Commercial Property Loans

Historic Tax Credits (HTC) in Commercial Real Estate

Historic Tax Credits (HTC) in Commercial Real Estate

The Historic Tax Credit, or HTC program, is a 20% federal tax credit designed to encourage investors to fund the substantial rehabilitation of historic structures. Since 1976, Historic Tax Credits have bee responsible for creating $144.6 billion in private investment in historic building rehabilitation while preserving more than 43,000 historic structures across the country. With the credit, an investor can take 20% of the Qualified Rehabilitation Expenditures (QREs) of the project as a deduction from their federal income taxes.

New Markets Tax Credits (NMTC) in Commercial Real Estate

New Markets Tax Credits (NMTC) in Commercial Real Estate

The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. Since congress started allocating credits in 2003, the program has issued approximately $25 billion in tax credits. Specialized investment vehicles called community development entities (CDEs) compete for NMTCs, which are allocated by the U.S. Department of the Treasury. Once a CDE has been allocated NMTCs, they can award investors the tax credits. In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts.

Effective Gross Income in Commercial Real Estate

Effective Gross Income in Commercial Real Estate

Effective gross income (EGI), is all the income generated by a property, including rent, tenant reimbursements, and income from sources such as vending machines and laundry machines. It can also be defined as a property’s potential gross income, after expenses such as vacancies and credit costs have been subtracted. EGI is an efficient way to estimate a property’s value and cash flow

Commercial MLS in Commercial Real Estate

Commercial MLS in Commercial Real Estate

A multiple listing service, or MLS, is a software system used by real estate brokers in order to represent the sellers of properties, search for properties for buyers, and to establish commission rates for other brokers who may help a broker sell a property. There are approximately 900 MLS services in the United States, most of which are intended for residential property brokers in specific local areas. However, there are only a few commercial MLS providers that stand out, including LoopNet, CoStar, CREXi, Brevitas, and ApartmentBuildings.com.

Commercial Equity Loans: The Basics

Commercial Equity Loans: The Basics

If you need capital to make repairs or renovations to your commercial property, or you’d like additional funds to purchase a new investment property, you may want to take out a commercial equity loan. Commercial equity loans allow you to tap into the equity you’ve built up in a property in order to get cash. These loans are typically offered by banks, but can be offered by private lenders. Commercial equity financing is also ideal for business owners that need additional funds to pay bills or expand their business.

Tenant Reimbursements in Commercial Real Estate

Tenant Reimbursements in Commercial Real Estate

Tenant reimbursements, also known as tenant recoveries, are expenses which are paid back to a landlord by a tenant. Common examples of tenant reimbursements include property taxes, property insurance, maintenance and repair costs, and other operational expenses.

Commercial Property Management Fees in Commercial Real Estate

Commercial Property Management Fees in Commercial Real Estate

Unless you plan to manage a commercial property yourself, hiring a commercial property management company is a must for any serious commercial real estate investor. However, just like any service, property management costs money. Typically, a commercial property management fee will be between 4-12% of the rent for a commercial property, though this can vary greatly upon several factors, including the location, size and condition of the property, the amount, type, and quality of tenants, the specific services that the company is expected to perform, and the average property management rates for that area.

Refinancing Commercial Real Estate Loans

Refinancing Commercial Real Estate Loans

Refinancing commercial real estate can be done for a variety of reasons. In many cases, borrowers get cash out refinances in order to free up capital to make renovations/property improvements, or to invest in other properties. In other situations, borrowers may wish to refinance a commercial property in order to achieve a better interest rate or a longer amortization, which can help them increase monthly cash flow.

Lease Renewal in Commercial Real Estate

Lease Renewal in Commercial Real Estate

Commercial leases can last as little as a few months, or as long as 20 years or more. In contrast, multifamily apartment leases are typically 12 months, with some leases ranging as long as 24 months. However, before a lease is up, a landlord has the option of allowing a tenant to renew their lease. Whether they want a tenant to renew is up to several factors, including the tenants behavior, as well as individual factors involving the property.

Securitization in Commercial Real Estate

Securitization in Commercial Real Estate

Securitization is the process in which commercial or residential real estate loans are pooled together, packaged into a financial product, and sold to investors on the secondary market. Not all types of commercial real estate loans are securitized, but many are. For instance, CMBS and conduit loans are always securitized and sold as commercial mortgage backed securities. In contrast, many, but not all HUD multifamily loans and Fannie Mae/Freddie Mac multifamily loans are securitized.

Debt Coverage Ratio in Commercial Real Estate

Debt Coverage Ratio in Commercial Real Estate

Debt Coverage Ratio (DCR), is a measurement of a property’s net operating income divided by its debt service. A property’s Debt Coverage Ratio, which is also known as its Debt Service Coverage Ratio (DSCR), is one of the most important eligibility factors for commercial real estate loans. Keep in mind that net operating income can be calculated by subtracting a property’s gross revenue by its operating expenses. DCR/DSCR can also be applied to an entire company, as well as a single property, which is more relevant in the case of owner-occupied commercial properties.

Earnest Money in Commercial Real Estate

How Does Earnest Money Work in Commercial Real Estate?

Earnest money is a deposit made to the seller of a commercial property in order to demonstrate the buyer’s intention to purchase the property. Putting down earnest money gives a buyer additional time to finish the approval process for their loan, order a property appraisal, and have property inspections and other third-party reports completed before purchasing the property.

How Much Earnest Money is Needed?

Earnest money is not always needed in a commercial real estate property transaction, but in general, it’s typically around 1% of the purchase price. However, it’s completely up to the seller as to how much earnest money they want a borrower to put down. For desirable properties in hot markets, sellers may ask for 5%, 10%, or even a 15% earnest money deposit to reserve a property.

Is Earnest Money Refundable?

Whether earnest money is refundable depends on the specific contract that a buyer has with the seller. In many cases, a potential buyer’s earnest money is not refundable, even if they cannot get financing to purchase the property in question. However, in other cases, it may be fully refundable if the buyer cannot get financing. Earnest money is almost always refundable, however, if the seller decides to pull out of the deal.

What Happens to Earnest Money?

If a commercial real estate deal successfully goes through, in the vast majority of cases, the earnest money will be credited toward the purchase price of the property. As mentioned previously, however, if they buyer pulls out of the deal, the money will often stay with the seller, whereas if the seller pulls out, the money will usually be refunded to the buyer.


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Commercial Equity Lines of Credit in Commercial Real Estate

Commercial Equity Lines of Credit in Commercial Real Estate

Commercial equity lines of credit, also known as CELOCs, involve a commercial real estate owner being given a line of credit that allows them to borrower against the equity in their property. Commercial equity lines of credit can be used for a variety of purposes, including growing your business by hiring new employees, obtaining new inventory, financing property improvements, or even purchasing a new piece of real estate. CELOCs are much like the home equity lines of credit (HELOCs) found in residential real estate.

Subletting in Commercial Real Estate

Subletting in Commercial Real Estate

A sublease, or sublet, occurs when a tenant assigns part or all of their lease to a new tenant. In general, most commercial leases permit subletting, but not all do. Many commercial landlords will charge a fee for subletting in order to compensate for the additional risks and hassles that may occur due to dealing with an additional tenant.

Loan Seasoning in Commercial Real Estate

Loan Seasoning in Commercial Real Estate

In commercial real estate finance, seasoning refers to the amount of time that a borrower has held a specific loan. Therefore, a seasoned loan is a one that has been held for a certain period of time. Many types of loans, including HUD multifamily loans and Fannie Mae/Freddie Mac multifamily loans have specific loan seasoning rules, especially when it comes to refinancing. In addition, most commercial and multifamily lenders will not let you take out a commercial equity line of credit unless your loan has been seasoned for at least one year.

Appraisals in Commercial Real Estate

Appraisals in Commercial Real Estate

If you want to purchase a commercial property, you’ll almost always need to get an appraisal first. An appraisal is a professional estimation of the market value of a property, which needs to be conducted by a certified appraiser in the area which the property is located. In most cases, commercial real estate lenders require an appraisal before they approve a borrower for a loan, since they need to determine the value of a property in order to accurately calculate its loan-to-value ratio and other important financial metrics.

Investment Variables in Commercial Real Estate

Investment Variables in Commercial Real Estate

When it comes to making a decision on whether to invest in a commercial property, there are a variety of variables that an investor can take into account. First and foremost, in many cases, is return on investment, which calculates the amount of money that a investor will make compared to the amount of money they’ve invested into the property, minus any expenses. Other variables include the safety of an investment property, a property’s development potential, the property’s location, and an individual investor’s financial instincts.

Return on Investment in Commercial Real Estate

Return on Investment in Commercial Real Estate

In commercial real estate, return on investment (also known as ROI), is a measurement of how much money an investor receives after all expenses have been deducted. The formula for ROI is:

ROI = (Investment Gain - Investment Cost)/Cost of Investment

Many factors can affect the ROI of a commercial real estate investment, including the size of any commercial real estate loans on the property, the interest rate of those loans, as well as any management, repair, or renovation expenses needed to maintain or upgrade the property.

1031 Exchanges in Commercial Real Estate

1031 Exchanges in Commercial Real Estate

When an investor or developer sells a commercial property, they'll usually have to pay taxes then and there-- but not always. An IRS 1031 exchange is a transaction that allows a commercial property seller to defer paying taxes on the sale of the property if they use the funds to buy another, similar property within a specific period of time. 

Floor Plate in Commercial Real Estate

Floor Plate in Commercial Real Estate

In commercial real estate, the floor plate is the amount of leasable square footage on an individual floor of a building. In multistory buildings, especially taller office properties in major urban areas, the floor plate on lower floors is likely to be larger than the the floor plate on higher floors. In some cases, a building's floor plate is also known as its footprint.