What is Commercial Real Estate?

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.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

What is a Percentage Lease?

When renting commercial real estate spaces, it’s important to understand the different types of leases to ensure the most practical and beneficial contract between the landlord and the tenant. Of these different lease types, net leases and gross leases are the most commonly known. However, percentage leases are also widely used in commercial real estate because of the beneficial properties they offer both the tenant and the landlord. Find out what you need to know about percentage leases.

What are the features of a percentage lease?

A percentage lease is a contract between a landlord and tenant where the tenant agrees to pay a predetermined rental rate in addition to a percentage of the sales earned while conducting business on the rental property. Because of these provisions, this type of lease is used exclusively in commercial real estate–particularly in retail mall outlets and companies with high sale volumes.

How is a percentage lease calculated?

Percentage leases have a predetermined base rental rate. The percentage of sales the landlord receives is determined once a base amount of gross sales is met. This base amount is called the breakpoint. Two different types of breakpoints exist to accommodate different calculations of a percentage lease.

An artificial breakpoint is a set dollar amount of sales both the landlord and the tenant agree on. This means a percentage of sales that exceed the set dollar breakpoint amount is paid to the landlord in percentage rent. In contrast, a natural breakpoint is when the base rent is divided by the established percentage to determine the breakpoint amount. This calculation ensures that a tenant only pays a percentage expense on the sales that exceed the amount required to pay the predetermined rental rate.

What are the benefits of a percentage lease?

Some tenants may be attracted to the terms of a percentage lease because these contracts typically have a lower fixed rental cost each month. In addition, the percentage lease is commonly used in multi-tenant buildings, which means these shopping centers or retail malls are a natural draw to other businesses in the building and can benefit tenants with both large and smaller sales.  

Percentage leases can also benefit the property owner because they have the ability to choose the type of businesses and companies that are placed within the retail space. Accordingly, strategic leasing can attract more customers to the space, which gives the landlord the opportunity to negotiate a percentage of sales.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!