When the housing market was booming, (and many say it will come back when the COVID-19 crisis is past) many associations found themselves in the enviable position of searching for new ways to invest reserve funds. There’s no more natural investment vehicle—and non-dues revenue generator—for a REALTOR® association than real estate. Yet owning commercial real estate has unique challenges.
“If you’re going to have tenants other than the association, then you need to understand what it means to be a landlord, because it’s a lot of work,” says Chuck Kasky, RCE, CEO of Maryland REALTORS® in Annapolis.
Kasky’s board of directors voted to keep the association’s old income-producing office property when it moved to a larger location in 2008. “The thinking behind it long-term is to control what will someday be one of the most valuable pieces of real estate in Annapolis,” says Kasky. “Now we own both properties that sit on the larger corner lot, and the plan is to redevelop the entire parcel to the highest and best use sometime in the future.”
The strategy for the property investment was developed by a committee of experienced commercial REALTORS®, which also represented the association in the purchase. “Commercial deals are very different from residential deals, so make sure you’re leveraging your commercial members to provide that kind of guidance,” Kasky says.
When leaders at the Hampton Roads REALTORS® Association in southeast Virginia realized the association’s 33,000-square-foot building in Virginia Beach, which was 65 percent leased to tenants, no longer provided enough parking, they voted to purchase 6 acres in Chesapeake, Va., and created a custom building to house the association. It also bought the neighboring land for future expansion.
Instead of selling the first building, association leadership decided to keep it as an investment property. The association keeps one classroom in the original building and leases the remaining space to tenants, which brings in quite a bit of revenue, says Executive Vice President Mike Reitelbach, RCE, CAE.
Keeping the property fully leased to quality tenants is a concern of all commercial real estate owners, but expert property management firms make a big difference.
“The first thing we did after closing was hire a leasing broker to represent us in the search for tenants for the building that we purchased,” Kasky said. “If you’re buying a building with additional space and you’re going to be a landlord, have people you trust as your broker to help attract and screen tenants and negotiate leases, then get a professional property management company to deal with the inevitable complaints and maintenance requests.”
Kasky says maintaining the original building has been a challenge at times because of its age and the costs to upgrade and repair portions of it. But having tenants vetted by the leasing broker has made the process easy to manage and has brought in more money than is paid out, he says.
“With any commercial building, the risk is if we can’t keep the space leased. Then it becomes a sinkhole for cash,” Reitelbach says. “But we’re very scrupulous about reserves and put aside a certain amount each month, not only for the general reserve but for maintenance and per capita expenditures.”
Real estate investing is not for the faint of heart and can be a complicated process, even with a dedicated and knowledgeable commercial committee and supportive board. But if you do the math carefully and get expert guidance, says Kasky, it can be a smart way to invest your reserves.