Investors intuitively understand that there are significant differences between residential property ownership and owning commercial property. For instance, residential real estate is private property intended to serve the round-the-clock needs of individuals, needs such as shelter and basic living space. Meanwhile, commercial real estate has its purpose right in its name: commerce. These locations facilitate trade and usually house businesses rather than people looking to lay their heads down after a long day. (Multi-family housing serves as an exception to that rule, but even it functions far differently than single-family homes.)
Given that these two types of properties are so fundamentally dissimilar, you’d expect for commercial property management characteristics and residential property management characteristics to vary significantly — and they do, sometimes in surprising ways. Below we detail 10 key differences between commercial and residential properties.
#1: Tenant Expenses
When dealing with a residence, tenants typically have relatively few responsibilities other than rent. Some leases don’t even require residential tenants to pay any utility costs, although most require them to cover some or all of their water, electricity, and gas bills.
Commercial tenant expense responsibilities are far more comprehensive. They may include property taxes, insurance, and maintenance, which are known as the three nets. Triple-net (NNN) leases place all three of these expenses on the tenant, while gross leases require the owner to pay for them. A modified-net lease typically splits the maintenance between the owner and the tenant while still requiring the tenant to cover insurance and property taxes.
#2: Management Needs
When horror stories about residential property management crop up, they generally involve a property manager having to fix something in a habitation during the dead of night. Yes, residential properties can require 24/7 maintenance, but they have one significant difference from commercial properties: They do not need to have a manager physically on site at all times.
Larger commercial sites such as office buildings often must have a manager available to address various property-related tasks such as repairs or emergencies. Some states have even codified this in law. However, while commercial managers typically need to be available after work hours, they do not usually have to remain on the property once tenants have closed up.
#3: Typical Lease Characteristics
One reason why so many owners of residential real estate property also manage it themselves is that residential leases are relatively simple legal instruments. Common terms, typical lengths, renewal periods — all of these remain easy to understand and implement.
Not so in commercial contexts. Commercial leases are far more complex and contain a greater number of variables such as longer leasing times, built-in variable rent increases, and an assortment of termination clauses. Ensuring a successful commercial lease requires additional attention to these many details.
#4. Applicable Legislation
Because of residency concerns, single-family homes and small multi-family properties end up subject to a patchwork of consumer-protection laws that vary from state to state, as well as federal laws such as anti-discrimination statutes. Failure to heed these laws can land a manager and/or an owner in significant legal trouble.
In contrast, commercial properties have fewer legal restrictions. Lessors and lessees enjoy greater freedom in their leasing arrangements — and it becomes that much more incumbent upon you to have a savvy real estate professional involved. Make no mistake: There’s no such thing as a “standard” commercial lease.
#5: End-User Needs
Although this point may seem obvious and immaterial, it highlights great commercial and property management differences. End users for residential properties want a home, a shelter, a place that they can retire to at the end of the day. End users for commercial properties want a profit center, something that supports their underlying business, an endeavor that benefits both themselves and associated stakeholders.
In most cases, the decisions a manager ends up making regarding tenants will relate back to these needs. Residential tenants primarily want to enjoy the residence and will seek aid regarding anything that interferes with that. Commercial tenants? They want managerial assistance with anything that is keeping their business from blooming.
#6: Pride of Use
Fortunately for property owners and managers, commercial tenants’ needs natural align with maintenance and care for a building. The desire for profit prompts a certain kind of pride of use. Neglecting or damaging the premises doesn’t exactly spring to dissatisfied tenants’ minds when they need a property’s attractive facade and intact interior to draw customers. It’s in their best interests to work with managers rather than become spiteful.
Residential tenants don’t have the same incentives. Their frustration boils over much more easily into damage to and destruction of the place that’s supposed to serve as their home.
Depending on the state, residential evictions can turn into a Sisyphean task with each required step agonizingly drawn out and sometimes subverted by disingenuously savvy tenants bent on gaming the system. Commercial tenants have fewer legal protections available to them, and good commercial leases contain crystal clear default clauses. In the unfortunate case that an eviction becomes necessary, managers typically find commercial evictions much easier to execute.
#8: Hours of Operation
While residential tenants may not remain at the property every moment — choosing instead to leave for work, go shopping, or enjoy some off-site entertainment — they have use of it all day, every day. That translates into the need for greater managerial vigilance. Who knows when a manager might receive an emergency phone call requesting immediate service?
Commercial property managers still receive their share of midnight security alarms and 2 a.m. plumbing catastrophes, but they occur far less frequently. Additionally, even when alerts crop up, commercial properties are usually connected to some sort of monitoring service, meaning that a third party helps handle emergencies that occur during the wee hours.
#9: Price Valuations
Residential properties get valued based on comparable sales, but every real estate veteran knows that such valuations can carry a large subjective component. School districts, granite counter tops, and a certain je ne sais quoi can tilt prices this way or that.
Such things really don’t happen with commercial real estate. Buyers and sellers have access to income statements and know prevailing cap rates. It’s fairly simple for everyone to extrapolate pricing from there on out.
No profit-making venture comes without risks, and no type of real estate is exempt from that. For instance, residential real estate faces natural disasters, income loss, and damages from tenants. Commercial properties must deal with all of these, and they stand a much greater chance of having them happen. Residential managers don’t often have to manage graffiti on facades, people getting hit by cars in parking lots, or the threat of slip-and-fall lawsuits.
That’s part of the reason why having good commercial-property management matters so much — and GNP Realty Partners would like to help. Our senior staff have more than 250 years of collective experience in Chicago and the surrounding area, and we’re an Accredited Management Organization® (AMO®). To learn more about how we can help with your commercial property, contact us at (312) 329-8466 or request a proposal.