Commercial real estate (CRE) is an investment asset that produces income typically through leases. Property types include retail, office, industrial, multifamily, hotel, and self-storage uses. Individuals invest in CRE either directly or indirectly to receive annual income, income tax benefits, and capital appreciation.

In general terms, it is not understanding risk associated with tenant leases, property operations, market supply and demand, property condition, and demand drivers, the key is understanding the risk in the context of expected return.Your goal should be to understand the risk factors, and then understanding any mitigants or management factors during your ownership period.

An estoppel is a document signed by the tenant (or tenants) confirming their financial rental terms, rights contained within the lease (i.e. termination), that the Landlord (or Seller) has not defaulted on its lease obligations, and that there is no pending litigation. Tenant estoppels should be received and understood by buyers for all purchase transactions. Lenders will also request tenant estoppels associated with a new or refinancing loan.

In all cases, physically inspect the property, drive the neighborhood and try to visit the area both during the day and in the evening. While in the local area, an inquiry should be made to verify zoning, code violations, and property tax increases that may result from a transfer of ownership. Always perform a Google search of the property address, property name and seller’s name to identify any negative or positive Google postings.

A commercial real estate loan provides leverage and reduces the amount of cash a borrower is required to contribute to close a transaction. Failure to make payments will result in default and possible loss of the property due to foreclosure.
Commercial real estate loans can be recourse or non-recourse with payment terms ranging from five and 15 years. 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.

The primary reporting documents include a tenant rent roll, property operating statement, and balance sheet. The property operating statement and balance sheet should correspond to the borrower’s tax return. Other reports are an accounts receivable aging report and accounts payable report. The quality and completeness of these reports provide information and value to an owner when selling and/or refinancing a property. The reporting and filing of annual income tax returns with reporting of an investment property is critical.

CRE Answers does not provide this type of service.

Investing in commercial real estate can be very rewarding, both personally and financially. For many, the objective of investing in commercial real estate is to attain cash flow on invested capital, capital appreciation due to an increase in real estate values, income tax benefits, and investment portfolio diversification.

• Possible reasons:

  1. Asking price too high
  2. Property condition is poor; deferred maintenance. 
  3. Physical obsolescence of improvements. 
  4. Title issues
  5. Access, visibility and/or parking issues (depends on use). 
  6. Adjacent property uses are incompatible or have issues.
  7. Seller is not willing to negotiate. 
  8. Buyers cancel the purchase following due diligence.