer will need to complete an initial inspection of the property and overall project. If you do not have the correct expertise to complete this inspection, it is important that you hire a general contractor or architect to do this. There are many architects and contractors who will complete these inspections for little cost as they realize that the inspection is needed to determine the contract for the work. If exterior work is needed to the property then commercial scaffolding will be needed. Be sure to use a reputable company for this, ideally located near Birmingham.
The initial inspection that is completed will need to include all aspects of the building such as the structure, systems including the plumbing, electrics and mechanics, the common areas and the exterior. The primary goal of this inspection is to determine if there are any major issues with the building that will make rehabbing expensive or difficult. Of course, it is important to note that there are other issues that should be reviewed such as the zoning, permits, utilities, regulations and financing. Before a final assessment is made, you will need to consider 2 other major costs as well.
Making The Space Suitable For The Tenant
The most important effort in real estate development is to find rent paying tenants. This is why you need to look at the costs of creating a space that potential tenants would want to pay rent for. The first of the costs related to this is the cost of making the building suitable for the tenant and the second is the tenant improvement costs. These 2 costs can be very similar, but there are some differences that you need to keep in mind.
Making the project suitable for the tenant will include any costs that you may have for making the building attractive to all tenants. However, this cost will not always include the costs that come from attracting a specific tenant or user to the project. The features and benefits that the building needs to attract tenants can generally be found by knowing the regulatory requirements and looking at other comparable projects or buildings in the same area.
If you are looking to buy and rehab a building for medical uses, you need to understand the full requirements of the intended users. Medical buildings will need to have larger elevators than other buildings as well as larger doors and hallways, windows in the patient rooms and handicap accessible bathrooms. There are many other features that you might have to consider depending on the type of medical facility you are looking at creating.
The Tenant Improvement Costs
The tenant improvement cost is another cost that all developers will need to consider. These costs will be the expenses incurred when enticing tenants to use the building. These costs can be expensive and will need a substantial investment in the overall project. When determining these costs, you will need to research the allowance made by other landlords in the area to ensure that your lease terms will be attractive and competitive.
You should be able to learn about the average tenant improvement costs from a local commercial property broker. It should be noted that evaluating the project and the intended use with a broker can be extremely beneficial. It should also be noted that certain project types such as apartments will not generally require a large tenant improvement allowance to attract tenants. However, multi-family projects will generally need a greater investment to include competitive benefits and features.
Once all of the major repair and rehab costs and issues have been evaluated, it is possible to determine if the overall project will be financially feasible. To determine this, the overall costs of the project will need to translate into lease terms that are attractive to potential tenants while providing returns. The evaluation will generally result in negotiations with the seller to lower the purchase price.
When you have the results of the initial inspection as well as the desired features and the market tenant improvement allowance, you will have a strong hand in the negotiations. You can easily justify why a reduction in asking price is required for the building. With all of the estimated costs on hand, you can decide whether or not to move forward with the project if there is a reduction in the asking price.