So it’s been a little over six weeks since I purchased a commercial office building (see Atlanta Tech Village) and became a landlord. It’s been a fascinating experience with several lessons learned.
On our first real day in the building, January 2nd, at 11am one of the toilets on the fifth floor started overflowing. Being that the building was built in 1986, there’s no extra drain on the bathroom floor and the overflow proceeded to go into the hallway. Not knowing any better, my colleague called Roto-Rooter and they came and snaked the offending toilet by way of a tube on the roof (necessary to get to the bathroom on the top floor). Well, the snake broke one of the pipes causing even more problems.
At 5:20pm that night, still on the first day, the power went out in the building and the whole neighborhood for 15 minutes. Tenants were calling and complaining and all we could do was point them to Georgia Power and the fact that our neighboring buildings didn’t have any power. Again, that was the first day.
Since then, things have gotten much easier and everything has been pretty smooth. Here are some of the lessons learned owning commercial real estate:
- Depreciation for tax purposes is a big deal and there are many strategies (e.g. a cost segregation analysis that assigns value to different items in the building so that they can be depreciated according to their useful life instead of a generic 39 year straight line depreciation)
- Recruiting tenants to move in to traditional leases is difficult due to timing and nature of their existing lease (e.g. you can’t just get your friends to move into your building because they can’t break their existing lease)
- Existing tenants follow the standard Pareto Rule where 20% of the tenants require 80% of the support and attention
- Operating expenses need to be closely monitored as they are a massive part of the business model (see the financial model for ATV)
- Fixed inventory of rentable square feet is a different mindset compared to software where there’s unlimited inventory
- Demand for flexible office space in a high energy, entrepreneurial environment is much greater than expected
Everything is off to a great start and I’m sure we’ll learn a ton more over the years.
What else? What are some other lessons learned owning commercial real estate?