Function, Location, Terms

All of us have heard the first commandment of real estate success. Thou shalt remember LOCATION- LOCATION- LOCATION. Please consider this divine intervention and let’s replace the first commandment with FUNCTION-LOCATION-TERMS-MANAGEMENT.

There are many investments in great locations that eventually fail because of the functional design elements of the building does not meet the demand of general public or that of potential tenants. Some such design elements that are commonly vacant and observed in our marketplace that cause underperformance are:

  • Retail storerooms with bay depths over eighty (80’) feet.
  • Retail storerooms set perpendicular to the main street.
  • Corner storerooms in retail centers with an “elbow”
  • Retail storerooms with low ceiling heights or no storage area
  • Inadequate parking and accessibility
  • Inadequate lighting and sense of security
  • Apartments with small bedrooms, no storage space, no privacy
  • Designs that require walking through the bedroom to get to the bath
  • Poor kitchen designs
  • Center hallways lacking security
  • Office warehousing with more than 50 percent allocated to office
  • Low warehouse ceilings height below 10 feet
  • Inability for tractor trailer truck size vehicle access

I think you get my point. Irregardless of the prime location your site is in, buildings designed without intelligent consideration to tenant or consumer demand will struggle to perform.

Location demographic characteristics that represent good locations show better than average:

  • Traffic Count
  • Occupancy Rates
  • Population per square mile
  • Graduation Rates in local schools
  • Average Home Value
  • Percentage of Home Ownership
  • Proximity to Major employer
  • Population Increase in 1-3-5-10 years

Sure location is important but function and financing terms are also just as important and must be considered when considering investment options.

Financing terms can make or break an investment’s performance also. Such terms must allow the investor to retain a “rainy day” fund for unexpected capital and essential improvements like carpet, roofing, pavement replacement, HVAC replacements, painting, appliances, infrastructure needs and other improvements that attract and retain valuable tenants. Lease expirations, mortgage maturity dates, paying too much and mortgages with fluctuating interest rates and amortization schedules unquestionably be murderous on investment performance irregardless of location and great design.

In summary, LOCATION is not the cure all. Inflation will not bail out investments with poor location, function and financing terms. Patience is a virtue. Answer the questions about the investment opportunity and combine with astute management and your yields and happiness will become more predictable. Such answers will bring the risks into focus and enable good decisions to be made.

Let us not forget the overall importance of great management. The success of any project is usually a function of the focused management time devoted to it.

Tom Fortin

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