Aging Commercial Real Estate: What To Watch For As A Buyer Or Owner

Posted by Anne Sheehan on Jun 23, 2015

Aging Commercial Real Estate: What To Watch For As A Buyer Or OwnerIf the 465 million Google query returns for “old buildings getting new look” is any indication, the topic garners a broad level of interest.

Indeed, the idea of giving aging commercial real estate a facelift to make it appealing to modern sensibilities resonates everywhere from desirable pre-war buildings in the city all the way to rural warehouses.

Aging commercial real estate, however, is not without its merits. The industrial style and facade of many older buildings are now selling points, with exposed brick walls and vaulted ceilings an appealing design trend rather than something to cover in plaster and sheetrock.

As you’re evaluating the aging assets in your commercial real estate portfolio, or considering purchasing an older property, here are some tips to keep in mind and mistakes to avoid.

  • Understand the impact of upgrades: Let’s say you’re interested in upgrading a commercial office building to make it more appealing to tenants. As part of this process, you decide to install new elevators, update the HVAC system and update building access with electronic security and keypad access. You might hire a professional decorator to make the lobby reflect modern workplace expectations — an inviting entrance, small meeting areas, grouped seating, Wi-Fi and other technology features. Your building is now more appealing to potential tenants and you’re able to increase rental prices.

While that’s good, you need to consider all the costs associated with these upgrades. In some states, your commercial property taxes may increase due to the new personal property you’ve acquired. If you’re operating in a locality that taxes personal property, it’s important to determine the tax implications associated with your upgraded assets. You need to consider what avenues are available to you in recouping these common area costs, predicated on lease terms or building regulations.  

  • Know the cost of looking “cool”: It’s great to be in an urban location close to popular restaurants and cultural activities. Aesthetic amenities like exposed brick walls and vaulted ceilings with open piping and ductwork make a space seem even more desirable.

But there’s often a cost to looking “cool.” When you’re talking about commercial real estate, it may lead to higher occupancy costs. Those exposed brick walls? Well, they’re porous, which means they’re harder to insulate. Vaulted ceilings? They look great, but the cost of heating and cooling that extra overhead space adds up quickly. Your awesome downtown location? Yes, it’s in the most desirable neighborhood in town, but occupying that space comes at a greater price than office space in the suburbs.

For businesses that need to attract a younger generation of workers or appeal to clients, these extra costs may be worthwhile, but it’s still important to be aware of the costs.

  • Know what you’re moving into: You should understand the true cost of occupying a space before you even consider moving in. You might love the location and feeling of a pre-war building, but consider that it’s held up with thick, brick walls. If your organization depends on seamless, high-speed Wi-Fi, will those walls affect your operation?

Make sure that your organization’s work is compatible with the building you’re buying or leasing. If you regularly host clients, you probably don’t want to buy a trendy downtown office building that has historic charm but lacks functional essentials like an elevator. If you’re thinking you’ll buy a space and make necessary upgrades later, make sure your vision can become reality before purchasing. You don’t want to plan to install an elevator in your building only to find out that it’s structurally impossible.

  • Be aware of depreciation: If you own aging commercial real estate, be aware of ways to lower your occupancy costs through commercial property tax savings. Functional and economic obsolescence are two big factors in the depreciation of an asset. If you know how to make your case properly, you could see commercial property tax payments decrease. For example, if your pre-war building lacks an elevator and installing one isn’t possible, you could argue that hurts your competitiveness in the marketplace and request a tax benefit.

Knowledge is everything. Take the time to thoroughly research the true cost of any property you own or are considering purchasing. Don’t forget that commercial property taxes are the largest cost of corporate occupancy. Be proactive to ensure you’re not paying more than your fair share of taxes.

Learn more about commercial property taxes and the true cost of occupancy by reading RPTA’s free e-book, The Corporate Taxpayer’s Guide To Reducing Commercial Property Taxes.

New Call-to-action

Property Taxes Gone Up? Act Fast To Appeal

Schedule a free consultation with a property tax expert