Commercial Concerns: Managing Mixed-Use Property

Over my 46-year property management career, I have managed everything from apartments to large, 400,000-square-foot warehouses and lots of self-storage properties. Some of those storage properties included ancillary real estate/businesses, such as small retail spaces, self-service car washes, business incubator spaces, contractor large bay flex space, indoor and under-the-stars RV/boat storage, mailbox rentals, and cell towers/billboard land leases. Even the largest rental truck dealer in Boston, Mass., was our tenant. 

The non-storage parts of these properties operate in a completely different manner than traditional self-storage. We’re all familiar with the standard month-to-month storage rental agreement (also known as lease or occupancy agreement), however these commercial tenant spaces are leased using commercial leases with terms that are often far different. Commercial leases are often for five to 10 years, while land leases for billboard signs and cell towers can be for terms of 25 to 40 years. Often the initial 25-year land lease is for five years with (4) five-year guaranteed renewal options. All have built-in rent escalations at a predetermined rate, typically about three percent. Three percent is not a great increase, but when the annual rent might be $45,000 or better, it’s not so bad. 

A short or brief commercial lease could be 10 to 12 pages, but I have seen some that are 25 pages or more, including a cell tower lease from Sprint that was 47 pages. I highly recommend you work with an experienced commercial real estate attorney when drafting and negotiating these leases, as you are likely to have to live with that agreement for a long time. That experience will pay off in ensuring your interests are protected. Grabbing a free or $50 lease off the internet may come back to haunt you over and over if something was accidentally omitted or not clearly written. Remember, the lease is the document governing the relationship between both parties.  Saving a few thousand legal dollars up front could be very costly should you end up in litigation that ends very poorly for you. 

Collecting delinquent rent from storage customers is less difficult since you have some tools at your disposal, such as denying access, overlocking, and ultimately lien sale/auction—all of which can be done without hiring an attorney or going to court. However, in the commercial real estate world, enforcement for non-payment or other lease violations will require an attorney and court time that may be drawn out.  You might think, “Not me; I’ll just go to small claims court myself.” That’s an option if within the limits of the court, which may be $5,000. If you win, you will receive a judgment; this is a piece of paper that indicates the court has decreed XYZ Company owes you $5,000. 

To force an eviction, you need a court order that then goes to the sheriff or local constable to serve on the tenant. The court order specifies how much time they have to move out. If they fail to move out, you must contact the authorities again to visit the business. But the old days of the sheriff hauling people off for not moving out are long over. By the way, you can’t legally lock out a commercial tenant!

Managing mixed-use property is not difficult if you understand the nuances between self-storage and the commercial space. Commercial tenants tend to stay far longer, pay better, and most accept rent increases without the emotions we are sometimes subject to from the residential storage tenant. 

I see more frequent mixed-use properties for sale than ever before. Maybe one is in your future.

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Charlie Fritts is a principal of Storage Investment Management (SIMI), which offers self-storage management and consulting. He can be reached at (716) 689-7377 or charlie@simi.org.