In an arm’s length transaction, the buyer of a product does not have a preexisting familial or business relationship with the seller. For instance, if an investor were to sell their sibling an apartment building, the transaction would not be arm’s length, while if they sold a stranger the building, it would be an arm’s length transaction. This has important consequences when it comes to buying and selling commercial real estate.
In many cases, commercial real estate investments are structured as real estate limited partnerships (RELPs). A RELP will generally consist of a general partner (GP) and multiple limited partners (LPs). The GP, who is financially responsible for the investment, is often a real estate developer or property manager, while the LPs are typically passive investors who only contribute capital to the project.
If you’re interested in demolishing a commercial building in order to make way for new development, it’s essential to understand the costs of commercial demolition. Right now, commercial demolition costs between $4 to $8 per sq. ft., with the average per building demolition cost in the U.S. currently sitting at $30,500. This makes perfect sense, as the median size of commercial buildings in the U.S. is about 5,000 sq. ft. (5,000 *6 = 30,000). However, it’s also important to note that for especially large buildings, demolition costs per square foot may fall slightly.
When it comes to commercial real estate investing, property managers and asset managers may have similar titles, but they have distinctly different roles. A property manager generally focuses on a property’s everyday operations, like maintenance, rent collection, and managing staff. Property managers often work onsite, but not always. In contrast, asset managers are more involved in the financial management of an investment property, including managing tax and legal issues, negotiating with lenders, and managing both the acquisition and disposition of a property in order to maximize long-term profitability.
When an individual profits from selling an asset, such as stock in a company, commercial real estate, or other investments, a capital gain has occurred. Instead of paying ordinary income tax, an individual generally must pay a special tax rate on these gains, known as the capital gains tax. However, this depends on how long the asset has been held. If you’re a commercial real estate investor, understanding the impact of capital gains taxes-- and how to minimize that impact, is essential if you want to maximize the profitability of your investment.
Merchant builders, also referred to as merchant developers, are those developers that build properties and sell them, rather than holding onto them for longer periods of time. In many cases, merchant builders trend toward the construction of single-tenant commercial buildings. This can often be explained by the fact that, much of the time, merchant builders don’t build on spec; instead, they develop a building with a specific tenant in mind, typically a national brand such as a Wendy’s or a CVS.
In commercial real estate, price indices are designed to show the current strength of the commercial real estate market across the United States. In general, most indices are not international, as CRE markets are substantially different in foreign countries, and combining the data would not likely to an accurate and informative result.
In commercial real estate, shadow space is any space that is being leased, but that a tenant is not currently utilizing. Generally, shadow space is most common in the office and industrial property market, but occurs for retail properties as well. In many cases, this is a result of company downsizing, but in other cases, a tenant may hold shadow space to prepare for future growth.
In commercial leasing, a blend and extend amendment is allows a tenant to extend their lease and negotiate a new rate, merging, or “blending” the new and old rents. During periods of particularly high vacancy, commercial landlords will often offer agree to a blend and extend amendment that lowers a tenant’s rent, in order to keep their property occupied for an extended period of time.
For commercial real estate borrowers, debt funds often offer loans that banks can’t-- or won’t offer, including commercial construction loans, bridge loans/lease-up financing, and certain property rehabilitation and redevelopment loans. According to the Mortgage Bankers Association (MBA), debt funds originated nearly $70 in billion commercial real estate loans in 2018, around 10% of all CRE loans originated in that year.
If a commercial real estate borrower seeks out a mezzanine loan, but does not want to pay an extremely high interest rate, the lender may agree to reduce the interest rate in exchange for a piece of equity in the project, referred to as an equity kicker.
When a commercial real estate investment is solicited to investors, they must typically be accredited investors. According to the Securities and Exchange Commission (SEC), accredited investors have an annual income of at least $200,000 (or $300,000 if married) and a net worth of at least $1 million. This does not include the value of the investor’s primary residence.
In commercial real estate, adaptive reuse occurs when an older building is adapted for a different use than it was originally designed for. Adaptive reuse can have a variety of advantages for commercial real estate investors and developers. Primarily, this comes in the form of significant savings; demolition and new building construction can be extremely expensive, and adaptive reuse can lead to substantially lower construction costs.
In commercial real estate, an intercreditor agreement is an agreement between two lenders that stipulates the rights and responsibilities of each party. Intercreditor agreements are most commonly used when mezzanine debt is layered on top of a senior commercial real estate loan. Typically, the agreement creates a variety of safeguards that protect that senior lender’s interest in the property should the borrower default on their loan.
In commercial real estate, infill is defined as the development of unused land in urban areas. This commonly takes the form of developing an empty lot of land between two buildings, but can also involve the demolition of older or underused properties. Supporters of infill development believe that it makes efficient use of existing land and reduces burdens on municipal services, due to the fact the area is already being served by water, power, and communications infrastructure.
In commercial leasing, a recapture clause permits a landlord to terminate a lease early, and may also allow them to demand all or part of the remaining lease payments immediately. Recapture clauses can be triggered by a variety of events, but are are most often activated when a tenant closes their business and attempts to sublease the property.
In commercial real estate finance, the capital stack is the legal organization of all the layers of debt that are used to purchase, build, or renovate a piece of real estate. The position of a piece of debt in a property’s capital stack determines what the order that lender will repaid in the case of a borrower default or bankruptcy.