Commercial Real Estate Leases: Understanding Gross, Double Net, and Triple Net Leases

Capital Gains Taxes in Commercial Real Estate

For commercial real estate investors, understanding the impact of capital gains taxes — and how to minimize that impact — is essential to maximizing returns.

Stacking Plans in Commercial Real Estate

A stacking plan is a visual representation of a commercial structure that shows the tenants on each floor, the square footage of each floor, when each tenant’s lease will expire, and sometimes other information. They are most commonly used for office buildings, but can sometimes be used for apartment or retail properties.

Holding Companies in Commercial Real Estate

Holding companies help reduce a commercial real estate investor’s risk profile and the potential liabilities they could incur as a result of owning an investment property by isolating one or more properties from an investor’s other assets.

Joint Ventures in Commercial Real Estate

Many sizable commercial real estate projects are not simply purchased and developed by one firm; instead, they are structured as joint ventures (JVs), in which one party provides commercial real estate expertise and the other party provides capital. In essence, a joint venture is very much like a commercial real syndication, except it generally between 2 or more large individuals or firms rather than one sponsor and a larger group of investors.

Arm's Length Transactions in Commercial Real Estate

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.

Real Estate Limited Partnerships in 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.

Property Management vs. Asset Management in Commercial Real Estate

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.

Demolition Costs in Commercial Real Estate

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. However, it’s also important to note that for especially large buildings, demolition costs per square foot may fall slightly.

Merchant Builders in Commercial Real Estate

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.

Commercial Real Estate Price Index in Commercial Real Estate

In commercial real estate, price indices are designed to show the current strength of the commercial real estate market across the United States.

LTPP: Loan To Purchase Price in Commercial Real Estate

LTPP, or loan to purchase price, is a metric that compares the size of the loan to the purchase price of the property. It's similar to loan to value (LTV) ratio, but slightly different, since the purchase price and the value of a property can often be different. However, much like LTV, LTPP is also a good measure of leverage-- the higher the LTTP, the more leverage the borrower/buyer is using.

Lockouts in Commercial Real Estate

A lockout is a restriction within the commercial real estate loan to prevent the prepayment of the loan. If the loan is paid early, then the lender will not benefit from the anticipated yield of the loan.

CAM Fees in Commercial Real Estate

Common Area Maintenance or "CAM" fees are charges incurred in a commercial lease. CAM is paid by a tenant to their landlord. CAM is charged on top of the basic rent and caters for maintenance expenses incurred for work on the common area of a property. For example, in an office park, the tenants will pay CAM for the gardening on the office park.

CapEx: Capital Expenditure in Commercial Real Estate

Capital expenditure or "CapEx" are the funds used to acquire, upgrade or repair the property. It also includes the acquisition of equipment for said property. An expenditure is considered a CapEx if it is a new purchase or extends the life of the property. For example, fixing the roof, installing a furnace or painting the building.