FAQ

In commercial real estate, a Letter of Intent (LOI) is a preliminary agreement between two or more parties outlining the general terms and conditions of a proposed transaction before formal contracts are drafted. While the LOI is typically not legally binding, it serves as a framework for negotiations and ensures that all parties are in agreement on the basic points before moving forward with more detailed and legally binding contracts.

Escrow refers to a financial arrangement in which a neutral third party, known as an escrow agent, temporarily holds funds, documents, or assets on behalf of the buyer and seller until specific conditions of the transaction are met. This ensures that both parties fulfill their contractual obligations before the funds or property are exchanged. Depending on what area of the country you are in, an escrow agent can be either an escrow company, an attorney(s), or a title company.

CAM fees, or Common Area Maintenance fees, are charges that tenants in a commercial property (such as an office building, shopping center, or industrial complex) pay to cover the costs associated with the general maintenance and operating expenses of the shared areas in the property. These fees are typically in addition to base rent and are a way for landlords to recover expenses related to the upkeep of the property’s common areas.

A 1031 exchange, not 1030, refers to a tax-deferral strategy used in real estate investing under Section 1031 of the U.S. Internal Revenue Code. It allows investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds in a ”replacement” property. The purpose is to encourage real estate investors to keep their capital working by reinvesting it in other properties, without paying immediate taxes on the gains from a sale.

STNL stands for Single-Tenant Net Lease, which is a type of commercial real estate lease in which one tenant occupies the entire property and is responsible for paying not only rent but also most, if not all, of the property's operating expenses. This typically includes property taxes, insurance, maintenance AND repair costs—hence the term “net lease” – as the rent received is the “net” amount to the landlord.

A Triple Net Lease (NNN) is a type of lease agreement commonly used in commercial real estate where the tenant is responsible for paying three key operating expenses of the property in addition to their base rent. The "triple" refers to the three "nets" that the tenant covers: property taxes, property insurance, and maintenance/repair costs.

A ground lease is a long-term lease agreement in which a tenant is allowed to develop or use a piece of land owned by a landlord, typically for a period ranging from 30 to 99 years. Under a ground lease, the tenant leases only the land, not any existing structures or buildings. The tenant is typically responsible for building and maintaining improvements (such as commercial buildings, apartments, or other structures) on the land, and when the lease term expires, the ownership of the land, along with any improvements made to it, typically reverts back to the landlord unless otherwise specified.

The capitalization rate (or cap rate) is a metric used in commercial real estate to estimate the potential return on investment (ROI) for an income-producing property. It represents the ratio between the property’s net operating income (NOI) and its current market value (or purchase price). The cap rate is typically expressed as a percentage and is used by investors to compare different investment properties, assess risk, and determine the value of a property relative to its income potential.

Cap Rate Formula:

Cap Rate=Net Operating Income (NOI)/Property Value or Purchase Price×100

GRM stands for Gross Rent Multiplier, a valuation metric used in real estate, particularly in residential and multifamily property investments, to estimate the value of an income-producing property based on its gross rental income. It is a quick and simple method to assess how long it will take for the property's gross rental income to pay off the property's purchase price, assuming no expenses. Unlike more detailed calculations like the cap rate, the GRM does not take into account property operating expenses, vacancies, or financing costs, and may not be an accurate assessment of the value of the property due to this.

CPI stands for the Consumer Price Index, which is a measure used to track changes in the average prices paid by consumers for a basket of goods and services over time. It is a key indicator of inflation, helping to reflect the purchasing power of a currency. Governments and financial institutions use the CPI to assess price changes in an economy and to adjust economic policies. Landlord’s may tie rental increases to CPI increases to mitigate their risk of high expense growth. NOTE: There are different CPI Indicis that vary from region to region, in a commercial lease setting, the CPI used is typically for the nearest large metro near the property in question.

Key Money is typically funds that are given to either a landlord, or a sublessor in exchange for the new tenant being allowed to take over the space. Many times the key money will include FF&E, and sometimes the business operations.

When handling complicated transactions like leasing, purchasing, selling, or investing in commercial buildings, it is helpful to work with a commercial real estate broker. In addition to saving time and guaranteeing informed decisions, brokers offer extensive market knowledge, negotiating skills, and access to unique listings or off-market options. They streamline the process by taking care of paperwork, property searches, and legal difficulties. Brokers can give you access to resources and bargains you might not uncover on your own because they have established networks of industry professionals, offer risk management through careful due diligence, and offer insightful information on local market trends. Brokers assist you optimize value, reduce risks, and negotiate advantageous terms whether you're trying to buy or sell a piece of real estate that generates income.

In commercial real estate transactions, the landlord or seller typically pays the agent’s commission. When a property is leased, the landlord usually covers the commission, which is often a percentage of the total lease value over the term. For property sales, the seller typically pays the commission, which is then split between the listing agent and the buyer’s agent. However, in some cases, particularly in competitive markets or specific deals, we do see buyers or tenants agreeing to cover part or all of the broker's commission to secure the services of a commercial real estate agent or to close a favorable deal. The structure of who pays the commission can vary depending on the market conditions and the specifics of the negotiation.

A tenant representation agreement is essential because it formalizes the relationship between a tenant and a commercial real estate broker, ensuring the broker’s commitment to act solely in the tenant’s best interest. By signing the agreement, tenants gain access to the broker's expertise, market knowledge, and professional negotiation skills, helping them secure favorable lease terms and access to off-market opportunities. It also encourages the broker to dedicate time and resources to the tenant's property search, providing efficient and personalized service. Additionally, the agreement clarifies the scope of services and commission arrangements, protecting both parties from misunderstandings and ensuring transparency throughout the process.

A typical commercial lease usually ranges from 3 to 10 years, depending on the type of property and the tenant’s needs. Retail leases often fall in the 5 to 10-year range, as businesses want stability and landlords seek long-term commitments. Office leases typically range from 3 to 7 years, while industrial leases are often longer, ranging from 5 to 10 years or more, especially when significant build-out or customization is involved. Lease length can be negotiated based on the tenant’s business plans, landlord preferences, and market conditions, with shorter or longer terms available depending on flexibility or expansion needs.

A building is considered a commercial property when it is primarily used for business activities or to generate income, rather than for residential purposes. Commercial properties include office buildings, retail spaces, warehouses, industrial facilities, hotels, and multi-family apartment buildings with five or more units. The key factor is the building’s intended use—whether it houses businesses, stores, or other income-producing operations. Zoning laws typically designate properties as commercial, and they are often subject to different regulations, taxes, and lease structures compared to residential properties.

• Location: Ensure high foot traffic, visibility, walkability, residential density in the immediate area, traffic counts, income demographics and proximity to complementary businesses or other traffic generators.

• Budget & Lease Terms: Set a budget, including rent and additional costs like utilities and CAM fees, and be ready to negotiate lease terms.

• Zoning: Verify the space is zoned for your business.

• Layout & Condition: Assess the size and condition of the space, and understand who pays for renovations (typically the tenant).

• Accessibility & Parking: Ensure easy access and sufficient parking.

• Lease Length: Choose a term that suits your business growth plans and negotiate flexibility.

• Competition & Synergy: Analyze nearby businesses for competition or potential synergies.

• Utilities & Costs: Clarify who covers utilities and maintenance.

• Signage: Check signage restrictions for visibility.

• Location: Ensure proximity to highways and transportation hubs for efficient logistics.

• Zoning & Permits: Verify industrial zoning and necessary permits for your operations.

• Size & Layout: Ensure the space fits your operational needs, with room for future expansion.

• Ceiling Height & Loading Docks: Confirm sufficient height and access to loading docks or bays.

• Power & Utilities: Ensure adequate electrical capacity (or type of power), water, and HVAC for your operations.

• Lease Terms & Costs: Plan for rent, utilities, and fees, and negotiate lease terms and rent escalations.

• Accessibility & Parking: Check for truck access, employee parking, and maneuvering space.

• Environmental Compliance: Ensure compliance with environmental regulations and safety standards.

• Security & Safety: Verify safety standards and the availability of security measures.

• Modification Flexibility: Ensure the lease allows for necessary modifications.

• Location: Ensure accessibility for employees and clients, with nearby transportation and amenities.

• Size & Layout: Choose a space that fits your current team and allows for growth, yet efficient use of the space..

• Budget & Lease Terms: Set a budget including rent and fees, and review lease terms and renewal options.

• Amenities & Services: Check for parking, security, internet, and nearby conveniences, such as lunch restaurants, gyms for employees, etc...

• Lease Flexibility: Look for flexible terms, including shorter leases or subleasing options.

• Parking & Accessibility: Ensure ample parking and ADA compliance.

• Technology & Infrastructure: Confirm the space has adequate internet and power support.

• Customization: Clarify who covers renovation costs and if changes are allowed.

• Environment: Evaluate natural light, noise levels, and surroundings for productivity.

Investing in commercial real estate offers higher income potential, longer leases, and less hands-on management compared to residential real estate. Tenants often cover expenses through leases like triple-net (NNN), and property value is tied to income, allowing for strategic growth. Additionally, there typically is less governmental oversight and it also provides tax benefits and opportunities for diversified income streams, making it a strong choice for long-term investors.

Within each asset class, there are sub-classes that some investors decide to only invest in. The most common asset classes of commercial properties for investment include:

Office Buildings – Single or multi-tenant properties used for business operations.

Retail Properties – Shopping centers, strip malls, or standalone stores for retail businesses.

Industrial Properties – Warehouses, distribution centers, and manufacturing facilities.

Multifamily Properties – Apartment buildings or complexes with five or more units, and mobile home parks.

Hospitality Properties – Hotels, motels, and short-term accommodations.

Specialty Properties – Healthcare facilities, self-storage units, and other niche investments.

When investing in commercial real estate, consider these key risks:

Market Risk – Changes in the economy or local market can affect demand and property values.

Tenant Risk – Vacancies or tenant defaults can disrupt cash flow.

Liquidity Risk – Selling commercial properties can take time, especially in a down market.

Financing Risk – Rising interest rates or difficulty securing loans can impact profitability, especially since most commercial real estate loans are not fully amortizing, but due in 10 years.

Operational Risk – Property maintenance, management, and unexpected expenses can strain finances.

Regulatory Risk – Zoning laws, tax changes, or new regulations may affect property use or income.

Mitigating these risks requires thorough research, diversification, and professional guidance.

The value of a commercial property is typically determined using these methods:

Income Approach – Calculates value based on the property's income potential, using metrics like Net Operating Income (NOI) and Capitalization Rate (Cap Rate): Value = NOI/Cap Rate

Sales Comparison Approach – Compares the property to similar recently sold properties in the area, adjusting for differences in size, condition, and location.

Cost Approach – Estimates value by adding the cost to replace or reproduce the property minus depreciation, plus land value.

Highest and Best Use – There are times when a property’s land value is greater than current “As Built” value. This may happen in areas that have been upzoned.

Each method may be used depending on the type of property, market conditions, and available data. Working with a commercial real estate professional ensures an accurate valuation.

To identify a good investment property, focus on key factors such as location, ensuring the property is in an area with strong economic growth, demand, and accessibility. Evaluate the property’s income potential by analyzing rental income, tenant quality, and lease terms for consistent cash flow. Immediate area metrics should include density and income demographics in a 1, 3, 5 mile range, traffic counts, visibility and other traffic generators in the area. Assess market trends, including vacancy rates and future development in the area, while considering the property’s condition and potential renovation costs. Conduct thorough due diligence and market research to make an informed decision. A good broker that works in the area can assist in gathering this information for you.

The due diligence process in commercial real estate involves thoroughly investigating a property before finalizing a purchase to ensure it meets your investment goals and has no hidden issues. It typically includes reviewing financial records, leases, zoning compliance, property condition, environmental assessments, and title history. This process is crucial because it helps identify potential risks, uncover liabilities, and confirm the property's value, allowing you to make an informed decision and avoid costly surprises after the transaction.

Several financing options are available for purchasing commercial properties, including:

Traditional Bank Loans – Fixed or variable-rate loans with terms typically ranging from 5 to 15 years.

Small Business Administration (SBA) Loans – Government-backed loans, such as the SBA 7(a) or 504, for eligible businesses purchasing commercial real estate.

Commercial Mortgage-Backed Securities (CMBS) – Loans bundled into securities and sold to investors, offering flexible terms.

Private Financing – Loans from private lenders or individuals, often with shorter terms and higher interest rates.

Bridge Loans – Short-term loans designed for transitional properties or renovations before securing permanent financing.

Owner Financing – The seller acts as the lender, offering flexible terms and reduced upfront costs.

When purchasing a commercial property, plan for these additional costs beyond the purchase price:

Loan Costs – Fees for loan origination, appraisals, and interest during the financing process.

Closing Costs – Legal fees, title insurance, escrow fees, and recording charges.

Property Inspection and Survey – Costs for inspections, environmental assessments, and boundary surveys.

Taxes – Transfer taxes, or recording fees.

Insurance – Commercial property insurance to protect against risks.

Renovation and Repairs – Budget for any necessary improvements or maintenance.

Legal and Professional Fees – Costs for attorneys, accountants, or consultants during the transaction.

Ongoing Operating Costs – Utilities, property taxes, property management fees, and regular maintenance expenses.

Investing in commercial real estate offers several tax benefits, including:

Depreciation – Deduct the property’s depreciation over time, reducing taxable income.

Mortgage Interest Deductions – Deduct interest paid on loans used to finance the property.

Operating Expense Deductions – Write off property-related expenses, such as maintenance, insurance, and property management fees.

Capital Gains Tax Deferral – Use a 1031 Exchange to defer taxes on profits by reinvesting in another investment property.

Tax Credits – Benefit from federal or state programs offering credits for historic preservation, energy efficiency, or development in specific zones.

Pass-Through Deduction – Eligible investors can deduct a portion of qualified business income from commercial properties.

A commercial real estate broker can help you find the right investment property by leveraging their market expertise, industry connections, and negotiation skills. They provide insights into local market trends, identify properties that match your investment goals, and evaluate potential opportunities using financial metrics like cap rates and ROI. Brokers also assist with due diligence, including reviewing leases, property conditions, and zoning compliance, ensuring you make informed decisions. Additionally, they handle negotiations, guide you through the transaction process, and may have access to off-market deals, increasing your chances of finding a lucrative investment. Many times a real estate broker can be your best friend in mitigating risks, and finding the best property that fits your budget, and investment goals.

Signing an exclusive agreement with a broker is not always required (although some states like California now require it), but it has advantages. An exclusive agreement ensures the broker is fully committed to your investment goals, dedicating time and resources to finding the best opportunities. It also clarifies expectations, including services provided and fees. The decision depends on your preferences and the level of service you need, but a clear agreement helps avoid misunderstandings.

The vacancy rate refers to the percentage of currently unoccupied commercial spaces available for lease, while the availability rate includes both vacant spaces and those that will soon be available, such as properties with upcoming lease expirations, subleases, or spaces under construction. The vacancy rate gives a snapshot of currently empty spaces, while the availability rate provides a broader, more forward-looking view of the market by accounting for spaces that are still occupied but will become available soon.

• Gross Lease: The tenant pays a fixed rent, and the landlord covers all property expenses (taxes, insurance, maintenance, utilities).

• Net Lease: The tenant pays rent plus some or all property expenses:

  • Single Net (N): Tenant pays rent and property taxes.

  • Double Net (NN): Tenant pays rent, taxes, and insurance.

  • Triple Net (NNN): Tenant pays rent, taxes, insurance, and maintenance/repairs.

• Modified Gross Lease: Rent covers some expenses, while others are split between tenant and landlord.

• Percentage Lease: Tenant pays base rent plus a percentage of their gross sales, common in retail.

The key difference between NNN (Triple Net Lease) and STNL (Single-Tenant Net Lease) is that NNN refers to a type of lease structure, while STNL refers to the occupancy arrangement of the property.

• NNN (Triple Net Lease): This is a lease structure where the tenant is responsible for paying not only rent but also the property’s operating expenses, including property taxes, insurance, and maintenance. This lease type shifts most of the financial responsibility to the tenant.

• STNL (Single-Tenant Net Lease): This refers to a property type or occupancy arrangement, where a single tenant occupies the entire property. Often, STNL properties are leased under an NNN lease structure, but STNL refers to the fact that there is only one tenant, rather than a multi-tenant arrangement.

Additionally, many STNL leases have a “self maintenance” clause, putting the responsibility on the tenant to maintain the premises and pay the taxes and insurance directly, this is different under a NNN lease with multiple tenants, where the landlord would pay for the taxes, insurance and maintenance, but bill back each tenant their proportionate share based upon the percentage of the center that they occupy.

In short, NNN describes the type of lease, while STNL describes the occupancy, with many STNL properties often using NNN lease structures.

The key difference between CAM (Common Area Maintenance) and NNN (Triple Net Lease) lies in what they cover and their scope within a commercial lease.

• CAM (Common Area Maintenance): CAM refers to expenses specifically related to maintaining and operating the common areas of a property, such as parking lots, hallways, landscaping, and building security. These costs are typically shared by tenants in a multi-tenant property based on their proportionate share of the space. CAM fees are just one component of the overall expenses tenants may be responsible for in certain leases.

• NNN (Triple Net Lease): NNN is a lease structure where the tenant is responsible for paying three key categories of expenses: property taxes, insurance, and maintenance and repair costs. The "maintenance" portion of NNN usually includes CAM expenses, but also covers other maintenance items related to the property as a whole, including capital expenditures. In an NNN lease, the tenant also pays property taxes and insurance costs, not just common area-related expenses.

In short, CAM fees are part of the operating expenses associated with shared spaces in a property, while NNN covers a broader range of expenses, including CAMs, property taxes, and insurance.

Environmental assessments for commercial properties, typically part of due diligence, identify potential environmental risks like contamination or hazardous materials. A Phase I Environmental Site Assessment (ESA) includes:

1. Site History Review: Checking past uses of the property for contamination risks.

2. Records Search: Reviewing public environmental records and past reports.

3. Site Inspection: Inspecting the property for visible signs of contamination.

4. Interviews: Speaking with current or past owners/tenants for information.

If risks are found, a Phase II ESA may involve:

5. Soil and Water Testing: Sampling to check for contaminants.

6. Air Quality Testing: Measuring hazardous airborne substances.