What is commercial real estate?
Commercial real estate includes any form of property or real estate used to produce income. Some businesses own the space they occupy, but most commercial real estate is leased from an investor through a net lease broker for one to ten-year terms. An investment lease brokerage firm acts as an in-between for the tenant and landlord or investor and as an advisor for all of their clients. These brokerages facilitate the sale and leasing of commercial properties for business or investment purposes. Distinct types of leases and exchanges are designed to accommodate the variety of commercial real estate property acquisitions.
Types of Properties
Commercial property encompasses many different kinds of spaces. They can be classified into several different categories including office, retail, industrial, multi-family, land and special purpose.
Office real estate is broken down into single or multi-tenant properties and categorized by classes A, B and C. Retail properties include single or multi-tenant buildings and shopping centers comprised of banks, stores, restaurants or strip malls. The industrial commercial real estate category is made up of an array of tenants and building structures, which typically involve construction, manufacturing or production plants and warehouses. Multi-family real estate covers all residential property except for single-family homes and, like office property, is graded for quality by classes A, B and C. Commercial land real estate is undeveloped property, including previously developed land that becomes compromised or condemned. Special purpose commercial property is real estate owned by investors or businesses that do not fit into any of the five main classifications, such as churches, entertainment spaces, hotels or self-storage.
Types of Property Leases
Commercial real estate brokerages work with tenants and investors to establish a method of leasing business property that satisfies the involved parties. The primary types of commercial real estate leases include gross leases, net leases (single, double or triple), pass-through leases and percentage leases.
Gross leases are simple, rent-only agreements, that typically include agreed-upon future increases. Single, double, and triple net leases are contract agreements that incrementally supplement the tenant’s financial responsibilities on top of the predetermined rent. Pass-through leases, or modified gross leases, are contracts that make the tenant responsible for a proportional amount of any combination of property expenses in addition to rent. Percentage leases require that the tenant pays rent as well as a percentage of the sales earned from conducting business on the rental property.
Types of Tax-Deferral Property Exchanges
Commercial real estate can be acquired through a few different forms of property exchanges that also allow the deferral of capital gain taxes. The Internal Revenue Service’s (IRS) tax code outlines these exchanges in sections 1031, 1033 and 721.
A 1031 exchange allows investors to exchange ownership of like-kind commercial properties without having to pay taxes on the appreciated capital gain. Section 1033 of the IRS tax code describes a regulation that allows the exchange of equivalent-use properties as a result of involuntary conversion or forced loss. Section 721 contains a tax deferral option that allows investors to exchange commercial property for shares in a Real Estate Investment Trust (REIT). A 721 exchange puts the ownership and management of the property into the hands of a commercial real estate investment firm.
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