Commercial Real Estate 101: What You Need To Know Before Investing

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The business of commercial real estate, particularly in metropolitan areas is a completely different world than residential real estate.

In commercial real estate, you will find generalists in the smaller markets who handle many different kinds of commercial real estate transactions.

In large markets, you may find specialists.

They may focus on individual segments of the commercial market such as retail, industrial or office.

There are also specialists who focus only on leasing as opposed to sales.

The rental of a residential home usually is all inclusive.

In other words, the taxes, insurance and maintenance expenses are generally taken care of by the landlord.

A commercial rental is usually quoted in price by the square foot. For example, in a higher priced market, rent may be as much as $22 per foot.

If you were in New York City, $22 a foot would be a bargain.

This would break down to 1.84 per foot per month. So the monthly rent on a 5,000-square-foot building would be $9,200.

As a rule, commercial space is much more expensive than residential rentals, and usually there are more charges.

A commercial lease is often a “triple net” lease. This means that the renter also pays or reimburses the landlord for other costs that are incurred.

These costs would include property taxes, insurance on the building and maintenance expenses.

As you can see, the $22 per foot rent would be a starting point with variable costs added that are subject to inflation.

Retail rentals are often done as a “percentage lease.”

The rental agreement may be based upon the gross sales of the business. This type of lease is quite common for large department stores.

This lease can be configured as a fixed minimum plus a percentage of the gross sales, whichever is greater. Although not common, the lease payments may be a straight percentage of the gross sales.

A factor for the landlord in commercial properties is the “TI’s” which is the common term for tenant improvements.

Commercial space is often rented as “gray shell.” Gray shell means the tenant gets bare drywall, bare floors and no improvements to the leased space. A potential tenant will often negotiate with the landlord to cover some or all of the costs of the TI’s. In return, the landlord will generally demand a longer lease term.

Commercial real estate is a world apart from the residential markets. Novices need to beware, especially in this economic cycle.

Ray Pugel is a designated broker for Coldwell Banker Bishop Realty. Contact him at (928) 474-2216.

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