Commercial Real Estate
What is Commercial Real Estate?
Commercial real estate is property intended for profit-making purposes, with a strong association to business usage. While commercial real estate is intended for work-space, there is some overlap with multi-family homes. A multi-family property that exceeds more than four units is considered commercial property. Reason being, at five or more units the focus shifts from the credit of the individual buyer to the income of the property. So, to think about commercial real estate as strictly business or work-space related is simply inaccurate. Commercial real estate is best defined as owned property intended to produce income. Realistically, commercial real estate can encompass any property type so long as it can produce income and/or profit.
Leases in a commercial real estate transaction can fall anywhere between one and ten years. Commercial real estate has benefits in long lease contracts giving the investor or investors cash flow stability so long as the property remains occupied by long-lease tenants.
Commercial property investing falls under the area of high risk, high reward real estate. A rather large amount of startup capital is needed if you are looking to invest in commercial real estate. In addition, extensive knowledge about the industry is necessary from a legal and financial perspective. Commercial real estate is a good investment if you can manage the cost and time it takes to produce a satisfactory profit.
Commercial Real Estate Example
Some of the more popular examples of commercial real estate are hotels, gas stations, strip malls, office buildings and large multi-family unit apartment complexes. As stated above, leases and building types vary in commercial real estate. Follow along with us to learn about different lease options and building classification for commercial real estate investments:
Primary Types of Commercial Real Estate Leases
- Single Net Lease: the tenant occupying the space pays rent and building property taxes for their portion of the property being leased. The real estate owner covers all other operating expenses (insurance and maintenance). A tenant in this example could choose to pay rent plus a monthly fee associated to the year’s taxes or pay rent and one lump sum to cover the year’s fee in property taxes.
- Double Net Lease: the tenant occupying the space pays rent, property taxes, and insurance for their portion of the building being leased. All other operational related costs, such as maintenance, is paid by the real estate owner. Keep in mind that building insurance and business insurance are quite different, in this case if a tenant in a shopping mall real estate venture signs a double net lease, they are then responsible for paying rent, fees associated to the building insurance and taxes for their occupied space, and finally their own business insurance covering their services or products being sold.
- Triple Net Lease: the tenant in a triple net lease is responsible for all the costs associated with the space being occupied. So, in addition to rent, the tenant is responsible for paying insurance premiums (building insurance), property taxes, and any necessary operational costs such as maintenance and/or repairs. The tenant also must cover their own business insurance for their products or services being sold. A real estate owner in this case is securing a low risk lease and can target high-quality real estate without concern for high maintenance costs. Triple net lease investment offerings must come from accredited investors (investors with $200,000 of income or with a $1 million net worth).
- Gross Lease: the real estate owner in a gross lease covers all the costs associated with the space minus the rent assigned. This means the building’s property taxes, building’s insurance and operational costs (maintenance and repairs) are covered by the real estate owner. A gross lease can be modified, for instance a tenant occupying a space in a mall may be required to pay the space’s utility bills in a gross lease.
Commercial Real Estate Building Classifications
The types of leases in a commercial property real estate venture can depend on the quality of the building, which is why the following commercial real estate classifications exist:
- Class A Buildings: best in quality in terms of infrastructure, new construction aesthetics, recently built, in a good location.
- Class B Buildings: built within the last twenty years in good locations, still sturdy and functioning well, but aesthetically looks less polished.
- Class C Buildings: older buildings built more than twenty years ago that require renovations in less attractive locations.
Commercial real estate is income and profit driven from an investment perspective. While a clear majority of commercial property can fall under business and work-space usage, it can also encompass any property type so long as it produces income/profit. If you’re looking to invest in commercial real estate it is important that you understand the zoning laws, lease types and building classifications of an intended property. You will also need a large sum of start up capital. CityVest is accustomed to working with commercial real estte, contact us today for more information to learn more.