COMMERCIAL LOAN GUIDE

Commercial Real Estate Investment FAQs

September 15, 2020

Are you looking for information on investing in commercial real estate for beginners? Are you perhaps looking to work in the CRE industry and need guidance on where to start? We’ve put together this real estate FAQ to quickly get the answers you need to questions you might have about this business. We hope this blog can help you decide if you want to pursue a career in commercial real estate or if CRE assets are something you want to put in your portfolio.

What is Commercial Real Estate?

Commercial real estate or CRE refers to property used solely for business purposes. CRE’s six categories are office space, retail, industrial, multi-family rentals (apartments with five and more units), land, and miscellaneous. CRE investments provide rental income and the potential for capital appreciation. Also, refer to the wiki definition for commercial property.

Examples of CRE include:

  • your neighborhood Wal-Mart
  • the apartment building next-door
  • that sleek high-rise downtown
  • the five-story suburban office building you work in
  • your cousin’s car wash/auto detailing center
  • the hotel where you last stayed at
  • and many more.

CRE encompasses any type of property (including land) that brings or can potentially bring income from an investment viewpoint. But from a business viewpoint, CRE is any office, retail, medical, hospitality, industrial, and other commercial space that can be purchased or leased for the business’s use.

What is a Commercial Real Estate Broker?

A CRE broker is a professional who has the license to help clients or investors buy, sell, and/or lease commercial real estate. CRE brokers deal exclusively in properties that are used for commercial purposes. Those who want to buy a home need to seek out the help of a residential real estate broker, not a CRE broker.

Think of it this way: A commercial real estate broker is essentially the “middle man” between an investor or business and a building or land they want to lease or purchase.

Also Read: Commercial Real Estate Loan Terminologies

What is a Commercial Real Estate Loan?

Commercial real estate loans are mortgage loans secured by a lien on commercial property. They allow businesses and investors to purchase commercial real estate for investment or business use. Commercial properties are typically sold to entities—such as corporations, LLCs, partnerships, trusts, funds, developers, etc.—instead of individuals. CRE investors usually have to structure their business properly instead of buying commercial properties as individuals to qualify for commercial real estate loans and limit their risk and exposure. 

Commercial real estate loans last anywhere from five to 25 years. They are much shorter than home mortgages that last as long as 30 years. Note that amortization periods of commercial real estate loans can go longer than the loan itself. This allows a commercial entity, for example, to make payments at longer-term rates for a shorter period. A final balloon payment is made at the end of the loan, completing the repayment.

What is a commercial real estate brokerage?

Think of commercial real estate brokerage as investment banking for commercial properties. A CRE brokerage is composed of a team of people that connects commercial property buyers with sellers. CRE brokers who successfully help conclude a CRE transaction are compensated with a deal (a commission).

Connecting the right buyers to the right property involves analyzing and ironing out many factors and variables, which is why brokers are so valuable and vital in the commercial real estate world. If you’re a seller, a brokerage can connect you to a potential buyer network and make selling a bit easier. If you’re a buyer, a brokerage can show you a list of property properties (many of which are not publicly listed) that fit your requirements.

Is there a need to go through a broker to look at commercial properties?

Yes, you are generally speaking. In most cases, you will need a broker to view the property you are interested in. While having a broker is not always or strictly required, you may not get full access to the property without one.

Of course, you can look at properties online without a broker. However, online listings are hardly complete. You can get more insider information and see properties that are not publicly viewable when you work with a broker.

Alternatively, you may be able to talk to a commercial property seller directly to gain entry to the building itself and access to all the information you need. While this is theoretically possible, it’s not recommended. The seller may be unavailable when it’s convenient for you to visit. Most sellers also only allow buyers to see their properties through their brokers.

How much do Commercial Real Estate Agents make in Commission?

Brokers don’t go by any specific number when it comes to CRE commission rates. Each brokerage has different rates, and not all of them make these rates known publicly. You will have to call them to inquire.

Commission rates are typically negotiable, much like the other variables of a CRE agreement. The property’s market value and brokerage are the two main factors that will affect the commission rate. The typical range is between 3% and 10%. It all depends on how much the buyer is willing to pay, the brokerage, and the property itself. The only way to determine the exact number is to inquire directly from the brokerage.

How do you Hire the Right Commercial Real Estate Agent?

Investing in CRE can be so much easier if you have a trusted agent, you can count on to show you good ideals. Knowing how to screen potential agents is essential if you want to narrow down your choices and ultimately finding a good one with whom you will feel comfortable working. Here are some key questions to keep in mind when structuring your inquiry to specific agents or brokerages:

• What are their reputation for honesty, attention to detail, and experience?
• Do they have relevant experience dealing with your particular commercial needs?
• How large is their brokerage?
• How accessible are they?
• How well do they communicate?
• What is their education and training background?
• What are their fees and commission rates?

Some of these questions you can ask the agent or brokerage directly, and some you can ask their previous clients. Be sure to talk to parties who have worked with your prospective brokerage or agent in the past. Ask them how they liked the agent’s work ethics. Ask if there were any problems with the deal and how it was resolved.

What is Commercial Real Estate Investment?

Commercial real estate lending provides financing or mortgages for CRE buyers. Without it, buyers would have to come up with all the funds needed to purchase the property all by themselves. Commercial real estate lenders are essentially like home mortgage lenders—they are in the business of extending loans to buyers who want commercial properties, and they are paid back over time with interest. 

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What are commercial real estate lawyers?

CRE lawyers focus their practice on handling various transactions for commercial real estate properties. These lawyers are either contracted as needed or work solely for CRE brokerages. They may act as general counsel for CRE transactions or get involved directly in the transaction itself. Their job is to help sellers and buyers make informed choices based on what they discover about the commercial property and how the trade may be affected by legal factors within the local government, among others.

What are commercial real estate underwriters?

CRE underwriters are responsible for assessing the risk of a CRE loan. Underwriters are trained to analyze the risk and the value of both the property and the borrower.

Here’s how it works: Any CRE loan offer goes through an underwriter whose job is to scrutinize the loan and measure it against the lender’s risk tolerance. CRE underwriters may evaluate the borrower entity’s credit history, the property’s market value, and other such statistics.

What is the commercial real estate cap rate? 

Short for capitalization rate, cap rate refers to the return rate of a CRE investment based on how much income it is estimated to generate. The cap rate helps an investor figure out the potential return they can expect on their commercial property investment. 

The cap rate is computed by dividing the net operating income by the property’s current market value. To get the net operating income, subtract any operating costs from the commercial property’s annual return. 

What is a letter of intent? 

Letters of intent are documents declaring the intentions of whoever wrote them. In a commercial real estate transaction, this letter describes the terms of the deal. It is used to allow the seller and buyer to agree on the terms of the proposal. 

Are letters of intent legally binding? 

No, letters of intent are typically NOT legally binding. That said, be sure to read everything carefully before you sign.

How much is the tax on commercial real estate?

Taxes on commercial real estate can change dramatically based on several variables. It’s impossible to provide exact and detailed tax information because the answer depends on its location.

Generally speaking, though, commercial property owners need to fill out tax forms with detailed information on the income generated by the property and its value. The amount of taxes you need to pay for the commercial property is impacted by factors such as how much revenue it generates, its expenses, its location, and more. It’s best to consult with industry professionals if you want accurate information based on your location and other relative factors.

Are there differences between buying commercial real estate and buying a home?

Yes. The most significant difference between these two deals boils down to due diligence. In general, residential properties need a quick general inspection, usually lasting no more than a day. Residential purchases are largely emotional; it’s just the nature of buying a home to live in. The closing period is usually also shorter, lasting anywhere from 30 to 45 days.

Meanwhile, commercial property purchases require a higher degree of due diligence. These properties will be used for business purposes, after all, so there is a lot more liability inherent in the property and the land connected to it. This is why commercial real estate inspection processes are much more extensive. The length of time it takes to finish inspections depends on how the property was/is used. Feasibility periods are much longer in CRE deals. Indeed, a CRE purchase can be a long and tedious process.

In commercial properties, how are lease rates quoted?

CRE lease rates are typically quoted by price per square foot, per year, or month.

What are CAM charges?

Common area maintenance or CAM charges are all of the Triple Net (NNN) lease operating expenses, such as insurance, taxes, and maintaining the shared areas. CAM charges are essentially additional fees on top of the base rent. Tenants pay their prorated share of the property’s total CAM charges—a percentage of their rented square footage of the total rentable area.

What are tenant improvements, and who pays for them?

Tenant improvements refer to any additional buildout required by the tenant-user for their intended use of the property. Manor tenant improvements such as adding rooms or installing new HVAC systems and fire sprinklers may necessitate plans, permitting, and contractor hiring.

 As for who pays for tenant improvements, this is negotiated, but the landlord usually pays in one way or another. The landlord can give a tenant improvement “allowance” to the tenant to help fund the improvements and other costs associated with moving into space. Alternatively, the landlord can provide a rent discount. For example, the tenant may get one free month for each year. Those savings get redirected to funding improvements. In both arrangements, the tenant oversees everything.

Some landlords provide a building standard allowance, offering improvement packages that tenants can choose from. If the tenant wants something that is not on the list, the tenant must shoulder those costs. The landlord oversees the improvement project, saving tenants time.

And then there’s the turnkey arrangement. The tenant submits improvement plans to the landlord, who then oversees and shoulders the work’s costs. This gives the tenant the freedom to customize the project without finding a contractor and managing it. This is convenient for the tenant, but they have to be willing to accept the risk that the results might not meet their expectations.

How does a 1031 exchange work?

It’s important to understand how the 1031 exchange works if you own a commercial investment property and sell it and buy another. It is essentially a procedure allowing you as the owner to sell your investment property and purchase a like-kind property asset while deferring capital gains tax. Talk to a commercial real estate expert if you’re interested in a 1031 exchange’s specifics and how the rules, definitions, and concepts apply to your situation.

What types of commercial real estate funding are available?

Even the most seasoned CRE investors sometimes find it frustrating to secure funding for their projects via conventional banking. Traditional processes take too long, and the requirements are rigorous; by the time the loan is approved, another investor has stolen the deal.

Luckily, there are many other options available. Aside from traditional loans, there is a wide range of other CRE funding available for investors. These include bridge money, hard money, jumbo, stated income, construction, and permanent loans. The best way to find the most suitable funding solution for your next commercial real estate project is to talk to our consultants here are Capital Investors Direct. We use the latest financial technologies to offer buyers and investors a wide range of financing solutions for varying commercial real estate funding requirements.

We know that every CRE deal is unique, with a specific set of challenges and conditions. Our CRE placement professionals can quickly evaluate the circumstances and structure of a financial solution that best suits your requirements and your project’s needs. Our job doesn’t end when you get funded; we follow up on your progress and can provide further assistance if you need us. You can count on us to be with you throughout your commercial real estate investment journey.

 

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