Commercial Muliple Occupancy
Most people in UK property have heard of Houses of Multiple Occupancy (HMOs), which are basically residential multi-lets. But have you heard of Commercial Multiple Occupancy (CMO)?
You’ve heard of HMOs, which are basically residential multilets, right? A landlord takes a single house and rents it out room by room to different tenants.
Tenants get cheaper accommodation than they’d get by renting out a whole property and landlords can charge more per room than they would get renting it out as a’single let’.
My guest in Episode #175 Jerry Alexander may not have been the first person to apply this principle to commercial properties but he is the first to coin the term CMO: Commercial Multiple Occupancy.
But whereas the physical room on offer to a tenant in a residential HMO doesn’t change either within a tenancy or between tenancies, Jerry’s model ensures that the tenants potentially have the option to increase or decrease in size according to their changing needs.
This has given rise to the term flex space: adaptable spaces within a commercial building, often leased on flexible terms.
Here are TEN ADVANTAGES to adopting CMOs as a UK property strategy:
1. There is less competition for commercial than residential property
2. If you get it right, it’s a high cash-flowing strategy
3. Multiple tenants reduce the risk associated with vacancy.
4. Stable income stream since not all units are likely to be vacant simultaneously.
5. Smaller units typically yield higher per-square-foot rental rates.
6. Flexibility in lease terms attracts a more extensive range of tenants.
7. Units can be quickly reconfigured to meet changing market demands.
8. Short-term leases cater to businesses requiring flexible space, ensuring high retention and demand.
9. Still growing as a business model as evidenced by institutional investors entering this space
10. Because commercial buildings are valued according to income, you can potentailly add value to a building and release a significant amount of your investment to rinse and repeat.
For more on this busness model and for other tips and tricks on getting started in Expat UK Commercial Property investing, join listeners in nearly 150 countries in Episode #175
Lots of different businesses rent
In the meantime, here’s a one-stop guide to this lesser known UK property strategy:
1. Introduction to CMO
Commercial Multiple Occupancy (CMO) is a property investment strategy that involves buying larger commercial units and subdividing them into smaller spaces for lease. This model increases the tenant pool, diversifies income sources, and enhances cash flow stability.
Definitions
Flex Space
: Adaptable spaces within a commercial building, often leased on flexible terms.
Multi-let Property
: A single property with multiple tenants, each occupying subdivided units.
2. Market Dynamics and Research
Assess Local Market
Demographics
: Understand the population and business density.
Demand Analysis
: Determine the demand for flexible commercial spaces.
: Which businesses are NOT being catered for?
Competition
: Evaluate existing multi-let buildings and their success rates.
: Look at what’s working. Look at what’s on offer and potentially what’s not on offer.
Data Sources
Local statistics websites (my own favourite is doogal.co.uk)
Property research platforms like CoStar, Nimbus, Property Data etc.
Engaging local commercial agents (ignore the ones that don’t respond and deal with the ones that do!)
3. Locating and Evaluating CMO Opportunities
Identifying Opportunities
Look for buildings with flexible layouts or potential for subdivision.
Check visibility in the market: properties listed for sale or to let can indicate areas with unmet demand.
Site Evaluation
Analyze foot traffic and accessibility.
Investigate local infrastructure and amenities.
Ensure zoning regulations permit commercial use and subdivision.
Opportunities
Seek out underperforming properties; adding tenants or improving leases can significantly boost property values.
Look for dilapidations clauses in leases of commercial property for sale to effectively secure purchase price discounts
Leverage capital allowances for tax benefits.
For more on this busness model and for other tips and tricks on getting started in Expat UK Commercial Property investing, join listeners in nearly 150 countries in Episode #175
4. Leases versus Licenses
Top of Form
Leases
Duration & Stability:
Term Length
: Leases typically have longer durations, often ranging from several years to even decades.
Stability
: Provides long-term stability for both tenant and landlord, often with fixed terms.
Legal Standing:
Property Rights
: Grants the tenant exclusive possession of the property, including some rights similar to ownership.
Legal Protections
: Governed by more stringent laws and regulations, offering substantial legal protections to both parties.
Financial Terms:
Rent
: Usually fixed or subject to periodic reviews, making financial planning easier for tenants.
Utilities & Maintenance
: Typically, the tenant is responsible for utilities and maintenance unless the lease specifies otherwise.
Control & Flexibility:
Controlled Environment
: Less flexibility to make changes to the terms, often requiring detailed negotiations for modification.
Subletting & Assignment
: More rigid, often requiring landlord's approval for subletting or assigning the lease to another party.
Licenses
Duration & Flexibility:
Term Length
: Generally shorter in duration, often ranging from month-to-month to a few years.
Flexibility
: Offers more flexible terms for both parties, making it easier to adapt to changing business needs.
Legal Standing:
Property Rights
: Does not grant exclusive possession, but rather permission to use the property for a specific purpose.
Legal Protections
: Less formal and usually governed by contract law rather than property law, providing fewer legal protections.
Financial Terms:
Rent
: Can be more variable, with terms often adjusting based on market conditions.
Utilities & Maintenance
: The landlord may cover utilities and maintenance, but these costs could be included in the licensing fee.
Control & Flexibility:
Flexible Environment
: Easier to modify terms and adapt to business needs like space requirements and lease duration.
For more on this busness model and for other tips and tricks on getting started in Expat UK Commercial Property investing, join listeners in nearly 150 countries in Episode #175