Frequently asked questions in Commercial Real Estate and Terms

Commercial transactions take a longer period of time, due diligence, and lender approval and then purchasing a home. The underwriting and documents are totally different

Letter of Intent. A nonbinding offer that negotiate the terms and conditions when purchasing commercial estate. Once agreed up the those terms and conditions in the LOI are then inserted into a contract

This is the pass through of operating expenses on a pro rata share to a tenant. Property taxes, insurance, landscaping, management fees, common area maintenance.  Debt service isn’t included  More prevalent in retail, free standing buildings, and some office buildings

 In the tax code. Once you sell a property you are able to use a third party accommodator and purchase a “like kind property” and thus defer your capital gains. There are strict guidelines and time frame to utilize this tool otherwise the IRS will deny it and you pay capital gains

Don’t see very often. Primarily older office buildings. You use the existing year’s operating expenses as the basis. If the next calendar year expenses exceed the prior year the difference is passed through to the tenant on a pro rata basis

Land.. requires much more due diligence and time.. Are there utilities to the site, easements, setback requirements, tree mitigation, deed restrictions, environmental issue, zoning, what can be built on the site, neighborhood associations may not approve, traffic analysis, title issues?  Need to bring in an engineering firm and attorney familiar with land development. Improved property. Get it inspected, confirm the zoning, check the title, evaluate the cost to renovate. Much quicker time frame than a land deal

Commercial. The facility, type of business and experience, liquidity, credit, financial strength, guarantors. Home.. Credit, income and financials’ and less risk

Realtor is a synonymous with a Residential Agent. Broker.. Commercial Real Estate

When a tenant leases space the landlord is going to give the tenant an improvement allowance. Second generation space typically for new flooring and paint if necessary. The amount if negotiable. Depends upon the term of the lease, use, condition of the space, financials’. New space as we refer to as shell space is handled differently

In many cases a tenant will pay the base the rent plus the operating expenses. For example the annual base rent is $25/sq ft plus and additional $10/sq ft for the NNN  ( operating expenses.) Say you want 3000 sq ft. You add the two numbers together $25+$10=$35/sq ft annually x 3000 sq ft=$105,000 per year or monthly $8750. Depending upon what type of facility  you may have to pay electric and janitorial. Industrial is much less.

You may have heard this term before. It’s one way investors will evaluate a property.

You take the base rental income and divide it by the sales price. Let’s use our example above. The Net Base Rent is $105,000/year say the sales price is $1,500,000. $105,000/$1,500,000= a 7% cap rate. When investing you want to look for a higher cap rate. Cap rate depends upon the age and condition of the property being purchases, term, and credit of the tenant.

Sometimes this will be required. You are making sure the property doesn’t have asbestos or they look at the past history of the property and surrounding to see if there was a gas station or another use that caused any contamination. This is called a Phase I. If there is a concern from initial testing may require a Phase II

Your home value in Texas is capped annually at 10% increase . Commercial Real Estate.. There is no annual cap. The county appraisal office will use sales comps, improvements to the property, income…