Commercial Real Estate

Commercial Real Estate Investing

 Advantages: Most commercial properties are rented with a NNN triple net lease and the tenant is responsible for all expenses. Commercial has also the great advantage that requires much less  maintenance from the owner, most commercial retail large buildings are NNN but even if you own a small office, this one only has a bathroom with a sink and a toilet and maybe an AC Heat unit, that is all that the owner is responsible in most cases.  

If you rent a single family home you have to mantain washer, dryer, stove, dishwasher,AC, Heat, roof etc.

Disadvantages: if commercial properties are vacant it might take a long time to find a tenant ( much longer than finding a tenant for a house).

Leasing: while residential lease are usually on a per month fee some commercial leases are more complicated than a Goldberg machine, I am not sure why, maybe job safety for commercial realtors ?

Usually the landlord has to give monetary concession in order to help getting a tenant.  Also, commercial properties take longer to sell in case cash in needed out fast. 

Commercial real estate is classified in Classes which represent the condition and amenities of the property

CLASS A Top Properties and Locations new or recently renovated ( Highest rent, high quality tenants, highest prices, lowest cap rates ,lower risk )

CLASS B  Good but not the best locations / conditions

Good rents, good tenants, in the middle between A and C

CLASS C Often outdated, near the end of their lifespan, not the best locations. ( Highest vacancies, lowest quality tenants, highest cap rates because they are higher risk)

Always consider Highest and Best Use possibility for the property Keeping the same or changing the use?  A home in a town center will have a different value if it is proposed as residential vs commercial use.  If you are selling make sure you sell for the best use of the property that should bring the highest value.

Besides the class distinction above we have

MULTIFAMILY:

Condominium : each unit is owned individually

Multifamily: normally one entity owns the entire building and rents it out to tenants – Less sensitive to economic ups and downs. Relatively stable asset

RETAIL

OFFICE

Need low customization

INDUSTRIAL

Heavy industrial: Need a lot of customization

Light Industrial: need low customization – Popular in industrial parks usually 80-90% warehouse with 10-20% office

SPECIAL USE PROPERTIES

Restaurants Bars and Night Clubs are linked to the economic cycle

ZONING

Another important factor in Commercial real estate is Zoning. The purpose of zoning is to separate residential from industrial and agricultural areas. Before buying it is important to know zoning. Make sure there is no caveat that restricts further the use of the property

APPRAISAL

COST APPROACH: Basically is the cost of building a similar structure. The newer the building the better is this method.

Land Cost + Cost of Builing – Depreciation

If the building is very old the cost approach should not be used

INCOME APPROACH ( For stabilized properties )

Need accurate NOI

Direct Capitalization approach

Value = NOI / CapRate

Use also CAP rate from similar properties on the market. Using comparable properties we can estimate the CAP rate of an unrented property

• Discounted Cashflow Method

with a stabilized NOI you can calculate the value using Discounte Cash Flow. DCF are more common in corporate finance

DIRECT COMPARISON APPROACH ( used also in residential )

How much would it cost to acquire a similar property? Most accurate in high-density areas with high samples sizes.

Calculate the price per square foot of similar properties