This is Part 2 of our series on the hidden costs of owning commercial real estate.
Part 1 discussed the expenses associated with capital expenditures, vacancies, and new tenants.
In this article, we’ll discuss the expenses acquired from:
- business license taxes,
- commercial sewer fees and
- unexpected environmental cleanup costs.
BUSINESS LICENSE TAXES
Many cities require commercial real estate owners to purchase a business license. Some cities even require owners to purchase a separate license for each property owned in the city.
In addition, there are cities that also require that business owners pay an annual registration tax for each license, and depending on the business activity, owners are required to pay a mill tax, a flat rate, or a combination of both.
And while it may not add up to a huge amount, it’s still one more expense to track and pay.
COMMERCIAL SEWER FEES
Commercial businesses pay a different rate for wastewater removal than residences. Typically bills are calculated based on flows, which are generally based on potable water consumption, as well as loadings, which are based on historical sampling data for that business type.
In addition, some cities also maintain a number of levels of customer billing; these levels are generally based on the discharge strength of the business. Depending on the type of business, you could be charged as much as $10,000 per year for sewer changes. If your property is a triple net lease property, then these charges are automatically paid by the tenant. If not, you can structure your lease so that your tenant must reimburse you for the fees.
ENVIRONMENTAL CLEANUP
When investing in a commercial real estate income property it’s important that you’ve done enough due diligence to understand the potential environmental risks and liabilities of a property.
Failure to investigate these issues thoroughly can leave you at best with a costly cleanup, and at worst, destroy the best of plans.
It’s also not uncommon to find asbestos in the ceilings, heating systems, or sheetrock, and while these are less costly than finding an fuel tank underground, they are also a significant expense.
For example, one commercial tenant began renovations in an older building, only to find asbestos in an old spray acoustic ceiling from the ‘60s. Since this was a pre-existing condition, the property owner is required to pay the costs of removing the material – at a cost of more than $20,000.asbestos.
Next week we’ll continue exploring additional hidden expenses of commercial income properties.
