What Is Cost Segregation and How It Benefits Buyers

Commercial investing occurs at an order of magnitude more challenging than investing in residential property. If you want to buy a residential rental investment or even an apartment complex, you simply hire a real estate agent and put your money down when you find a property that meets your standards. Even renting your residential property isn’t too tough, if you know how to do it right.

Buying commercial property is a bit more complicated — from the challenges in finding investment property loans, to the complex demands of commercial tenants, to the arcane tax laws that govern depreciation.

After all, every commercial real estate investor knows that depreciation is one of the most powerful tax credit advantages of owning property. Depreciation gives you a significant tax deduction every single year you own a property until that property exhausts its useful life — a span of 27.5 years for residential investment properties, and 39 for commercial investment properties.

But advanced investors know that to really unlock the power of depreciation, you have to use cost segregation. Effective, expert cost segregation can help you enhance and increase the amount of depreciation you can claim — sometimes multiplying it by up to a factor of 10x in a single year.

Let’s look at how cost segregation works, how it can benefit commercial investors, and some of the potential complications of investors who pursue cost segregation.

What is Cost Segregation?

Using standard depreciation on a commercial property you own is very straightforward: You simply divide the purchase price of the property by 39, and claim that amount every year.

Cost segregation is a more granular method of valuing the property, separating out items like personal property, finishes, and land improvements, which are depreciated on a more accelerated schedule.

That may not sound all that advantageous, but it’s common for up to 50% of a property’s features (and value) to fall into real estate tax categories that can be written off much faster than the building structure. That translates to a massive, immediate improvement over standard depreciation, and is one of the main reasons that commercial properties, if utilized correctly, are hands down one of the most effective avenues of real estate investing.

How Do You Start Taking Advantage of Cost Segregation?

The first step to using cost segregation is to have a cost segregation study done. Cost segregation studies examine the features and components of your property, and separate out certain improvements and costs that can be depreciated on a faster schedule — typically five, seven, 10, or 15 years. These can include special finishes, plumbing or lighting fixtures, or updated commercial equipment.

Cost segregation studies usually take 45 to 60 days to complete, and typically cost around $5,000 to $15,000. Unfortunately, the IRS has never provided precise standards or requirements for these studies, which has forced owners to essentially improvise the industry standards as they go.

But while some owners may be tempted to have their CPA or construction engineer execute their cost segregation study, it should really be handled by a specialist. The IRS itself says, “The preparation of cost segregation studies requires knowledge of both the construction process and tax law involving property classifications for depreciation purposes.” There are a lot of people who are familiar with just one of those areas, but few who are experts in both.

Smart owners should find an experienced cost segregation study expert, or their deductions could run into trouble in the course of an IRS audit.

An Example of Cost Segregation

Let’s look at a hypothetical example of traditional depreciation versus cost segregation to illustrate just how powerful cost segregation can be.

Let’s say you buy a commercial office property for $10 million. If you used standard depreciation for this property, you’d simply subtract the value of the non-depreciable land ($2 million) and divide the remaining $8 million by 39, which leaves you to claim $205,128 in depreciation every year. Pretty simple, and no harder than calculating standard residential real estate commission.

However, let’s say you commissioned a cost segregation study, and the study found that your property contained $2 million in personal property that can be depreciated in five or seven years. It also found $1 million in land improvements that can be depreciated over 15 years. That leaves $5 million in value for the structure itself to be depreciated over 39 years.

Because of the way the current law allows you to claim bonus depreciation, as laid out in the 2017 Tax Cuts and Jobs Act, you can now claim that $3 million ($2 million in personal property plus $1 million in land improvements) in year one. Plus, when you divide that $5 million by 39 years, you get an additional $128,205 — meaning your total first-year depreciation comes to a staggering $3,128,205!

If you’re in the top taxpayer bracket of 37%, this cost segregation will offer you property tax savings of roughly $1.157 million right off the bat ($3,128,205 x 0.37). That’s a stunningly large benefit unlocked by a comparatively small investment of time and money.

The best part is that if you can’t use those entire savings that year, you can roll over the unutilized benefit to future years.

It’s Never Too Late to Take Advantage of Cost Segregation

While most owners like to have their cost segregation studies done either soon after construction is completed, or as soon as their purchase of the property is finalized, you can get retroactive benefits of cost segregation even if you’ve already owned the building for several years or decades.

As long as the property in question was purchased or renovated after December 31, 1986, you can conduct a “look-back study” to claim all the prior years of depreciation you didn’t take advantage of, and roll them into a massive, one-year benefit.

This is calculated as the difference between what you claimed as depreciation and what you could have claimed if you’d done a cost segregation study. As you can see from the example above, this difference is often very significant. Considering that you can claim retroactive benefits as far back as 1987, a look-back study could be worth tens of millions of dollars — or more — in catch-up depreciation.

Doing a look-back catch-up doesn’t even require an amended tax return. Your CPA simply files a tax form indicating a change in accounting method and attach the cost segregation study. So whether you’ve just bought your first office building, or you’ve owned a whole portfolio of commercial properties for years and are just now learning about cost segregation, you should do yourself a big favor and have a cost segregation study done today.

 

Source: What Is Cost Segregation and How It Benefits Property Buyers | Crexi Insights

https://www.creconsult.net/market-trends/what-is-cost-segregation-and-how-it-benefits-buyers/

Selling an Apartment Building FAQ's

[ux_text text_align="left"]

Top Frequently Asked Questions on Selling a Multi-family in Chicago

Are you thinking of selling your multi-family property?

Here are some of the most frequently asked questions we get from clients looking to sell multifamily properties in Chicago.

Before You Sell:

How is selling a multi-family different than selling a single-family home?

If you’ve sold an investment property before, you’ll be familiar with the ins and outs of selling a multi-family. However, if it’s your first time, you’ll learn that the process works differently than it would with a single-family or condo.

A large part of a multi-family’s sale appeal will lie in its cash flow. Buyers looking for a multi-family are looking for more than just a home: they will want to see a property that generates good rental income, rents easily, and provides a financial incentive for them to buy. This could be in the form of easy upgrades they can make to boost rental income or as an empty unit for them to occupy and offset their own living expenses.

Do I need a broker to sell a multi-family?

Of course, we’re biased...but we do recommend working with a broker who is experienced in the multi-family market in your neighborhood. Not only will they be able to pull good comps and provide a market analysis of how you should price the property, but an experienced agent will know how to show the proeprty to different types of buyers, whether they are experienced investors or first-time multi-family buyers who want some supplemental income. Brokers who work in multi-family markets are also in the know about rent prices and trends, which will help them sell your home at the right price.

Do I need to make repairs before selling?

Some buyers look for multi-families with units that could benefit from some updating because they see it as an opportunity to raise the rent using some sweat equity. Your agent should be knowledgeable of the renter’s and buyer’s market for your area and property type and will have good recommendations of what types of updates to make before selling.

Making simple upgrades around the property and in common areas like hallways and entryways can be an easy way to boost the property’s curb appeal that won’t break the bank, whether it’s through new fixtures or a fresh coat of paint.

How do I list a multi-family?

One of the most important parts of getting ready to list your property is confirming the number of legal units in the building. In a city full of old homes like Chicago, many apartment units have been created in old basement spaces or have been de-converted into larger single unit. If you sell your property with an incorrect number of legally recognized units, you could face legal issues down the road. To get the most accurate picture of how your property should be valued and listed, get in touch with the local village to confirm the number of legal units listed in their records.

How should I price my multi-family?

Buyers and their lenders will typically appraise a multi-family home using the income approach method instead of simply using comps in the area to compare values. This means that the appraiser will look at the cost of property maintenance and rental income to evaluate a property’s cash flow. To price your multi-family, you should do appraise a building’s income and use comps in the area to accurately represent what someone might want to pay for it.

How should I market my multi-family?

• You’ll want professional photos of each unit to get ready to list your property, which means asking your tenants to clean their spaces and set up a time for the photographer. Having an empty unit comes in handy because it gives you the opportunity to deep clean the space and potentially even stage it with furniture to show off its potential.
• Put together a financial breakdown and lease abstract to show possible buyers. This might include details like current rents, cost of utilities, and other maintenance fees to give them a better idea of potential rental income.

Selling a building with tenants.

How do I sell my multi-family with occupied units?

One of the trickiest parts of selling a multi-family is to make sure that you are aware of your tenants’ legal rights and that you make the selling process as effortless for them as possible.

• Breaking the news to tenants: Announcing that you’re listing your property for sale isn’t the easiest conversation to have with tenants. For them, it means the hassle of cleaning their apartments for multiple showings, a change in landlords, and a potential increase in their rent after the sale. However, you are legally obligated to inform your tenants when you sell the property, so it’s important to have that conversation before getting too far into the selling process.
• Tenant’s rights when a property is listed for sale: To protect yourself from liability and provide a smooth transition for your tenants during the sale process, it’s important to be aware of their rights determined both by the state and by their lease agreement. Your tenants most likely have a right to be notified a set amount of time before showings and have a lease that can’t be terminated just because you want a vacant unit to sell the property. Reread your lease agreements and the tenant’s rights for your city before listing your home or schedule showings.

How do I show a property with occupied units?

An experienced Broker will know the ins and outs of how to show a property with occupied units (which is one of the biggest reasons why you should take your time to find a good agent). The most important concern when it comes to showing units is to make sure that the tenant is aware of the appointment sufficiently ahead of time. Check your lease agreement to see if there are already guidelines in place, or contact your tenant prior to listing the process to come to an agreed-upon amount of days or hours before the showing when they should be contacted.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

 

Source: Selling an Apartment Building FAQ’s

[/ux_text] https://www.creconsult.net/market-trends/selling-an-apartment-building-faqs/

2023 eXp Commercial Commercial Real Estate Symposium

REGISTER TODAY

The Commercial Real Estate Symposium will provide junior and senior agents and brokers with valuable insights on topics, including: international opportunities, capital and funding for small businesses in today’s market, how to attract investors, and much more.

Dates: April 25-26, 2023
Start Time: 9 a.m. - 4 p.m. CST
Location: eXp Commercial Campus

We look forward to seeing you in the metaverse!

Important: Please download the virtual eXp Commercial Campus prior to the event, and follow the instructions to login and create your avatar. Feel free to explore the campus before the event begins.

 

+ Add to Google Calendar   + Add to iCalendar

 

Interested in Joining eXp Commercial as a Commercial Real Estate Agent?

Further Info

https://www.creconsult.net/market-trends/2023-exp-commercial-commercial-real-estate-symposium/

Top 6 Tips for Selling Commercial Real Estate

Selling commercial real estate has always been a complex process due to the multiple steps in the sales process and the uniqueness of each transaction. Despite new transaction trends which have accelerated post-pandemic, the fundamentals of selling commercial real estate remain the same.

In this article, we’ll discuss the six most important things to consider when selling commercial real estate for sale.

1. Conduct In-Depth Market Research

The most successful investors know it’s never a good idea to try and time your sale with the top or bottom movement of the commercial real estate market. With that being said, there are steps you can take and trends you can monitor to understand better if you’re getting the best value when you sell commercial real estate:

• Location, including neighboring properties and ease of access for tenants and customers
• Tenant and lease documentation, including rent rolls, actual vs. market rents, vacancy history, tenant credit quality, and aging of tenant receivables
• Future supply and demand metrics, such as absorption rate and new construction in the pipeline
• Historical change in property prices and rents in the immediate market over the past five years
• Average days on the market before vacant space is leased to help measure demand.

After you’ve completed your market research, you’ll be able to identify the best buyers for your specific property and determine the right asking price or whether to price at all. However, before you list your property for sale, you’ll want to conduct a “reality check” of your property value by reviewing the most recent sales comparables.

2. Review Real Estate Sales Comps

Comps are recently completed sales transactions of properties most similar to yours. While market research determines the price you hope to receive, sales comparables tell you the price you’re most likely to receive based on current market conditions.

There are four main ways that buyers value income-producing real estate. Comparing your sales comps to each of these four methods can help you gain a better understanding of how buyers are currently pricing a commercial property for sale:

1. The income capitalization approach compares the net operating income (NOI) to the property sales price and is expressed as a capitalization rate.
2. The gross rent multiplier (GRM) divides the property price by the gross income and is expressed as a ratio.
3. Value per door is typically used to buy an apartment complex and is calculated by dividing the property price by the number of units.
4. Cost per rentable square foot measures the amount of rental revenue generated by the total amount of leasable square footage to make a fair evaluation of a building’s value.

Remember that real estate sales comps may not give you the information you want. But knowing what to expect, you and your commercial broker can make informed decisions throughout selling commercial real estate.

3. Find the Right Representation for Your Property

Hiring a great commercial realtor can make the difference between selling your property quickly at the best possible price or having it sit on the market month after month with no buyers.

Some of the most significant advantages of having a broker represent your property for sale include the following:

• Determining a fair and realistic asking price based on current market conditions, helping to ensure a favorable return on your investment
• Exposing your property to an established network of contacts who may be interested in buying your property right away
• Handling the back-and-forth negotiations through closing, including managing the necessary paperwork. The broker only gets paid when the sale is complete

4. Use Online Marketing for the Best Results

Even before COVID-19 struck, the rise in CRE tech and online marketing tools was revolutionizing commercial real estate marketing and significantly expanding the pool of qualified buyers:

• Virtual tours, online Zoom calls, drone aerial videos, and AI in real estate are now the rule rather than the exception.
• CRE tech tools can put your property in front of qualified buyers, helping you understand what future buyers look like.

Marketing and selling commercial real estate online makes it easy to gather contact information for prospective buyers and build a database with names, phone numbers, and emails.

5. Do Your Due Diligence and Prepare Your Property for Sale

Most qualified buyers won’t waste time waiting for a seller to gather information and put documents together. To keep your prospective buyers interested, plan by doing your due diligence and preparing your commercial buildings for sale:

• Order a preliminary title report and look for issues such as monetary liens and overdue taxes
• Update lease files to include all leases, amendments, and modifications, along with copies of all material tenant correspondence, then put together a historical and year-to-date rent roll.
• Service contracts for existing vendors, including maintenance, landscape, and property management
• Collect copies of all maintenance records and capital expenditures, including mechanical systems such as HVAC and electrical, structural and safety systems such as roof and fire suppression systems, and common areas such as parking lots and elevators
• Compile historical and year-to-date profit and loss statements that accurately report the annual operating revenue of the property, using your tenant lease details and maintenance records as a backup
• Assemble physical due diligence material, including an updated Phase 1 and 2 environmental assessment report, ALTA survey, zoning reports, and insurance studies

6. Set Realistic Expectations for the Sales Process

Selling commercial real estate sometimes takes longer than many owners realize. Market conditions can change after escrow is opened. Sales costs such as cleaning and staging the property for virtual showing, inspections and repairs, and legal fees can quickly add up.

There are four basic steps in the sales process for commercial real estate:

Escrow

Escrow paperwork is more extensive than buying a residential property. Less regulation of CRE transactions requires escrow officers to have expertise in conducting commercial real estate closings.

Legal entities

CRE deals often involve two or more legal entities, such as an LLC or LLP, to protect buyers and sellers from personal liability. Properly structuring entities can create an extra layer of paperwork and potential delays in the closing process.

Due diligence

Although a lack of RESPA can lead to creative deal structuring, closings may also be delayed due to lease verification and review of the seller’s books and records.

Title and closing documents

Commercial real estate titles are often more complicated due to the liens, encumbrances, and easements included. Reports must be thoroughly reviewed, with objections filed within the deadline or negotiated contingency extension.

Commercial real estate transactions can take as little as one month to complete or as long as a year or more, depending on the deal’s documentation and complexity. In-depth market research, efficient CRE tech, and advice from your real estate broker can prepare you for the realities of the marketplace and set the right expectations for how much profit to expect when your transaction closes escrow.

 

Source: Top 6 Tips for Selling Commercial Real Estate | Crexi Insights

https://www.creconsult.net/market-trends/top-6-tips-for-selling-commercial-real-estate/

Commercial vs Residential Real Estate: Which is Better?

When evaluating investment opportunities, it is important to understand the difference between commercial and residential real estate. They are both vastly different beasts with their own unique sets of pros and cons.

The main difference between commercial and residential real estate is that commercial real estate is used for business purposes, while residential real estate is used for living purposes. That means that commercial properties are typically larger and more expensive than residential properties, but they also have the potential to generate higher returns. Commercial real estate is also riskier than residential real estate, so it’s essential to do your due diligence before investing.

So, which is better? It all depends on your individual goals and needs as an investor. Here’s a look at the key differences between commercial and residential real estate to help you make an informed decision.

What is Commercial Real Estate?

Commercial real estate is any property zoned and used for commercial purposes. This can include office buildings, retail space, warehouses, factories, and more. Commercial real estate is integral to any city or town as it provides space for businesses to operate.

Different types of commercial property

There are four main types of commercial property: office, retail, industrial, and mixed-use:

• Office properties typically host business operations, including small single-story buildings to large skyscrapers.
• Retail properties are designed for businesses that sell goods or services to the public, such as stores, restaurants, and malls.
• Industrial properties are usually large warehouses or factories where goods are manufactured or stored.
• Mixed-use properties are a combination of two or more of the other types of commercial property and are often found in busy urban areas.

Is it worth buying commercial property?

The estimated value of the commercial real estate in the U.S. is $20.7 trillion, including large apartment buildings and special-use properties like hospitality and self-storage. Regarding real estate investment, commercial properties offer a range of advantages over their residential counterparts.

Firstly, commercial tenants tend to stay longer, leading to a steadier income stream. Commercial properties also often have higher rent rates, providing the potential for greater returns on investment. In addition, commercial leases often include clauses that require the tenant to cover certain expenses, reducing the financial burden on the owner. Examples include property taxes, improvements, and building maintenance.

What are the disadvantages of commercial real estate?

While commercial real estate can bring in steady income through rent or leases, it also carries a higher risk than residential properties. One drawback is the longer timeline for finding tenants or customers and negotiating contracts, resulting in potentially longer periods without income.

In addition, commercial properties often require more maintenance and upkeep, including major repairs such as roof or HVAC replacements. Another potential issue is the higher cost of financing, as commercial loans generally have stricter requirements and shorter repayment terms. Overall, careful research and analysis are necessary to weigh the potential risks and benefits before deciding.

What is Residential Real Estate?

Residential real estate is the property for living purposes, including new construction and resale homes. It covers many property types, from single-family homes to multifamily dwellings like apartments and condos.

Different types of residential property

There are many different types of residential real estate, including single-family homes, townhouses, condominiums, and cooperative apartments:

• Single-family homes are the most common type of residential real estate in the United States. These homes are typically detached from other residences and have a yard or garden area.
• Townhouses are another type of residential real estate. They are attached to other residences but usually have their entrance.
• Condominiums are another type of residential real estate. They are similar to apartments, but each unit is owned by an individual rather than rented from a landlord.
• Cooperative apartments are residential real estate where the residents own and operate the property together.

Other types of residential real estate include multifamily homes (such as duplexes and triplexes), mobile homes, and manufactured homes. Multifamily homes are usually investment properties, while mobile and manufactured homes offer a more affordable option for those who want to own their own home.

Is it worth buying residential property?

Many people view commercial real estate as the more profitable investment, but residential property also presents its unique benefits compared to commercial. One significant advantage is the consistency of demand. Commercial properties can experience fluctuations in rental income due to changes in the industry or the economy. Conversely, residential rents tend to remain steady as there will always be a need for housing.

Additionally, rental rates for residential properties have a strong potential for growth over time. This can provide investors with a steady income stream and the potential for value appreciation if they choose to sell. And, unlike commercial leases, which often have long terms and strict landlord responsibilities, residential leases are typically shorter and less demanding.

What is the Difference Between Commercial vs. Residential Real Estate?

Commercial real estate vs. residential real estate investing

Here’s a more detailed look at the key differences between these two real estate types.

Location

Location is one of the most important factors when choosing between commercial and residential real estate. Commercial properties are usually located in business districts or nearby businesses, whereas residential properties are typically situated in neighborhoods or subdivisions. The location of a property can impact its value, so it’s essential to choose wisely.

Renters/Tenants

Another key difference between commercial and residential real estate is who rents/lives in the property. In commercial real estate, businesses are the typical tenants, while in residential real estate, individuals or families are the usual occupants. The type of tenant can affect the stability of income, as well as the amount of maintenance required.

Size/Scale

Commercial real estate properties are often much larger than residential ones since businesses need more space than home residents. This means that commercial properties typically require more capital to buy and more manpower to maintain. However, it also means that there’s potential for higher returns on investment (ROI).

Financing Options

When it comes to financing, commercial and residential real estate each have their unique options. For instance, with commercial real estate, you may get an SBA loan, which the Small Business Administration backs. With residential real estate, you can take out a home equity loan if you own your home outright or have significant equity built up. You could use these funds as a down payment for a rental property.

Is commercial real estate better than residential?

So, which is better—commercial or residential real estate? The answer depends on your goals as an investor. Residential real estate is probably your best bet if you’re looking for stability and modest returns. However, if you’re willing to take on a bit more risk in exchange for potentially greater rewards, commercial real estate could be the way to go.

Whatever you choose, make sure you do your homework first to know what you’re getting into.

The Bottom Line

Choosing between commercial and residential real estate is a big decision that should not be made lightly. There are many factors to consider, such as location, type of tenant, size/scale, and financing options. In addition, the type of investment you choose will depend on various factors, including your investment goals, budget, and experience level. By understanding the critical differences between the two, you’ll be better positioned to make the right decision.

 

Source: Commercial vs Residential Real Estate: Which is Better? | Crexi Insights

https://www.creconsult.net/market-trends/commercial-vs-residential-real-estate-which-is-better/

The Most Common Types of Commercial Real Estate Loans

Commercial real estate loans are for purchasing a property such as an office space, retail space, or apartment building to lease out to tenants. In most cases, you can take out a real estate loan of up to $5.5 million, with interest rates beginning around 5%. Repayment terms can vary but can usually extend up to 25 years.

It is essential to know that loan-to-value (LTV) ratios of property loans are generally 65%-75%, which means the down payment will be at least 25% of the purchase price. Read on for a breakdown of the most used CRE loans and what to remember when seeking commercial real estate lending.

Benefits of Commercial Real Estate Financing

There are several benefits to taking out a commercial real estate loan. The most crucial advantage is establishing ownership of the property with a small down payment, with the ability to collect rental income and build equity over the long term.

You often have lower interest rates and fixed monthly payments to help you plan for upcoming expenses. You can pay for your commercial mortgage over the years, which helps you focus on essential business details without stress.

Benefits of Using OPM

Investing with OPM or other people’s money can unlock several benefits. Investing with other people’s money allows you to make more without spending all of your own money.

Earning a return on investment, or an ROI, is the ultimate goal when investing in commercial real estate. Using OPM finance can drastically increase your cash return on investment.

What is Leverage?

Leverage is when you use borrowed capital to increase your real estate investment return. While leverage can provide excellent returns, it can also lead to loss if the real estate industry enters a downward cycle. Staying abreast of macro and local commercial real estate trends can keep you aware of what the future may bring.

What are the Common Types of Commercial Real Estate Loans?

There are several types of commercial real estate loans you can apply for. The most common ones include SBA, permanent, hard money, blanket, and bridge loans.

SBA Loans

The SBA (United States Small business Administration) provides two types of business loans for commercial real estate financing: SBA 7(a) and SBA 504.

Before applying for an SBA loan, you will need to make sure you have the following:

Business Plan	Good Credit	Know the Amount You Need	Collateral
You must provide your lender with a business plan when applying. The SBA’s website has a free business plan guide.	Lenders will look at your credit history to determine your credit risk and interest rates.	You need to know how much money you will need and how an SBA loan will benefit your company. You will also need to show how you will use the funds and how you will pay for the loan.	Often, you will need to provide your home or other types of collateral to take out a loan.

SBA 7(a)

The SBA 7(A) is the most popular out of the two different SBA loans due to its flexibility. It is usually for longer-term business financing.

The maximum amount you can take out for an SBA loan is usually $5 million. There is also an SBA Express loan with a maximum of $350,000, and SBA Export Express loans have a maximum of $500,000. The maximum maturity for SBA loans for real estate is 25 years.

The borrower and lender negotiate the interest rates, though they need to consider the SBA maximums. According to the SBA website, the chart below shows mortgage rates for variable-rate loans:

Loan Amount	Max rate if maturity is less than 7 years	Max rate if maturity is more than 7 years
$25,000 or less	Base rate plus 4.25%	Base rate plus 4.75%
$25,000 to $50,000	Base rate plus 3.25%	Base rate plus 3.75%
$50,000 or more	Base rate plus 2.25%	Base rate plus 2.75%

SBA 504

504 loans provide fixed-rate financing of up to $5 million for significant fixed assets where businesses can grow and create jobs. An example of these fixed assets would be existing land or buildings.

You can get a 504 loan through Certified Development Companies known as CDCs. Certified Development Companies are community-based partners regulated by the SBA and promote economic growth inside their communities.

When applying for an SBA 504, you must show proof that you have management experience, provide a business plan, and qualify as a small business before getting credit approval.

Permanent

Despite its name, a permanent loan is not unlimited, but it does have an unusually long term. Real estate developers secure permanent loans once a construction project is finished and investors purchase an existing commercial property for sale. These loans take the place of a construction loan and generally have loan terms of between 5-10 years, with amortization rates of between 20-30 years.

Hard Money

Hard money loans are issued by private companies and individuals instead of by traditional lenders such as banks. This short-term loan is popular with real estate investors who don’t plan on holding onto the property for a long period. Hard money loans typically last between three and 36 months.

Blanket

A blanket loan is used mostly by builders and developers to purchase multiple real estate pieces.

What separates a blanket mortgage from a traditional mortgage is the release clause. The client can sell a property and release their liability for that part of the mortgage. This allows the person to sell the property without repaying the loan in full or having to refinance each time they sell.

Bridge

Bridge loans are a short-term financing option often used to cover the gap between a development loan and permanent financing can be secured. These short-term loans usually last between six to twelve months and have higher interest rates than traditional loans, usually ranging between 8.5% and 10.5%.

Business Line of Credit

A business line of credit is a less common loan to cover short-term costs. These loans do not provide the borrower with a lump sum, so you only pay interest on what you withdraw.

Business lines range anywhere from a couple of months to 10 years, with interest rates starting at 7%. The downside is that it can be hard to get a business line of credit with a bank, and online lenders can have interest rates ranging from 8% to 80%. Due to the low availability and high-interest rates, a business line of credit should be for highly short-term needs such as emergency expenses or buying inventory.

Where Can You Find Commercial Real Estate Loans?

There are several options to choose from when it comes to finding investment property loans. It is essential to thoroughly research your choices and compare commercial loan rates from different lenders.

Commercial Lenders

Commercial lenders offer a handy choice for those who need a real estate loan quickly for their small or medium-sized company. Commercial lenders typically have lower fees and closing costs, but their interest rates are usually higher than loans from banks. Also, most loans from commercial lenders are short-term, so this might not be for you if you are looking for a long-term loan.

Banks

Banks provide commercial loans for different kinds of properties, including long-term financing. The standard loan amount for a bank loan is usually $1 million, and your bank may provide a discount if you are already a customer.

When taking out a commercial real estate loan with a bank, expect it to be fairly slow. You will need to provide ample documentation, and the bank will approve or decline your loan based on your credit. If your credit score is less than 620, this might not be a good option.

SBA Lenders

Traditional banks can often provide an SBA loan, or you can go through an online lender that offers these types of loans. SmartBiz is a great option. However, the SBA website has a valuable lender match tool to help you find a local SBA lender.

The Bottom Line

Investing in commercial real estate property can be a rewarding and enjoyable experience when you are adequately prepared. Before you get involved with purchasing any property, you need to figure out how you will pay for your investment. Before deciding, weigh your options and compare interest rates, costs, requirements, and more with each bank or lender.

 

 

Source: The Most Common Types of Commercial Real Estate Loans | Crexi Insights

https://www.creconsult.net/market-trends/the-most-common-types-of-commercial-real-estate-loans/

The Basics of Commercial Real Estate Property Types

Commercial real estate is the US's third most valuable asset class, right behind stocks and bonds. With an estimated market value of about $17 trillion, it’s understandable why many investors are adding commercial real estate to their investment portfolios.

Let’s take a quick look at commercial real estate basics, including commercial real estate types and asset classes, and the best opportunities for commercial real estate investing this year.

What Makes Real Estate Commercial?

Commercial real estate (CRE) is used for business or investment purposes and is usually rented to tenants to generate income. CRE is a massive asset class and includes everything from single storefronts and apartment buildings for sale to large multi-tenant office buildings and industrial distribution centers.

Multiple income streams are among the most significant advantages of investing in a multi-tenant commercial real estate building. That means the property still generates cash flow if one unit goes vacant.

Commercial real estate prices are generally higher than a residential rental property, so there is less competition from other investors. CRE investments can also be more management-intensive, with larger commercial properties usually having an on-site property manager and leasing office.

Commercial Real Estate Classes

Commercial real estate is categorized into one of three groups or classes:

• Class A property is newer buildings with the best amenities and highest rents in the best locations.
• Class B property is older with average amenities at at-market rents, often attractive to value-add investors for renovation or repositioning.
• Class C property is the oldest, with minimal amenities and below-market rents, usually with obsolete floorplans and in need of significant maintenance.

It’s important to note that CRE property classes are market-specific. For example, a Class A office building in Tulsa might be considered a Class C property in a more urbanized market like San Francisco.

Main Types of Commercial Real Estate

Commercial real estate properties are generally placed into one of five main types, according to the 2021 US Real Estate Market Outlook from CBRE and the Appraisal Institute’s Property Use Classification System.4,5

Office

• Central Business District (CBD)
• Suburban Office Business Park
• Creative/Loft
• Medical
• General Purpose
• Research and Development

According to CBRE, suburban office markets are forecast to grow faster than office buildings in a central business district (CBD). Business-friendly office markets such as Raleigh-Durham, Nashville, Tampa, Phoenix, and Dallas-Fort Worth should perform best for investors and tenants looking to rent office space in 2021.

Industrial

• Industrial Business Park
• Warehouse – distribution, refrigerated/cold storage, lumber yard, general-purpose
• Flex Industrial Space – reconfigurable with up to 85% office space
• Manufacturing – light, heavy, high tech
• Processing – food, minerals, refinery, solid wastes
• Research and Development
• Communication and Data Center

E-commerce will continue to drive the demand for industrial space, according to CBRE. Commercial real estate investors can expect more retail-to-industrial conversions as industrial occupiers search for last-mile delivery solutions.

Industrial markets to watch include Phoenix, Las Vegas, Salt Lake City, Texas, and Southeastern CRE markets such as Atlanta, Charleston, and Central Florida.

Retail

• Automotive
• Day Care Facility
• Laundromat
• Restaurant and Bar
• General Storefront/Street Retail
• Convenience Store
• Strip center
• Neighborhood Center
• Community Shopping Center
• Regional Center
• Super-Regional Center/Mall
• Specialty Retail Center

Retail store closures will likely continue this year, creating opportunistic investment opportunities in many retail markets. Adaptive reuse and conversion of Class B and C malls into higher and better uses will keep accelerating.

CBRE lists Phoenix, Austin, Denver, Charlotte, and St. Louis as some of the best retail markets to watch for commercial real estate investment.

Multifamily

• Multiple Units – buildings with more than four units, including garden, mid-rise, and high-rise apartments
• Student Housing – dormitory, fraternity/sorority, and both on-campus and off-campus housing
• Senior Living – independent and assisted living, retirement community, skilled nursing facility
• Group Housing – for people with disabilities or criminal backgrounds to reintegrate into society.

Multifamily vacancy rates should remain relatively low in 2021, with rents rising in many markets as more households rent rather than own. Affordable Class B and C workforce housing will remain in short supply.

Suburban multifamily assets in the Midwest and Southeast regions were recommended as the best multifamily investment opportunities by CBRE. Particularly promising cities include Indianapolis, Memphis, Cleveland, Kansas City, and Louisville.

Hotels

• All Suites
• Bed and Breakfast
• Casino Hotel
• Convention Hotel
• Economy Hotel/Motel
• Extended Stay
• Full Service
• Limited Service
• Luxury
• Resort and Spa

Normal hotel occupancy levels are not expected to return until 2023, with higher chain hotels suffering the most due to their dependency on business and group travel. Hotels and lodging facilities in drive-to destinations are predicted to recover the fastest by CBRE. Rural and interstate hotels and lodging facilities in small metros and rural areas in drive-to destinations may offer the best opportunities for investing in hotels.

Alternative Commercial Real Estate Types

With an asset class as large and varied as commercial real estate, some CRE properties are difficult to categorize into one of these five main types. Alternative commercial real estate properties have distinct, specialized uses or a combination of the aforementioned ones.

• Mixed-Use properties combine two or more uses, such as retail and office space on the first level, with multifamily units on the upper floors.
• Unique Purpose properties have a niche or purpose-built use and include parking lots and garages, self-storage facilities, sports stadiums, theaters, amusement parks, churches, and government buildings.
• Data Centers are colocation facilities leased to large cloud service providers and content providers. They have rapidly developed into a new subclass of alternative commercial real estate and are ideal for CRE investors looking for high-quality assets leased to long-term credit tenants.

Where to Find Commercial Real Estate Listings

Some commercial real estate property types will grow faster than others, although each type offers CRE investors unique opportunities. High-rise urban offices may be impacted more by employees working from home, while suburban office buildings closer to home better fit the hub-and-spoke model.

Retail property in markets such as Las Vegas is performing well, while other retail types offer investors the opportunity for repositioning to use better. The same is true of hotels, with hospitality and lodging properties in drive-to locations providing the best investment opportunities.

In most markets, industrial and multifamily commercial real estate performed exceptionally well and will likely continue to do so even during an uncertain economy.

 

Source: The Basics of Commercial Real Estate Property Types | Crexi Insights

https://www.creconsult.net/market-trends/the-basics-of-commercial-real-estate-property-types/