Six benefits of commercial space over residential property

Last Updated at: November 04, 2019
1736

Are you tired of untimely calls to fix that leaking tap, or tenants routinely leaving your house because they changed jobs? Is your landlord threatening to evict you and your established business out of his property?

Get Your Property Registered

Whether you’re an investor in real-estate, a property owner thinking of whether to rent out your space as a commercial unit or a businessman confused between using a residential unit as an office or renting a commercial space, you should consider the following advantages a commercial space has over a residential property:

  1. Comfort, Constancy and Collateral value Commercials spaces by virtue of their location (proximity to markets, malls, shopping centers) are likely to fetch you businessmen and entrepreneurs who would want to own the place for longer durations, ensuring you a fair return for a longer time. This enhances the stability of your investment and also reduces potential losses due to an interim vacancy. This leads to a win-win situation for both the tenant and the landlord. The tenants get the safety net of fixed overhead expenditures whereas the landlord is assured of fixed returns, which are also looked at quite favorably by banks. In contrast, most residential contracts are for eleven months or yearly renewable, leading to several renegotiations. People may also leave the city due to several reasons such as transfer from their existing job or getting married, whereas a business is far less likely to disband an existing base.  
  2. Negotiating Responsibilities: When it comes to the critical obligation of major repairs, maintenance, and overhauling, most standard residential contracts fix the responsibility of the landlord largely for the reason that these are year-to-year leases and since either party may vacate the property easily (the notice periods are usually 30 days) it is the landlord who should foot the bill to maintain the services for the next tenant. In the case of commercial properties, the companies appreciate the freedom to move furniture and fixtures and undertake modifications to suit their office needs. Companies often redo the décor and wall-paint to match their logo-themes. Thus, the burden to finance repairs and maintenance in most cases would be shouldered by these organizations themselves, leaving you with little to worry about.
  3. Reduced chances of default: While this may not be a blanket rule, but medium to large companies are less likely to default in the payment of rent, unlike small residential tenants with limited household resources. A company, because of the goodwill associated with their brand and the need for stability in their operating base is more likely to agree to pay upfront for months or even years of rental value, making it easier for you to negotiate a fixed-sum deposit. Moreover, due to the additional investment by your corporate tenant, they wouldn’t want to leave the location anytime soon.
  4. No rent control laws, strictly: While residential property rents may be escalated only up to the limit prescribed by the state’s own rent control laws, there is no such clause for commercial property. The more established a business gets in a location, the less likely they would be to undertake a change of location and would be willing to pay more to keep your property. If you’re the rare owner of a property somewhere at Whitefield in Bangalore or a BKC in Mumbai, your rentals may enable you to afford that private jet.
  5. Grading, Returns, and Risks: Ever heard of a house-property being given A, B or C grades based on their quality? Don’t worry; there exists no such system for residences. In sharp contrast, most commercial properties are classified into three categories. Class A covers newer commercial buildings with the best amenities and aesthetics. Class B covers average office spaces which may be old but fetch above average rents. Class C category buildings are the least desirable and offer low quality, cheap spaces. In the recent past, commercial properties in Grade A have offered a 9-11 percent rate of return, while Grade B properties fetched around 7-9 percent return. This classification gives rise to not just better rents and more value in the eyes of a tenant but also assures a higher rate of return and lower risk than residential properties.
  6. Exemption from RERA provisions: While most spaces are built for a mixed corporate, technical, IT business let-out or sale, if a builder is making ear-marked spaces only for an “industrial purpose”, the entire project would lie outside the purview of Real Estate Regulation Authority and thus, the obligations such as increased disclosure, post-possession liability and restrictions on use of funds would not apply, as in the case of all residential property projects.

While there are several advantages of owning and renting a commercial property, it does come with its own risks, all of which can be effectively minimized by suitable alterations in your contract. For example, the exit-provisions may be one-sided- a long lock-in period favoring the tenant which prohibits the landlord from evicting the tenant for a certain number of years. While generally, longer lock-ins generate better returns for the investor, the inherent risk in letting out the property for longer durations should not be ignored. In such a case, it would be prudent for you as the landlord to seek a higher security deposit. Although commercial properties are known to have fared better returns with lower risks, tax advantages of a residential property may differ and be higher than commercial property. After all, it may not be untrue that “The safest way to make money on property is to find out where everyone is headed and buy land there before they reach”.

Six benefits of commercial space over residential property

1736

Are you tired of untimely calls to fix that leaking tap, or tenants routinely leaving your house because they changed jobs? Is your landlord threatening to evict you and your established business out of his property?

Get Your Property Registered

Whether you’re an investor in real-estate, a property owner thinking of whether to rent out your space as a commercial unit or a businessman confused between using a residential unit as an office or renting a commercial space, you should consider the following advantages a commercial space has over a residential property:

  1. Comfort, Constancy and Collateral value Commercials spaces by virtue of their location (proximity to markets, malls, shopping centers) are likely to fetch you businessmen and entrepreneurs who would want to own the place for longer durations, ensuring you a fair return for a longer time. This enhances the stability of your investment and also reduces potential losses due to an interim vacancy. This leads to a win-win situation for both the tenant and the landlord. The tenants get the safety net of fixed overhead expenditures whereas the landlord is assured of fixed returns, which are also looked at quite favorably by banks. In contrast, most residential contracts are for eleven months or yearly renewable, leading to several renegotiations. People may also leave the city due to several reasons such as transfer from their existing job or getting married, whereas a business is far less likely to disband an existing base.  
  2. Negotiating Responsibilities: When it comes to the critical obligation of major repairs, maintenance, and overhauling, most standard residential contracts fix the responsibility of the landlord largely for the reason that these are year-to-year leases and since either party may vacate the property easily (the notice periods are usually 30 days) it is the landlord who should foot the bill to maintain the services for the next tenant. In the case of commercial properties, the companies appreciate the freedom to move furniture and fixtures and undertake modifications to suit their office needs. Companies often redo the décor and wall-paint to match their logo-themes. Thus, the burden to finance repairs and maintenance in most cases would be shouldered by these organizations themselves, leaving you with little to worry about.
  3. Reduced chances of default: While this may not be a blanket rule, but medium to large companies are less likely to default in the payment of rent, unlike small residential tenants with limited household resources. A company, because of the goodwill associated with their brand and the need for stability in their operating base is more likely to agree to pay upfront for months or even years of rental value, making it easier for you to negotiate a fixed-sum deposit. Moreover, due to the additional investment by your corporate tenant, they wouldn’t want to leave the location anytime soon.
  4. No rent control laws, strictly: While residential property rents may be escalated only up to the limit prescribed by the state’s own rent control laws, there is no such clause for commercial property. The more established a business gets in a location, the less likely they would be to undertake a change of location and would be willing to pay more to keep your property. If you’re the rare owner of a property somewhere at Whitefield in Bangalore or a BKC in Mumbai, your rentals may enable you to afford that private jet.
  5. Grading, Returns, and Risks: Ever heard of a house-property being given A, B or C grades based on their quality? Don’t worry; there exists no such system for residences. In sharp contrast, most commercial properties are classified into three categories. Class A covers newer commercial buildings with the best amenities and aesthetics. Class B covers average office spaces which may be old but fetch above average rents. Class C category buildings are the least desirable and offer low quality, cheap spaces. In the recent past, commercial properties in Grade A have offered a 9-11 percent rate of return, while Grade B properties fetched around 7-9 percent return. This classification gives rise to not just better rents and more value in the eyes of a tenant but also assures a higher rate of return and lower risk than residential properties.
  6. Exemption from RERA provisions: While most spaces are built for a mixed corporate, technical, IT business let-out or sale, if a builder is making ear-marked spaces only for an “industrial purpose”, the entire project would lie outside the purview of Real Estate Regulation Authority and thus, the obligations such as increased disclosure, post-possession liability and restrictions on use of funds would not apply, as in the case of all residential property projects.

While there are several advantages of owning and renting a commercial property, it does come with its own risks, all of which can be effectively minimized by suitable alterations in your contract. For example, the exit-provisions may be one-sided- a long lock-in period favoring the tenant which prohibits the landlord from evicting the tenant for a certain number of years. While generally, longer lock-ins generate better returns for the investor, the inherent risk in letting out the property for longer durations should not be ignored. In such a case, it would be prudent for you as the landlord to seek a higher security deposit. Although commercial properties are known to have fared better returns with lower risks, tax advantages of a residential property may differ and be higher than commercial property. After all, it may not be untrue that “The safest way to make money on property is to find out where everyone is headed and buy land there before they reach”.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.