Commercial Real Estate FAQ’s

When trying to understand the real estate market and what the professionals within the industry do, it helps to answer a few questions that are important about the industry. The easiest way is to start at the beginning with what people do who are in the career of commercial real estate.

 

What does a commercial real estate broker do?

 

A commercial real estate broker is a type of professional who has been licensed to help various clients buy, sell or lease real estate properties. These properties are generally used for commercial purposes. If someone wants to use a property for their home, they will need to seek out a residential real estate broker instead.

An easy way to understand what a commercial real estate broker does is to imagine that they are the “middle man” between a business and a property or building they want to purchase for their business.

 

What is in a commercial real estate loan?

 

A commercial real estate loan is a type of mortgage loan that has been secured by a lien (legal right) on property for commercial purposes. These loans are used to allow businesses to make a larger transaction and purchase of commercial real estate for their business. Property that has been purchased for commercial intent is usually sold to entities (corporations, partnerships, developers, trusts, funds, etc.), rather than individuals.

Commercial real estate loans can last, on average, anywhere between five and twenty years, which is much shorter than its residential counterpart, which is often times a thirty year period. The amortization period of a commercial real estate loan can also be longer than the term length of the loan itself. This structures the loan in a way that allows commercial entities to make payments for a shorter period of time at rates designed for longer terms. At the end of the loan, a final “balloon payment” will be made to complete the loan’s repayment.

 

What is commercial real estate brokerage?

 

Commercial real estate brokerage can be compared to investment banking, but for commercial properties. A commercial real estate brokerage is a team of individuals who are part of a firm that connects property sellers with property buyers. Brokers who have helped with a commercial real estate transaction will take a percentage of the deal, known as a commission.

There are a lot of factors and variables that are involved with being able to connect the perfect buyers to specific pieces of property, which is why real estate brokers are so important and valuable in the real estate world, both commercial and residential.

As a seller of commercial real estate, a brokerage has a network of individuals and firms to work with that can connect you to potential buyers.

As a buyer of commercial real estate, a brokerage has a list of property sellers who can be recommended for your commercial entity or business.

 

What is commercial real estate lending?

 

Commercial real estate lending is the process in which a buyer of commercial property acquires financing or mortgages necessary to make the property purchase. Without commercial real estate lending, a potential buyer would need to have all of the funds necessary to purchase the property. Instead, commercial real estate lending allows businesses and commercial entities to acquire financing (like a loan) to purchase their property and pay the lender back over time.

 

What do commercial real estate lawyers do?

 

Commercial real estate lawyers are responsible for handling various real estate transactions for commercial properties. Lawyers who specialize in commercial real estate can either work for an attorney, who are then contracted as needed, or work directly for commercial real estate brokerages. Lawyers may work as general counsel for transactions or may be directly involved in the transaction itself.

Commercial real estate lawyers can help buyers and sellers make the right choices based on information they discover about the property, legal information within the local government, and more.

 

What should you ask your commercial real estate agent?

 

Knowing what to ask potential commercial real estate agents can help you to narrow your results to not only finding a qualified agent, but one you will feel comfortable working with. Below are a few questions you can use to help structure your inquiry to specific commercial real estate agents or their brokerages.

 

  • What is agent’s reputation for experience, honesty, and attention to detail?
  • Does the agent have the experience dealing with commercial needs that my company has?
  • How large is the agent’s brokerage?
  • What is the accessibility of the agent?
  • How good is the level of communication of the agent?
  • How educated is the agent?
  • What are the agent’s strong and weak points?
  • What are the fees and commission rates of the agent and brokerage?

You can ask some of these questions directly to the brokerage or agent, or you can ask other people in your industry who have worked with that agent or brokerage in the past. This will help you to get additional feedback about the agent and their brokerage.

 

What do commercial real estate underwriters do?

 

A commercial real estate underwriter is responsible for helping in the assessment of risk of a commercial real estate loan. The underwriter must be able to analyze the value and risk of both the commercial property, as well as the borrower for the loan.

When a commercial real estate loan is offered, it must go through the commercial real estate underwriter, who will then scrutinize the loan and compare it against the risk that the lender is willing to take on. The underwriter may evaluate statistics like the credit history of the entity taking on the loan, as well as the market value of the commercial property.

 

What is commercial real estate cap rate?

 

Commercial real estate cap rate (which is short for capitalization rate), is the rate of return of an investment in commercial real estate, based on the amount of income it is expected to generate. This statistic is generated to help an investor determine the potential return on their investment in the property.

The commercial real estate cap rate of a property can be determined by taking the net operating income and dividing it by the current market value of the property. The net operating income can be determined by looking at the annual return on the property after subtracting any operating costs of the property.

 

What is the letter of intent?

 

A letter of intent is a document that has been written up to declare the intentions of the writer. From a commercial real estate point of view, the letter of intent describes what the terms of the real estate transaction are. The letter of intent is used to allow two parties (the property seller and the property buyer) to agree on all terms of the proposed deal.

 

Do I need a broker to look at properties?

 

Generally speaking, a broker (who is often times part of a larger firm, called the brokerage) is needed to allow potential buyers access to view the property. While it’s not a strict requirement for a buyer to view properties, they may not be able to get the same levels of access to the property without them.

A buyer could choose to view properties online, which does not require a broker. There may be difficulty in finding some of the properties online, however, and you won’t have as detailed of information as a broker can get.

Alternatively, you could choose to talk to a seller directly to gain access to additional information or to be granted access to enter the building itself. While this is a possibility, not all sellers are going to be available at times that are convenient for you, or may choose to only allow buyers to visit through their broker.

 

How much is commercial real estate taxed?

 

Commercial real estate taxes can change drastically based on many different variables. It’s not possible to provide exact, detailed information in a FAQ as the answer will depend on you, the property, and the location the property is in.

Generally speaking, governments require business and property owners to fill out tax forms that will provide them with information about the income and value of your property. The variables that impact the amount of taxes you will have to pay for your commercial property can include the following: income generated from the property, expenses of the property, location of the property, and more.

You can check out this NOLO article that talks about calculating commercial real estate taxes on your property.

We suggest talking with industry professionals who can provide more accurate information and data based on your location and other relative factors for your business.

 

How much is commercial real estate commission?

 

When it comes to commercial real estate commission rates, there is no specific number that brokerages need to go by. Each brokerage will have different commission rates for their brokers and not all brokerages will provide their rates to the public, except by inquiry.

Commission rates are negotiable, just like other variables that are part of a commercial real estate agreement. The two primary factors that will impact the commission rates are the brokerage themselves and the market value of the property (or the transaction value).

Certain types of commercial real estate properties will have higher commission rates and others will have lower rates on average. It’s not uncommon to see commission rates ranging between 3% to 10%, but it all depends on the property itself, how much a buyer is willing to pay, and the brokerage.

The easiest way to find out the commission rate is to call a commercial real estate brokerage and ask.

If you have any further questions about commercial real estate, feel free to send us a message or get a hold of us and we’ll be happy to help.

 

What is the difference between a commercial real estate deal and buying a house?

Generally the biggest difference comes down to due diligence. Residential purchases deal with general inspections which is typically a quick one day inspection. Residential purchases are also cheaper and are more likely a homestead. Residential deals are emotional purchases that can usually be closed withing 30-45 days. Commercial property purchases involve property that is being used for business purposes, so there is more liability in the property and the land connected to it. The inspection process is extremely extensive, depending on prior usage, so the feasibility period is much longer and closing on commercial real estate deals can be a very long process.

How are lease rates quoted for commercial property?

Commercial lease reates are usually quoted by price per sq.ft. per month or per year.

 

What are CAM charges?

These are all of the NNN (referred to as Triple Net) charges such as,taxes, insurance, and common area maintenance.

 

Is a letter of intent legally binding ?

Typically letters of intent are NOT legally binding. However, it is important to read everything you sign!

 

What are tenant improvements?

Tenant Improvements are any additional build out required by user for it’s intended use. This money is allocated by the landlord and may require plans, permitting, and the hiring of contractors.

 

Who pays for tenant improvements?

It is negotiated. Tenant usually pays and the landord can credit a certain amount of that.

 

What is a 1031 exchange?

This is an investment transaction where an investor that sells a property can transfer that amount over to another property to purchase. They then have a limited time frame to identify the property and close it.

 

How do I list a property for sale or lease?

Enter into a legal binding listing agreement with Greenberg & Company by contacting us today!