Most commercial property owners think that increasing value requires renovation. In practice, the value of an income-producing property is derived from its operating cash flow, so the fastest route to a higher valuation is through the lease and costs—not the contractor.
Why It Works
If the capitalization rate in your market is seven percent, every thousand shekels saved on a recurring annual expense adds approximately 14 thousand shekels to the property's value. Annual savings of 30 thousand shekels on operating expenses translate into an increase in value of over 400 thousand shekels. This is the calculation that turns management into an investment tool.
Seven Measures That Work
First, review the municipal tax classification. An inaccurate classification or floor area is a common source of overpayment, and in some cases it can be corrected and a refund obtained.
Second, properly pass through expenses in the lease. Municipal tax, building insurance, management fees and routine maintenance should be addressed in the agreement rather than remaining the property owner's responsibility by default.
Third, indexation. A lease without a precise adjustment mechanism loses value every year. Indexation and periodic adjustments are the least expensive improvement.
Fourth, energy. Energy-efficient lighting, control of air conditioning in common areas and reviewing electricity bills save significant amounts in large buildings.
Fifth, insurance. Obtaining a new quote once a year, with insurance amounts accurately tailored to the property, reduces costs without reducing coverage.
Sixth, preventive maintenance. Periodic inspections of the roof, waterproofing and air-conditioning systems cost less than emergency repairs and prevent disputes with the tenant.
Seventh, strengthen the lease. Extending the lease term, arranging proper security and obtaining a guarantee create cash flow that is perceived as more secure, improving both the property's value and financing terms.
Ready for the next step?
Browse available commercial properties or get an offer for leasing out your own space.
What Not to Do
Do not aggressively raise the rent for a good, long-term tenant. One month of vacancy can wipe out a substantial percentage increase. Do not cut back on maintenance in ways that lead to damage. And do not manage a commercial property with a single spreadsheet and no tracking of leases, adjustment dates and insurance expirations.
How We Do It
At Flamingo, we begin managing every new property with a review of its costs and lease, and present the property owner with a before-and-after cash flow analysis. In most cases, the first improvement is achieved within one quarter, without capital investment.
