Questions about commercial real estate, we have answers...
We have compiled the list of our most frequently asked questions from clients and partners. If you need more help, please reach out here or email us at firstname.lastname@example.org.
Any real estate that is used in a trade or business. For example shopping centers, office buildings, amusement parks, etc. Multifamily real estate (i.e. apartment properties) is sometimes considered commercial because it is held for investment. Learn what sets us apart in commercial real estate.
A commercial real estate broker is a trained professional who has been licensed to advise clients to buy, sell, or lease commercial properties.The primary difference between a commercial real estate broker and a commercial real estate agent is that the broker can work independently while the commercial real estate agent must be employed by a licensed broker. In order to protect your best interests and get the highest return on your investment, you should always engage a Broker for any and all commercial real estate transactions. Meet our experienced team of commercial brokers.
No. Brokers generally specialize in certain areas of the commercial real estate industry. For example, some may specialize in retail, industrial, office, land, or investment sales and therefore it’s important to work with a real estate professional that understands your needs. See how our commercial brokers go the extra mile.
Most fees are typically paid for by the seller or landlord and are paid upon either the sale of the property or in the case of a lease ½ when the lease is fully executed and non-contingent and the remaining ½ when the tenant starts paying rent or opens for business. The actual fees and timing for when they are paid out varies depending on the parties involved as well as the type and size of the transaction. Send us a note and we will be happy to talk to you about how it all works.
You should always consider using the services of a commercial real estate broker even if you are a highly proficient commercial real estate investor. A good commercial broker will save you time and money, minimize risk, provide valuable market information, and negotiate a deal that best suits your specific needs when looking for commercial property. Looking for retail, industrial, office, land, or corporate real estate?
What is the broker or broker company’s experience in dealing with commercial needs - specifically, my company needs.
What services does the brokerage firm provide and how do they compare with other brokerage firms?
What geographical areas does the broker or brokerage firm focus on?
Who are some past and present clients of the broker and/or brokerage firm?
Request a list of references from the broker or brokerage firm.
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Basic CRE Terms
A letter of intent (LOI) is a document that summarizes the deal points in a transaction and is used as the basis for a negotiation. An LOI is typically, but not always, considered non-binding and is the document used to then draft the formal legal document such as the lease or purchase agreement. We have more answers if you have more questions about commercial real estate.
Common Area Maintenance (CAM) charges are the costs a landlord incurs to maintain the common areas of a property benefiting the tenants in the property such as a parking lot, landscaping, etc. These expenses in a net lease are typically passed onto the tenant as part of their “triple net” charges. We have more answers if you have more questions.
Triple Net (NNN) charges are the expenses passed on from the landlord to the tenant in a NNN lease which expenses include common area maintenance (CAM’s), taxes, and insurance. It’s important to understand these charges and exactly how they are structured. We have more answers if you have more questions.
A 1031 refers to IRS code section 1031 which is a tax deferral on the sale of a property used in trade or business or held for investment when exchanged for “like-kind” replacement property. Before entering into a 1031 or other tax deferred exchange it’s important to talk with a 1031 expert and your CPA to make sure it is the right vehicle for your purposes. We have more answers if you have more questions.
A CASp report is performed by a Certified Access Specialist (CASp) who has been certified by the State of California to have specialized knowledge of applicable state and federal accessibility or ADA standards. A licensed architect or engineer can also provide an access compliance review, but only a CASp can provide a “qualified defendant” status in a construction-related accessibility lawsuit. We have more answers if you have more questions about commercial real estate.
A Phase 1 Environmental Site Assessment or ESA is completed by a licensed environmental professional who researches the current and historical uses and records of the property to determine if the soil or groundwater on or beneath the property could pose an environmental threat. In most cases it is recommended that some type of environmental report, such as a Phase 1 ESA, be conducted prior to purchasing a property and it’s often required by most lenders. We have more answers if you have more questions.
An estoppel certificate is a signed document certifying that certain facts are true and correct to prevent the signatory from asserting a contrary claim. Estoppel certificates are typically used in income property transactions in which tenants are asked to confirm the terms of their lease agreements. We have more answers if you have more questions about commercial real estate.
A force majeure event is an unforeseeable circumstance or “act of god” that prevents someone from fulfilling a contract. It typically does not however relieve someone of a rent payment obligation. We have more answers if you have more questions.
A build-to-suit is when a building is designed for a specific user / tenant who contracts with a developer in exchange for the tenant’s agreement to lease the space upon completion. We have more answers if you have more questions about commercial real estate.
Common Area is generally considered the areas of a shopping center or building that provide general services to the public or building tenants and are not included in the office or store area of any specific tenant. Common Area can often be defined differently depending on the type of lease such as office, retail, etc. and on how the landlord may elect to define common area. We have more answers if you have more questions.
- Class A buildings are generally considered to be premier in terms of the quality of construction, higher end finishes, state of the art building systems, and as a result achieve premium rental rates.
- Class B buildings are more of the average and appeal to a wide range of tenants / users with rents that are average for the trade area. Typically these buildings have finishes that are in newer and good condition, buildings systems are in good working order and adequate, and they don’t compete with the Class A buildings.
- Class C buildings are slightly below average in terms of the quality of finishes, typically older building systems, and appeal to users / tenants looking for simply functional space at below average rents.
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These terms are often used interchangeably but they have distinct differences that are important to note. Available space is the total amount of space being marketed and includes both space that is vacant or also occupied, but will soon become vacant. We have more answers if you have more questions.
According to BOMA the GLA is determined by the measure line which goes to the exterior face of the space / enclosure to the centerline of any demising walls that separate the space from other occupants. No deductions are made for columns or other structural elements or for occupant voids. For more info. visit: https://www.boma.org/ We have more answers if you have more questions about commercial real estate.
In commercial real estate the landlord and tenant often agree upon certain work each party with undertake to facilitate the transaction. The “Work Letter” outlines the parties’ responsibilities and often describes the scope of work, costs, deadlines, etc. We have more answers if you have more questions.
Often times in a lease agreement the tenant will negotiate for a Right of First Refusal “ROFR”. The ROFR gives the tenant the ability to lease additional space that may become available at a future date upon the same terms another 3rd party has offered to enter into an agreement. There can also be a ROFR to purchase which grants a tenant the right to purchase the property on the same terms offered by a 3rd Essentially, the tenant has the “last look” at an offer and tenant has the right to match the offer. We have more answers if you have more questions about commercial real estate.
A Right of First Offer “ROFO” differs from a “ROFR” because the landlord is required to notify the tenant if the specified additional space becomes available. There can also be a ROFO to purchase which grants the tenant the right to make the first offer to purchase the property on the terms that are going to be offered to the public. Essentially, the tenant has the “first opportunity” to make an offer. We have more answers if you have more questions.
In most leases there is an assignment clause that describes if or under what conditions the tenant can assign the lease obligations to another party. Typically, a landlord will not allow for an assignment without landlord approval and often if landlord approves of the assignment the original tenant still remains liable. In more sophisticated lease documents, there are “permitted transfers / assignments” that do not require landlords’ consent and typically it’s to an affiliated entity / parent company and/or there are qualifiers such as net worth, quality of the assignee, etc. We have more answers if you have more questions about commercial real estate.
FF&E stands for Furniture, Fixtures, and Equipment and are items that are not connected permanently to the structure of the building. The FF&E may be removed by the tenant when they vacate the premise. We have more answers if you have more questions.
Often times the tenant and landlord negotiate as part of a new lease or lease renewal whereby the landlord will contribute towards the cost of new improvements of the tenants’ premise. TI’s or the TIA is typically quoted on a Per Square Foot (PSF) bases, for example, $20 PSF. We have more answers if you have more questions about commercial real estate.
Commercial Real Estate Lease Types
A Triple Net Lease “NNN” is a lease whereby the tenant pays for their share of the property operating expenses including fixed and variable expenses, potentially HVAC, plumbing, and electrical systems, taxes, and insurance. The landlord is responsible for structural repairs, utilities lines servicing the property, and capital expenses. The term NNN often gets interchanged with Absolute or True NNN so it’s important to clarify between the two definitions. We have more answers if you have more questions.
An Absolute, True, or even sometimes referred to as Bondable Net Lease is when the tenant is responsible for all expenses including the operating expenses, taxes, insurance, repairs and maintenance, roof and structure, casualty, condemnation, etc. It becomes a bondable lease when the tenant has strong credit / financials and provides a corporate guarantee or credit enhancement. We have more answers if you have more questions about commercial real estate.
A Double Net or “NN” is a lease whereby the tenant is responsible for two of the three typical property expenses that are payed for by the tenant under an NNN lease. For example, a tenant may only pay for its share of property taxes, insurance, but is not responsible for any maintenance or common area expenses. We have more answers if you have more questions.
A Single Net or “Net” is a lease whereby the tenant is responsible for one of the three typical property expenses that are payed for by the tenant under an NNN lease. For example, a tenant may only pay for its share of property taxes, but is not responsible for any insurance, maintenance or common area expenses. We have more answers if you have more questions about commercial real estate.
A Modified or Modified Gross Lease is a lease whereby the tenant pays its base rent in addition to the tenants prorate share of other costs associated with the property such as property taxes, insurance, utilities, and maintenance over the “base year” costs. It can often get confusing because in the industrial sector a modified gross lease might be referred to as an Industrial Gross lease. We have more answers if you have more questions.
A Gross or Full-Service lease is when the tenant only pays base rent and landlord is obligated to pay for all or most of the property’s operating expenses including taxes, insurance, maintenance, repairs, and replacements. We have more answers if you have more questions about commercial real estate.
A ground lease is when a tenant or user leases the physical land and the tenant in most circumstances improves the property by installing improvements such as a building. Most ground leases range from 15 years to 25 years, but there is no rule, and some can be as long as 99 years. When the ground lease expires the landlord typically gains ownership of the improvements constructed on the land. We have more answers if you have more questions.
CRE Investment Terms
The general concept of a Cap Rate or Capitalization Rate is a method of determining the value of an asset applying a market Cap Rate to the Net Operating Income (NOI). (NOI/Cap Rate = Value) Cap Rates move up and down depending on several factors such as the credit of the tenant, term left on the lease, market conditions and quality of the real estate among other factors. It’s important to note this is only one metric used when evaluating commercial real estate. We have more answers if you have more questions.
Net Operating Income or “NOI” is the income the property generates, typically on an annual basis, after property expenses such as utilities, taxes, insurance, maintenance, property management, etc. NOI does not however include loan payments, depreciation expense, capital expenditures or amortization and is calculated before taxes. This calculation is similar to EBITDA which would be used in evaluating a business. NOI = (Total Income – Vacancy and Credit Losses) – Operating Expenses. We have more answers if you have more questions about commercial real estate.
A cash on cash return is simply the annual pre-tax cash flow / total cash invested. This calculation is used to measure the ratio between the assets annual cash flow in relative to the cash invested. We have more answers if you have more questions.
The Return on Investment or “ROI” calculation is used to determine the actual return or “benefit” divided by the total project cost. The ROI can be impacted by things such as the remodel / renovation and replacement expenses as well as the cost of financing and how much was borrowed. ROI = (Current Asset Value – Total Cost of the Investment) / Cost of the Investment. We have more answers if you have more questions about commercial real estate.
The Debt Coverage Ration or “DCR” can often also be called a Debt Service Coverage Ratio “DSCR” compares the assets NOI with the proposed total debt service. It’s typically used by lenders when evaluating if the asset will generate enough income to service the debt and its typical of a lender to require a DSR/DSCR of 1.15 to 1.35. DCR/DCSR = NOI / Total Debt Service. We have more answers if you have more questions.
The loan to value ratio is used by lenders to determine the equity requirement. It’s calculated by taking the total mortgage amount and dividing it by the appraised value. We have more answers if you have more questions about commercial real estate.
The loan to cost ratio is typically used in new construction and lenders use it to determine the equity requirement. It’s calculated by taking the total project cost and dividing it by the appraised value. It’s typical that most lenders will calculate both the LTV and the LTC in determining the borrowers required equity. We have more answers if you have more questions.
A Capital Expenditure is cost incurred to replace, maintain, or improve fixed assets such as buildings, land, etc. Some examples include roof replacements, parking lot replacements, etc. that become an asset and are typically larger expenses and are typically depreciated over time. There are often two factors that differentiate a routine repair or maintenance expense from a capitalized expense and that is “lifespan” and “value”. It’s important to pay attention because often these items need to be budgeted for and in a lot of cases tenant leases do not allow for reserves or there are stipulations on a tenants’ contributions to capital expenses. We have more answers if you have more questions about commercial real estate.