Investing in commercial real estate can be a great way to diversify your portfolio and generate stable income. However, commercial properties are subject to various regulations that investors need to understand before making a purchase. Being aware of these regulations and properly navigating them is key to avoiding potential legal issues and expenses down the road. Here is an overview of some key commercial property regulations and tips for navigating them as an investor.
One of the most important factors to research is the zoning of any property you are considering. Zoning determines which uses are allowed on a property, such as retail, office, industrial, etc. Make sure the zoning aligns with your intended use for the space. Know that rezoning a property can be an expensive and lengthy process. Also be aware of any overlay districts that impose additional restrictions or design standards. Thoroughly vet the zoning implications before committing to a property.
Permitting And Inspections
Most improvements, renovations or changes of use to a commercial property will require permits from the local municipality. Be sure to factor permitting costs and delays into your plans. Know that permits often trigger code inspections for compliance with building, fire, health and safety regulations. Inspections can create delays and additional costs if repairs are needed to bring things up to code. Check with the permitting office on requirements for your specific plans.
Americans With Disabilities Act (ADA)
The ADA requires public accommodations, including most commercial properties, to provide accessibility for those with disabilities. This can include everything from parking, ramps, door widths, counter heights and more. Private spaces still in use by the public, like office lobbies, may also be subject to ADA rules. Know your obligations for making both existing properties and future remodels ADA compliant.
Various environmental regulations can impact commercial real estate transactions. For example, Phase I Environmental Site Assessments may be required to check for potential contamination on a site. Properties may also be subject to rules regarding asbestos, lead, mold, radon or hazardous materials on site. Be aware of both state and federal environmental laws that may come into play.
Carefully review all existing leases on a commercial property prior to purchase. Make sure leases contain protections for the landlord and that all tenants are compliant with lease terms. Know when leases expire and the options for renewal. Factor in costs of tenant turnover and periods of vacancy. Set rents at competitive market rates and build in escalators to adjust over time. Consult an attorney to ensure your lease terms comply with laws.
There are various taxes to keep in mind relating to commercial real estate. This includes property taxes, transfer taxes upon purchase, and potential capital gains taxes when selling. Depreciation of commercial buildings can help reduce federal income taxes. Consult with both a commercial real estate agent and a tax professional to fully understand tax obligations. Stay up to date on any changes in local tax rules and rates.
Work with an insurance firm like Titan Risk to determine adequate insurance coverage for your commercial property. This may include general liability, property, flood, business interruption and other policies. Insurance needs will vary based on factors like building age, size, location, number of tenants, etc. Update policies as needed over time, such as when making renovations. Keep detailed records of any insurance claims.
Following regulations may seem daunting, but being proactive makes the process much smoother. Do thorough due diligence, involve professionals, build time for compliance into your plans, and keep detailed records. With the right knowledge and preparation, you can successfully navigate commercial real estate investing.