Commercial real estate is different from residential real estate and comes with a myriad of complexities that are easier to navigate with a dedicated professional by your side.
“A full-time commercial broker practitioner is in the market every day of every week,” says Rick Schaefer of Ruhl Commercial. “We are keenly aware of current market conditions, affecting supply and demand, pricing, market trends, lease language, purchase agreement language and what is fair and reasonable.”
A large part of the commercial real estate market includes leasing. It’s important to work with an agent who understands all the complexities of leasing, whether you’re a landlord, a buyer, or a seller. It’s also important to communicate what you need from your agent to get the most out of the business relationship. Be sure to tell the agent what you expect from them, and they’ll be better positioned to serve your needs and secure the right deal.
Marge Stratton of Mel Foster Commercial Real Estate Services says there are several key reasons why you should hire a commercial real estate professional. Despite concerns about costs with paying a commission, Stratton says that working with a dedicated professional will usually result in a better deal, negating any costs from commissions. And the experience of that dedicated professional is another key reason. “Relationships fostered over years of working in the business that can give them an edge to help you find the perfect location,” says Stratton.
“We have knowledge of zoning regulations, building code requirements and many other potential issues to help our client avoid costly mistakes,” says Schaefer. “We assist clients with identifying and evaluating all reasonable options to determine the best possible real estate solution.” This can include navigating due diligence items on a piece of property, recommending third party vendors, coordinating inspections, and even helping clients find financing and legal counsel to close a transaction.
Stratton echoes this sentiment. “Working with lawyers, architects, contractors, designers, move managers, and property managers,” she says, means that, “your commercial real estate professional will ensure the space you end up in is exactly how you pictured it.“
An agent can and should present you with a market analysis with comparable properties. Depending on how you plan to use the property, an agent may be able to provide a marketing plan with details about how to find the right tenants in a rental situation, or a comparison with similar properties in another commercial situation. Where they can’t help, an agent can refer you to other professionals to share their areas of expertise. There are a lot of moving parts in commercial estate, and the agent is there to help at every stage.
In other words, you don’t hire a commercial real estate agent just to show you properties, or just to sell you properties. You hire a professional to help manage the entire process.
If you are thinking about buying commercial property for the first time, the landscape can be daunting. Even if you already own several commercial properties, you may encounter new challenges. So then, what should you consider before making your next commercial property investment?
Investopedia defines commercial real estate (CRE) as “property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space.” The main categories of commercial properties are office, industrial, multi-family, and retail. Because commercial real estate typically requires more capital than residential real estate, investing in it can be more difficult for individuals.
We have all heard the cliché, “Location! Location! Location!” applied to home buying, and the same is true of commercial real estate. In fact, it is the very first point the U.S. Chamber of Commerce recommends investors consider when looking to make a real estate purchase. However, location can be a bit more complicated for an investment property. The infrastructure surrounding your location can make a significant impact on your investment, too. If you buy a warehouse with the intent to lease it to an industrial tenant, you need to make sure the infrastructure is there for this type of user. For example, proximity to interstates or highways can be beneficial.
After you have determined the classification of a property, it is important to really get to know the building. As the U.S. Chamber of Commerce points out, you want to know what the building was previously, how much wear and tear has been done to the property, and what potential repairs are going to be necessary now and in the future. Major expenses often include repairing or replacing items like the roof, the parking lot, or the HVAC system. Our commercial appraisals can help with this kind of insight, but you should do your own research as well.
Once you have gotten to know the property, there are four types of commercial leases you as the owner can offer for investment purposes, according to MasterClass. We would also add a fifth type of commercial lease to their list.
- Single-net lease: Single-net leases make the tenant responsible for paying all property taxes for the duration of their lease.
- Double-net lease: Double-net leases make the tenant responsible for paying insurance and property taxes for the duration of their lease.
- Triple-net lease: Triple-net leases make the tenant responsible for paying insurance, maintenance, and property taxes for the duration of their lease.
- Gross lease: In a gross lease, the tenant only pays the rent, and the property owner pays all other related fees for the property.
- Full-service lease: An all-inclusive lease where the owner pays for in unit services (cleaning). These are often government leases.
If you have any questions about our commercial services, please contact us.
Sometimes looking at commercial real estate language feels like learning the language of quantum physics. At first glance, the language seems overly and unnecessarily complex. But just like quantum physics, or any other profession, the language is there for a reason, to ensure accuracy and specificity.
According to Investopedia, Cap Rate, short for Capitalization Rate, is the expected rate of generated return on an investment property. While it’s not exactly quantum mechanics, it does involve some simple math. Basically, Cap Rate is a percentage calculated by dividing the net operating income by the property asset value. It’s not meant to be the only measure used to estimate the profitability of a property, but is a useful tool to get a rough idea of an investor’s potential return on a commercial real estate investment.
Capitalization Rate = Net Operating Income / Current Market Value
Net Operating Income
Since we use Net Operating Income in our formula, we should go ahead and explain what that means in commercial real estate. Bungalow defines Net Operating Income (NOI) as “a real estate term representing a property’s gross operating income, minus its operating expenses. Calculated annually, it is useful for estimating the revenue potential of an investment property. NOI is not affected by how you finance a property—whether you get a mortgage or buy with all cash.”
Net Operating Income = Gross Operating Income – Operating Expenses
Current Market Value
This one is more complex than we have time for in a blog, but it’s worth reading Investopedia’s summary of Current Market Value as it relates to commercial real estate. In fact, this site is a good resource for many terms you’ll encounter in commercial real estate. But as with any online resources, it’s often worth finding more than one source if you’re looking to truly understand a topic.
You can also always reach out to us with questions about complex property language. We’re here to help and we would rather take the time to fully explain a topic than leave you confused. We’re certainly not experts in our clients’ businesses, and don’t expect you to be an expert in ours. We’re here to help every step of the way. Never hesitate to get in touch.