Commercial Real Estate Frequently Asked Questions
What does a commercial real estate broker do for a client?
A licensed commercial real estate broker will represent the client in a leasing or purchase transaction of commercial real estate (CRE) assets. The broker will provide objective advice and counsel as to the suitableness, availability, and pricing of properties. The CRE broker has access to proprietary databases for commercial inventory and is well versed in searches of the databases to find the right fit for the client. A broker and their brokerage will have networks of buyers and sellers that you as a client can connect to to fulfill your commercial real estate needs.
What types of commercial real estate are there?
Commercial real estate properties fall into several categories depending on the end use of the client. There are properties that can be leased by a single user, investment properties that can be bought by an investor for return on investment or the client user can build their own facility from the ground up for their use. There are many variations of commercial real estate usage and investment depending on the clients needs and wants.
Why should I buy or lease commercial real estate?
Commercial real estate is an asset class that allows an investor to diversify out of other asset classes to reduce asset portfolio risk and to provide income and tax benefits that are unique to real estate.
If you are a business looking to expand or set up a business location a lease of an office, manufacturing facility or medical office may be what you need. Leasing allows flexibility if your business moves, needs more space or changes it’s business focus or location. Have this discussion with your broker as they have probably encountered a similar situation with another client and might have some good ideas on what you should be searching for.
How do I borrow money for a commercial real estate purchase?
A commercial real estate loan is unlike a conventional residential mortgage. It is usually secured on the property itself and the lender looks at the cash flow from the property as opposed to the individual’s income. A broker can help you look at purchase properties for investment and determine if the property financials will satisfy a lender.
CRE loans can last anywhere, on average, from between five to twenty years, which is much shorter than a residential mortgage and the amortization schedules can differ. Fees and points can be higher than a residential mortgage as CRE loans are more complex and are often sold to third party investors.
One of the best ways to obtain a good commercial mortgage is to work with your commercial broker who usually has good referrals to a lender that will fit your needs. Not all banks and lenders do all types of properties, so this is an area in which a knowledgeable broker can add a lot of value for the client. A broker can also tell the client in advance what sort of paperwork and documentation will be needed.
What are the tax benefits of commercial real estate?
Commercial real estate has some very attractive tax benefits for investors and lessees. An owner of a CRE property can deduct all reasonable expenses that are incurred in the operation of the property including taxes, loan interest, utilities, maintenance etc.
There are specific rules on some expenses which you should work with your tax counsel on to meet the specific tax agency standards for deductibility and expensing. The Federal tax code also has Section 1031 provision in it that allows you to defer the gain on sale by reinventing the proceeds from the sale of your property into a new property. This Code Section is very unique to real estate and can build wealth if the investor so chooses to elect this provision.
Keep in mind though that the rules for this exchange are very precise as to timing and fund flow, so engaging qualified professionals to advise you in the transaction is a necessity. One mistake can expose your entire gain to taxation and the deferment will be invalidated.
What is the difference between buying commercial real estate and buying a single family residence?
A single family residence for a personal purchase is usually based on subjective and emotional factors and considerations. Type of house, neighborhood, school districts, and other similar decisions. All go into the purchase criteria.
Commercial real estate is based on the numbers and the business and investment needs of the client, and is usually a very objective review of needs such as return on investment, capitalization rates, space needs, personnel and staff considerations, and other such factors.
Residential real estate investing for cash flow and appreciation (single family homes only) is usually not considered to be commercial real estate unless it involves multi-unit properties like apartments, student housing, etc. If you would like to do this type of investing, we have many good residential broker referrals from our company.
Can’t I do it myself without a broker?
Of course. If you have the time to spend away from your business and you know the markets, anyone can search for investment properties or spaces to lease.
If you are comfortable negotiating with landlords and sellers, have access to the latest market offerings and can negotiate with lenders, you can do it yourself. We look at our brokers as a value add to your search that will save you time and money and keep you away from sub-par investment real estate that you may find on the public market that have been sitting, as they may be overpriced or difficult to finance.
Our brokers also have access to lease comparison programs that can look at all the hidden costs of lease that a once in a while non-agent lessee may not notice. Just as you would not want to represent yourself in court or argue with a tax agency yourself, you may want to seek competent real estate counsel as well.
How is the broker paid for the transaction?
Brokers are paid by the commission model, which is usually a percentage of the total transaction value. The agents receive the commission payment when the lease or purchase transaction closes and the ownership transfers.
Commission rates vary from region to region and type of property, but it is always the best practice to have this discussion with your representative before you begin your search. Your broker can review the methodology of commission calculations with you. As a general rule, but by no means the absolute rule, the landlords and sellers of property offered for lease or sale are usually the parties in the transaction that pay the brokers in the deal.
Who does the broker work for?
Brokers usually represent either the seller/landlord (listing side) or the buyer/tenant side. It is important to know which side your broker works for, and there are usually forms that spell out the agency (legal term for representative role in the transaction), so make sure you know and define this before you engage the broker.
What is a letter of intent (LOI) and what are its benefits?
Commercial real estate often uses a methodology of submitting an offer on a property known as a Letter of Intent (LOI). Essentially, it is a non-binding memorandum that spells out the deal terms as agreed on by both parties (there are binding letters, but these are rare in most transactions). Each party can review the terms and decide if there need to be changes or the terms are good as-is.
An LOI can save a lot time and money by coming to an agreement without the costly revisions of formal sale contract or lease contract. At the point both parties agree on the terms of the deal, those terms can then be moved onto a formal Purchase and Sale agreement or Lease Agreement.
Using LOI’s will usually save legal fees and time make the terms of the transaction far more apparent than if those terms are buried in legalese in a formal contract. Brokers usually have a standard format they use for Letters of Intent.
What’s the next step if I want to buy or lease commercial real estate?
The next step is to contact a commercial brokerage firm and arrange to meet with a broker to review your needs. You should have a pretty good idea of the type of property you want to pursue and your financial capabilities to define the purchasing power of your transaction when you meet.
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