Chapter 5 Unit 12: Commercial Real Estate

office rents vary by location within the property itself: An owner could choose to charge higher rents for the following spaces:

1. Ground floor offices, transfer points or offices near elevators 2. Higher floors with good views 3. Corners of the building

Other Nonresidential Properties include:

1. Industrial and warehouse 2. Agricultural property 3. Recreational real estate

List three reasons why a business might prefer leasing over purchasing property.

1. Leasing is more cost effective if a tenant needs less space than what is currently available. 2. Leasing is a more flexible option if an owner decides to move to a different location. 3. Ownership involves operation, maintenance and repair of the building which takes focus away from the owner's primary business activities.

office rents vary by location within the property itself: an owner could choose to discount the rent for the following spaces:

1. Middle floors or space far from elevators 2. Offices with poor or obstructed views 3. Nonadjacent space - for example having part of the business on one floor and the rest on another floor

Fixed Expenses examples

1. Real estate taxes - The assessed value of the property determines the real estate taxes. 2. Insurance premiums - The replacement cost of the project determines the insurance premiums that the investor will pay. 3. Repairs and maintenance - These expenditures are usually incurred after a tenant leaves and the space must be made ready for the next tenant, so they are relatively fixed. 4. Advertising and promotion - an investor can set a weekly or monthly budget for these types of expenses.

List two advantages of investing in nonresidential property.

1. Unlike apartment properties, there is very little risk of any kind of rent control. 2. Business tenants are generally easier to deal with than apartment house tenants.

Variable expenses examples:

1. management fees are based on a percentage of the rental income. 2. Utility expenses - water, electricity, gas - typically fluctuate according to the number of tenants in the building at a given time. (However, many utility companies charge a minimum amount, even for a vacant building). 3. Expenses for cleaning specific rooms used by the tenants depend on how many tenants are using different areas of the building at any given time.

Why do retail leases often contain provisions that affect how tenants may or may not operate their businesses?

Because most retailers will be operating their businesses close to other retailers

Lease Terms: Industrial Properties

Because they have special-purpose buildings, leases are usually individualized. Most leases have a three to five year term, although many tenants prefer longer-term leases, especially when they are installing expensive equipment that would be very difficult to move. Most industrial leases are net leases.

Nonresidential properties are broken down into five major subcategories:

Commercial Industrial Agricultural Recreational Institutional

What is included in recreational real estate?

Country clubs, marinas, sports complexes, parks, forests and campgrounds

For example, the market rent on an office building will depend on several factors:

How many similar firms are doing business in the area How likely it is that new firms will locate to the area How many employees are currently employed or will be employed in the near future How much space the firm needs for its employee to do their job

What makes institutional real estate different from other types?

It has a unique use to the persons who own and use it, such as a government agency, a church, a hospital or a university and usually would not be easily tailored to other uses.

A particular building's potential for generating income depends on two factors:

Its ability to attract tenants to rent space The expenses involved with the building's operation

What factors affect net operating income?

Market rate, vacancy, expenses

Several factors affect the net operating income.

Market rent Vacancy Expenses

What might you find in a farming lease that you wouldn't see in other leases?

Most farming leases need to address the issue of environmental concerns

Market rent - The rent depends on several factors:

National economic outlook Economic base of the property's surrounding area Demand for the type of space the particular property provides in the local area Availability and supply of similar competitive space

What are the subcategories of commercial real estate?

Office buildings, retail space and hotels/motels

Industrial properties: An owner could choose to charge higher rents for the following spaces in an industrial or warehouse complex:

Space near the entrance to the park Space near interstates or railroads

Industrial Properties: an owner could choose to discount the rent for:

Space with poor entrance or exit Space where traffic flow is poor

Define market rent.

The price that a specific type of property is likely to draw under the current market conditions

Why might tenants leasing industrial property prefer to have very long-term leases?

They might have this preference if they are installing expensive equipment that would be very difficult to move.

What kind of expenses are normally associated with income properties?

Variable expenses and fixed expenses

an office building can be

a major multi-tenant building that you would find in the central business district of a large city. Or it can be a single tenant building, sometimes built for a specific tenant's needs, such as a medical office building near a hospital.

Lease Terms: Homes and Apartments

are usually leased on a yearly basis, although leases could be longer or shorter. The terms are usually renegotiated when the lease expires.

Retail Properties

can be large regional shopping centers, with millions of square feet of space. Or they can be small stores with individual tenants that you see in the downtown areas of most cities and towns.

Lease terms: Agricultural leases

can vary depending on the use of the property. Leases for hunting rights are typically shorter than farming leases - hunting leases are usually for one year while farming leases typically last three or more years.

Mixed Use Developments (MXDs)

combine several different uses into one complex including retail, office, residential, hotel, recreation, or other functions

Fixed expenses

do not fluctuate.

Variable expenses

fluctuate according to the degree of occupancy.

Lease Terms: Retail Space

leases vary considerably. If the business is small, the tenant may lease space for only one or two years. Larger businesses may be willing to commit to much longer lease terms. Most shopping centers have percentage leases with minimum rents.

Residential properties include

single-family homes and multiple-family properties such as apartments, condominiums, and co-ops. By definition, residential properties provide dwelling places for individuals or families.

Lease Terms: Space in an office building

tends to be leased for a three to five year term.

the market rents for retail space will depend on

the percentage of income families in the area usually spend on the purchase of goods and services from the retail companies in their area.

Market rent, also known as economic rent, is...

the price that a specific type of property is likely to draw under the current market conditions. The market rent could be higher or lower than the amount the property is actually renting for under its current lease.

Lease Terms: Hotels and Motels

typically rent on a daily basis.

two kinds of expenses that are normally associated with income properties:

variable expenses and fixed expenses.