31 Ways to Add Value to Commercial Real Estate Investments
Value-add commercial real estate investments are hands down my favorite approach to buying commercial real estate.
This strategy, which is often called the BRRRR method, is great.
It allows you to buy undervalued properties, fix them up, and significantly increase the value to a point where you can refinance all of your cash out (and still own the property!) or cash flow it like crazy.
Here are 31 ways to add value to your next commercial real estate investment.
Physical Improvements
Renovations and Upgrades: Enhance the property's aesthetics and functionality through renovations, modernizing amenities, and upgrading systems like HVAC and lighting.
Exterior Enhancements: Improve curb appeal by refreshing the facade, landscaping, and signage, attracting more tenants and customers.
Energy Efficiency Initiatives: Implement energy-efficient measures, such as solar panels, LED lighting, and smart building technologies, reducing operational costs and attracting environmentally conscious tenants.
Accessibility Improvements: Make the property ADA-compliant and accessible, catering to a broader range of tenants and customers.
Facilities Expansion: Consider adding extra square footage or additional floors to maximize rental space and increase revenue potential.
Repositioning: Reposition the property for a new market segment, such as converting an industrial building into creative office space or repurposing retail space for mixed-use development.
Common Area Upgrades: Enhance common areas like lobbies, elevators, and restrooms, creating a more inviting and modern environment for tenants and visitors.
2. Operational Improvements
Effective Property Management: Optimize property management practices to reduce vacancy rates, improve tenant retention, and increase overall property efficiency.
Lease Restructuring: Analyze lease terms and conditions, and negotiate with existing tenants to optimize lease structures, rent escalations, and long-term commitments.
Tenant Amenities: Provide attractive amenities like fitness centers, conference rooms, and communal spaces, which can attract and retain tenants.
Efficient Space Utilization: Optimize space utilization within the property to accommodate more tenants or create flexible, multi-purpose areas.
Building Maintenance: Implement preventive maintenance programs to prolong the property's lifespan and reduce costly repairs.
Sustainable Practices: Adopt sustainable practices, like recycling programs and water-saving measures, to attract environmentally conscious tenants and reduce operational costs.
Safety and Security: Enhance security measures, including surveillance systems, access control, and safety protocols, ensuring a safe environment for tenants and visitors.
3. Financial Improvements
Cost Segregation: Utilize cost segregation studies to accelerate depreciation and increase tax deductions, reducing overall tax liability.
Expense Reduction: Analyze operating expenses to identify cost-saving opportunities, negotiate contracts, and seek competitive bids from service providers.
Tax Incentives and Abatements: Take advantage of available tax incentives and abatements provided by local governments for certain types of investments or developments.
Capital Expenditure Planning: Plan and budget for capital expenditures over time to avoid unexpected financial strains.
Rent Optimization: Regularly review market rental rates to ensure competitive pricing while maximizing rental income.
Value-Add Leasing: Lease vacant spaces or re-lease expiring spaces at higher rates after implementing value-add improvements to the property.
4. Market Positioning
Targeted Marketing: Employ targeted marketing strategies to reach potential tenants and showcase the property's unique features.
Diversification: Diversify the tenant mix to reduce reliance on specific industries or businesses, minimizing risk.
Branding and Identity: Establish a strong brand identity for the property, creating a unique market position and increasing its visibility in the market.
Community Engagement: Engage with the local community through events, sponsorships, and partnerships, enhancing the property's reputation and tenant appeal.
Market Research: Continuously monitor market trends, demographics, and demand to make informed decisions that align with the evolving market.
5. Financing Strategies
Refinancing: Periodically assess refinancing options to take advantage of lower interest rates or access additional capital for improvements.
Value-Add Investment Partnerships: Consider value-add partnerships with investors who specialize in enhancing properties for increased returns.
6. Exit Strategies
Property Portfolio Optimization: Assess the property's role within your portfolio and consider selling assets that no longer align with your investment strategy.
1031 Exchange: Explore the option of a 1031 exchange to defer capital gains taxes when selling and reinvesting in a like-kind property.
7. Sustainability Initiatives
Green Certifications: Obtain green certifications like LEED or ENERGY STAR to attract environmentally conscious tenants and qualify for additional incentives.
Renewable Energy Integration: Integrate renewable energy sources, like solar panels, to generate electricity and reduce utility expenses over time.
Examples of Upgrades to Commercial Property:
Travis Drive
Here’s an example of a property where we performed a value-add renovation. This 12,070 square foot office building was almost completely vacant (less than 1,000 sq. ft. occupied) and we upgraded the following:
painted the interior and exterior
resealed and striped the parking lot
upgraded interior and exterior doors
added hardscaping and landscaping
LVP hardwood flooring
new restroom and kitchen fixtures
LED lighting
smart sensors for lighting / HVAC
This office building was much nicer than other spaces available in the market and because we were able to buy it cheaply (due to the vacancy), we were able to offer it at our competitor’s rental rates. All 17 spaces were leased up in 6 months and we sold the building for 36% higher than our all-in cost after 16 months.
The Ellwood
This 28,000 square foot office building was nearly 40% occupied when we acquired it in 2019. The leasing program was off, asking rates too high, the property was in need of some serious updating, and the leases were all over the place.
Upon takeover, we immediately engaged Parasol Property Management to handle the asset, re-did all of the restrooms and common areas, added tenant directories, added security cameras, implemented LED lighting and controlled HVAC (both had a significant impact on decreasing our electric costs), and prepared a new lease for tenants taking space in the building.
Since then, the property has achieved over 90% occupancy, despite the pandemic and the apparent “office apocalypse” and operations have run significantly smoother.
Navigating the bustling, high-energy atmosphere of these events can be challenging for those of us who find large crowds and constant networking a bit overwhelming. However, through my experiences, I've discovered a few strategies that have helped me make the most of these conferences, even as an introvert.